13th annual Municipal Finance Conference


13th annual Municipal Finance Conference


The inconvenient truths about Greece

As Greece seemingly returns to normal, everybody in Athens, Washington, and Brussels hopes to put the whole affair in the rear view mirror, possibly because they know that, at the height of the crisis, neither Greece nor Europe dealt with their respective weaknesses.

But how can this be, when so much has been done—so many pieces of legislation adopted in Europe to deal with the crisis, so many mechanisms created, and so many measures imposed on the mostly reluctant Greeks?

Europe has done rather little to update the structure of its governance to deal with the core issues that exposed it to the crisis, whether in terms of the shakiness of the European Union or with respect to the struggle to enforce EU law evenly in all member states to facilitate “convergence in institutions.” And Greece has done little to offer quality governance to the Greeks in line with an idealized European state.

Which brings us to the inconvenient truths about the supposed “Greek success story.” The average size of Greek firms remains small, a product of many longstanding structural weaknesses at the national level that served as an almost insurmountable barrier to growth. The fallout from this can still be observed in the weak private sector job market, weak innovation and export activity, the “missing tax base,” and a persistently high consumption to GDP ratio. The adjustment programs have failed to put Greece on a trajectory that clearly separates it from these negative metrics that characterize the years until the eruption of the crisis.

So maybe simply enforcing austerity does not suffice. Maybe the way day-to-day economic and social activity is organized, from licensing to policy debates, from the rule of law and court decisions to the protection of the freedom of the press, are more important after all. They determine the extent to which people take initiatives, create economic activity, and thus generate taxable income.

Even if we take into account the fact that the private sector in Greece has almost been excluded from access to finance for nearly a decade and the impact of over taxation and the risks entrenched by the so called Grexit talk, we still cannot explain the lack of any evidence that the structure of the Greek economy is moving away from the patterns associated with the crisis. Unless, that is, we accept that the equilibrium between politics, society, and the economy has not changed, and, that after nine years of programs, the kleptocracy still conducts “business as usual.” But how is that possible, given the strict oversight of Greece all these years?

It is here that the unhappy answer dawns. The adjustment programs did little to shift the balance of power that had turned Greece into a rent seekers paradise, a kleptocracy run by hardcore groups. On the contrary, through the imposition of ever higher and more progressive taxation, it amplified the barriers to growth. Greece has turned into a small shopkeeper’s economy. If anybody thought that clientelism would be exiled from the country as a result of the list of structural reforms, which lagged always behind the list of fiscal measures, they should think twice. As people became poorer, they became more politically radical, as has happened so many times before in history. The combination of weak institutions and unchecked executive power meant that in such an environment populism did not decrease, but rather flourished and even took some interesting turns. Nationalism, radical left, and radical right united under the watch of the institutions as they prioritized the achievement of short-term fiscal goals, regardless of how the fiscal milestones were achieved.

Everybody seems to sigh with relief as the fiscal targets are met, willfully overlooking the inconvenient fact that the private economy has largely been decimated, to an extent that it will not be able to mend itself. The further erosion of already weak political institutions essentially rendered the country incapable of designing and implementing viable policies. This was not because of a failure of the lazy and tax evading Greeks, but simply because they have been broken and corrupted to an extent that they also cannot mend themselves. Surprisingly, austerity has not made Greeks more frugal, but rather disgruntled and more prone to listen to political sirens. The fact that Greece has now a parliamentary system with a newly acquired purely proportional electoral system, just as the Weimar Republic had, surely adds no comfort.

Such thoughts make the choice to pretend that Greece is now a success story indeed much more appealing, in the short term. Tomorrow someone else will be on watch, or at least so we hope.  This is exactly the ultimate argument of our latest book, “Who’s to Blame for Greece.”

But it need not be so. For one, Greece has almost succeeded in the past to overcome the underlying causes of the crisis. So it could do it again. Europe could deal with its shortcomings if it were willing to redesign the map of powers and competencies in a more elegant and coherent way. Technically both can be done. Political vision and will is all that is required.