Hubris, Ate, Arete

03.21.15 10:45 AM ET

How Greece Became A Basket Case

Greek bailouts are nothing new—ask Lord Byron. But is the country finally ready to learn its lesson and clean up its own fiscal house?

Last year I took a trip with my father to Messolonghi, in western Greece, to visit the monument to Lord Byron in the city’s Garden of Heroes. The 19th-century English poet had travelled to Greece to fight in its 1821-1832 War of Independence against the Ottoman Empire. He never returned home.

The Greek War of Independence began from the attempt of a few bourgeois Greeks influenced by the ideas of the French revolution. It was an insane project. The Greeks could never hope to defeat the military power of the Ottoman Empire—but in the eyes of the world, Greece was an ancient nation trying to re-birth itself.  Foreign fighters, including many of the most famous men of the day like Byron, flocked to what became a global cause.

Byron’s monument, cast in thick stone, stands (literally) for the debt of gratitude Greece still feels towards him, but it also stands for something more amorphous, and more instructive. Stathis Kalyvas, professor of political science at Yale, has identified a recurrent pattern in modern Greek history: namely, the country’s ability to engage in vastly ambitious projects that are beyond its capacity, that receive international attention out of proportion to its actual size, and that invariably fail.

The War of Independence was not well-organized and by 1825 it was effectively finished. But support emerged amongst the three major powers of the time—France, Russia and Britain—for the Greek cause, and their forces destroyed the Ottoman fleet at the Battle of Navarino in 1827. The Greeks were subsequently able to expel the Turks from the Peloponnese and eventually central Greece; true independence came a few years later. Despite its own shortcomings, Greece had been bailed out.

Greece’s founding story, Kalyvas argues, is the key to understanding its current crisis: “[What you have is] a very ambitious project,” he says. “It does fail, but Greece gets bailed out and the actual outcome is good.” But, he continues “you have the Moral Hazard problem: that precisely because you got these positive results through somebody else’s intervention, you don’t create the proper institutions—self-sustaining, accountable and that operate productively—necessary to