Is Greece a Failing Developed State? Causes and Socioeconomic Consequences of the Financial Crisis

The Context

Is the Greek financial crisis an isolated case or the first in a series of future failing developed states? It may not be on the front page of the Financial Times anymore, but it is far from over. The financial crisis did not only manifest itself in Greece, but also in Ireland, which has also sought an equally large EU-IMF rescue plan, and in Portugal and Spain, which too have been under the microscope of the media and credit rating institutions. These events in the periphery of the Eurozone have repercussions for the currency as a whole as well as for the EU. Greece, Ireland, Portugal, and Spain are members of the Eurozone area, which means that they share the same currency with economic giants such as Germany and France.

Greece’s debt is primarily owned by French, German, and, less so, British banks. If Greece defaults, the confidence in other‘risky’ countries such as Spain, Portugal and Ireland would be severely undermined. Northern European banks have a total exposure of twotrillion Euros to these countries.Thus, a Greek default could bring down many of these banks –including most of the Greek ones– and ultimately, it could unravel the whole financial system of the European Union.

This article aims to first address the deep and more proximate causes of the public debt crisis: the Ottoman legacy, Greece’s geographic location, populism and patronage politics, repeated electoral cycles, and finally, endemic corruption. It then discusses a wide range of socioeconomic consequences—negative as well as positive—that the financial crisis has (or will have). The negative consequences include: intensification of conspiracy theories and of the brain drain, high unemployment accompanied by a feeling of hopelessness, complete bankruptcy of the political system, and the reverse migration of the most productive immigrants in the country. The article concludes with a discussion of some developments that can be viewed as opportunities for contemporary Greece with the more positive consequences being: the ‘taming’ of the public sector, structural reforms, and the stabilization of migratory and refugee flows to Greece, and decentralization.

Since other EU member states, such as Ireland and Portugal, find themselves in a situation similar to that of Greece, it appears that the problem is also systemic. Both Ireland and Greece have resorted to EU-IMF rescue plans when faced with enormous deficits, poor credit ratings, and sky-high borrowing rates. Like Greece, Ireland is also in the periphery of the EU and has also borrowed billions from European banks with the possibility of a default. In this sense, Greece is not a unique case of a failing developed state. Moreover, it need not be one at all if adequate measures are taken timely enough.

The Deep and Proximate Causes

During the past one hundred and eighty years, modern Greece has found itself in default-like situations for more than fifty of these. Most defaults emerged following war: after the War of Independence in the 1820s, the end of the nineteenth century as a result of the Greek-Turkish war, the mid-1920s as a result of the Asia Minor Catastrophe, and the end of World War II. However, these default precedents, to which many people point, are not relevant this time. Now, Greece is facing such a situation in the absence of war. Maybe the defaults of 1893 and 1932, the only ones which were not preceded by war, are more relevant precedents for the current situation.

There are other historical factors that scholars and commentators have advanced. Some point to the Ottoman legacy as an explanatory factor for Greece’s problems. This argument follows the logic that the Ottoman legacy is to blame for patronage politics, endemic corruption, populism, and nepotism in the country. Populism has, and still does, thrive in Greece. In the past two centuries of Greek politics there have been some exceptions but these have not managed to reverse the trend. Endemic populism has led to vested interests, corrupt practices, a large public sector, and a culture of reliance on the state.

Robert Kaplan recently blamed Greece’s geography for its political and economic troubles. He argues that ‘[the] relatively poor quality of Mediterranean soils favored large holdings that were, perforce,under the control of the wealthy. This contributed to an inflexible social order, in which middleclasses developed much later than in northern Europe, and which led to economic and politicalpathologies like statism and autocracy. It’s no surprise that for the last half-century Greek politicshave been dominated by two families, the Karamanlises and the Papandreous’.

Beyond the impact that Greece’s history of past rule, natural endowments, and mode of production have had on its socioeconomic development there is a direct way in which  geography accounts for Greece’s troubles. The country maintains the second highest defense spending level in NATO and the highest in the EU on a percentage basis because of its conflict with Turkey. The spending is arguably a major contributing factor to the accumulating debt.

Yet there are more proximate causes to Greece’s present financial crisis. In the past thirty years, Greece has experienced strong electoral cycles, which have increased deficits and built up an enormous state debt over time. Contemporaneously, the European Community’s developmental funding of the early 1980s supported projects designed to solidify the political base of the ruling party. Andreas Papandreou pioneered this practice. The end result of such patronage politics and the need to service the public debt kept resources from being invested in productive activities that could have lead to sustainable growth. There were attempts in the 1990s to reverse this trend, but they were in vain.

Paradoxically, another proximate cause was Greece’s entry to the Economic Monetary Union in 2001. This development allowed Greeks to borrow and consume more andprolonged the market’s realization of the Greek sovereign debt problem. At the same time, EU monitoring mechanisms were failing. Though these failures help put things into perspective, they do not create sufficient reason for accusing fellow European Union members for Greece’s present economic predicament. The Greek economic policies of the last three decades have brought Greece close to bankruptcy. While Greeks kept on spending, the Greek state proved incapable of collecting revenues efficiently. On top of that, the dysfunctional Greek judicial system is not helping combat the prevalent culture of impunity.

Finally, another crucial proximate cause for the Greek crisis is the inaction of the Greek political elites. Not surprisingly, the two main parties in Greece have been pushing the envelopearound for a while. In the most recent cycle of blame, the Karamanlis government attributed the increased 2004 deficit to the cost overruns of the 2004 Olympic Games and on PASOK’s concealment of the true picture of the Greek public finances. A financial audit was conducted and the center-right government promised transparency from that point forward. However, the Karamanlis government did not manage to implement the necessary structural reforms during the five years of its rule. Moreover, the Karamanlis government did not succeed in addressing the problem of the rapid debt accumulation and uncontrolled fiscal deficit. In September 2009, Kostas Karamanlis declared snap elections under the pressure of a rising Greek deficit, a global financial crisis, and a vociferous opposition. At the apogee of the financial crisis, the then governing center-right party lost the election to the Pan-Hellenic Socialist Party of Greece (PASOK). As soon as it came to power, PASOK revealed a far bleaker picture of the Greek economy than anyone had expected – or purported to expect. Once again, it blamed the previous government and promised transparency.

This bleak state of the Greek economy was initially treated, and perceived, as primarily a challenging moment to EU-Greece relations. Greece’s credibility as an EU member and partner had been tarnished. In the meantime, the new government, which had been elected on a ‘spending’ rather than an ‘austerity’ platform, did not take any of the necessary measures to decrease the deficit during the first few months of its rule. From October 2009 to March 2010 the newly elected PASOK refused to accept the situation. In the meanwhile, Nea Demokratia was internally divided and focused on changing its leadership. During this period, Greece was especially vulnerable to speculative attacks by financial institutions that bet on Greece going bankrupt.

Moreover, Eurozone countries and the EU as a whole took longer than they should have to address this problem. As a result the Euro plunged.Only after Christmas 2009, when the Euro started to drop relative to the dollar was the public debt crisis seen as a European problem. But soon after, it was understood as a global problem, a sovereign debt problem affecting governments across the world, including Ireland, Spain, Portugal, Japan, and even the USA. Thus, the global financial crisis proved to be a catalyst that revealed Greece as the weakest link in the Eurozone.

The Socioeconomic Consequences

Public discourse is dominated by the financial crisis. Having engaged in conversations about the crisis with people as varied as taxi drivers, businessmen, politicians, young professionals, artists, the unemployed, and public sector employees, I have noted four distinct attitudes toward it. First there is pessimism, whining, and cynicism. Second, there are long diatribes about which way to go: Should Greeks endure the austerity measures of a joint IMF-EU bailout, or should Greeks go at it alone by restructuring the debt and returning to the Drachma? Third, others focus on the personal repercussions that the financial crisis has had on their income and their future prospects.  Fourth, and last, some focus on the scandals and the punishment of politicians who are identified as being the most responsible. Regardless of the mode of approach, the everyday Greek suffers the socioeconomic consequences of the financial crisis.

Negative

With the passage of time the economic consequences of the crisis are crystallizing: A gross external debt of 185% of GDP, a negative real GDP growth rate (around 4%), increased taxation, inflation, shrinking household incomes and declining consumption. In the private sector, many businesses are closing, others are moving to Cyprus or Bulgaria (where taxation for businesses is at 10%), and large sums of capital have moved out of Greek banks. High taxation and non-flexible labor laws have forced many companies to relocate and have almost completely eliminated Foreign Direct Investment. 

The persistent problem with government revenue collection is exacerbated and the economy is threatened with an even deeper recession. The middle class –the backbone of democratic politics– is emaciated. Small and medium size businesses are closing one after the other, more and more checks bounce, and non-performing bank loans are on the rise.Moreover, employees are losing their jobs (12% unemployment) and a new class is being formed, that of the ‘former middle class’.

All these developments have had a negative impact on the self-esteem of many Greeks. The drastic economic situation has led many to acts of desperation such as committing suicide. According to an NGO that monitors suicides in Greece for the Ministry of Health, ‘suicides have doubled, if not tripled’ compared to 2009. According to the psychologist Aris Violatsis, ‘men are no longer earning enough money to provide for their families and feel they no longer have a role to play – people who are going through identity crises are more at risk.’

Many young people have decided to leave the country and look for better opportunities abroad. Greece’s greatest asset is its human capital. Brain drain has been a problem for Greece and is being exacerbated by this crisis. Seven out of ten people that have just completed their studies (or are about to) would gladly leave Greece for opportunities abroad. Half of them have already tried to get such a job. People that would not otherwise leave are now leaving and the people that might have been planning to return are less likely to do so now. Sadly, another generation will face blocked social and political mobility as a result of nepotism, clientelism, and corruption.

The delegitimization of political parties and state institutions in Greece is a highly disconcerting development. In a recent poll only 39% of people said they would vote for PASOK and Nea Demokratia. This is a historic low. Furthermore, eight out of ten citizens express disappointment at the Government, and nine out of ten express disappointment at the main opposition party. The financial crisis, the numerous political scandals, and the solutions proposed by the ruling party –in line with the IMF-EU recommendations– have led many people to believe that the social contract is up for renegotiation. An unfortunate consequence arising from the perception that the government has let the people down has been the legitimizing of the use of violence as a tool of political dissent among certain individuals in Greek society.

The financial crisis has multiplied public belief in conspiracy theories. For example, such theories proliferated after the Marfin Bank arson in early May 2010.Some argued that it was anarchists that wanted to punish the employees that did not go on strike. Others have argued that this was government-planned provocation aiming for the delegitimization of public unrest and reaction to the government policies.Many suggested that this was an outside job. In particular, this narrative suggests that certain financial institutions and investors had bet on a Greek default and that they had therefore arranged this incident.

There are many more stories. What we are really dealing with is a daily phenomenon. To be sure, this phenomenon is not new or unique to Greece. Many societies resort to such explanations to satisfy the psychological needs of the people, to attribute blame to whomever they do not trust, and to make sense of the world. However, the phenomenon has reached new levels this time around, both in intensity and in complexity.

With time, the conspiracy theories circulating in Greece have ceased to be plausible and have multiplied in number. Thus, while in the past an event would usually have two interpretations, the official and the conspiratorial, these days it has three or four, if not more, competing explanations. The financial crisis has evolved into a real economic crisis, expressing itself as lost jobs and diminished purchasing power for the average Greek. This has led the population to new levels of uncertainty about the future, which provides a fertile ground for conspiracy theories to emerge and spread. Add to the mix the advanced technological capabilities –relative to the past– that are available to most Greeks, and the seriousness of the situation becomes apparent. An unwanted consequence of our ability to communicate freely and instantly is the dissemination of rumors and conspiracy theories that reproduce a culture of avoiding responsibility.

Tertiary education is at a historic low and the sovereign debt crisis is not helping. The cuts in allowances and bonuses have seriously affected university professors, lecturers and non-tenured assistant professors. Essentially, lecturers with a basic salary similar to that of an elementary school teacher find it difficult to continue their necessary research activities, since they are either forced to work a second job (which leaves them with no time for research) or they simply have no money left for research. Inevitably, this situation increases their dependence on the tenured professors who control their academic future. Under these circumstances, the future of non-tenured Greek professors is increasingly less related to their research and merit (to the extent that it ever was) and increasingly with a singular clientelist system revolving around departmental and dean elections. With a lecturer’s basic salary of €1,183, incentives for research are few for low-ranking and non-tenured academics in Greek universities. Their dependence on personal relationships unrelated to their research is growing.

With monthly earnings of under €3,000, even the salaries of tenured professors do not correspond to their qualifications, or to salaries that they could receive abroad. This leads some of them to undertake extra-academic activities unrelated to their teaching obligations and to their research interests. In general, the competitiveness of the Greek university, and therefore of its graduates, is at its thirty year low point.

Neutral

There are some signs that migration to Greece has decreased, while a significant number of existing immigrants are moving out of Greece. This development has a mixed impact. On the one hand, the immigrants who are leaving are the ones who contribute maximum to the Greek economy. On the other hand, the extra cost of policing and integrating new migrants further burdens an already bankrupt state.

Half of Greece’s population lives and works in Attica. Decentralization has been a goal for a long time. As a result, the rest of the country’s infrastructure and economic development has lagged behind. Many governments have had decentralization as a stated goal in their political programs. What years of policy planning have been unable to achieve, the financial crisis may. People who moved from Thessaloniki to Athens, from Kilkis to Thessaloniki, from Herso to Kilkis, might find it opportune to return to their place of origin. This might boost local economies and –if followed by the right set of incentives– set the basis for sustainable decentralization.

Positive

This crisis may show itself as an opportunity to make fundamental changes. The de-legitimization of the current political system may lead to real political change. In addition, it may lead to the prosecution of those who embezzled money from the state. Many of the reforms that the current government has pursued –under the pressure of the IMF and the EU– are necessary and long overdue, but still more are needed. Through these necessary reforms, the Greek economy will become more competitive and attract foreign investments. As a result, serious investments in tourism, private education, shipping, research and development, renewable sources of energy, and proper services may transpire. Additionally, while it remains difficult for the government to borrow from the international markets, the need for funds to cover daily government operations is fundamentally changing the tax collecting process. This in turn will put pressure on the unregulated economy. Most importantly, the mentality of the Greek people might change.

Epilogue

Let me close with a discussion of the mentality problem I referred to above. Each time a scandal is revealed involving public sector hiring, most TV analyses focus on whether the accusations were valid or not, and on who was to blame. It is definitely important that hiring in the public sector is meritocratic and impartial; however, I believe a deeper problem is revealed when we consider this phenomenon. Nobody comments on the fact that all of these highly connected and educated people want to work in the public sector. It does not cross anyone’s mind to question that motivation, to wonder why Greek society has ended up turning the public sector into the dream of young people. The crowning of the public sector as the king of opportunities is the most important message. Changing this mentality is the key to Greece’s recovery.

This mentality has bloated the public debt through yearly deficits. In order for growth rates to rise, entrepreneurship initiatives that would attract foreign direct investments are needed. Nevertheless, this can hardly happen when most of the Greek population’s dream is to enter the public sector. This indeed is the outcome of decades of patronage politics, populism, and nepotism; all causes of the current crisis as highlighted above. Shrinking the public sector, while at the same time achieving positive growth rates, is the only solution. However, nothing can change until our mentality does. We need a movement, which will campaign for entrepreneurship and innovation instead.

The European Union may actually emerge stronger as a result of this crisis by replacing the current emergency fund with a permanent bailout and restructuring mechanism, a European Monetary Fund. Austerity is needed in multiple corners of the EU to commensurate public spending and tax revenues.All in all, Greece may be a unique case in that it is experiencing a failed public sector crisis, with the root causes of its failings being different from Ireland’s primarily private banking sector crisis. Yet, if the right measures are undertaken, and if the mentality of the people is altered, Greece may not become a failed developed state after all.

This article first appeared in Botsiou, Konstantina E.; Klapsis, Antonis (Eds.) The Konstantinos Karamanlis Institute for Democracy Yearbook 2011: The Global Economic Crisis and the Case of Greece. Springer.

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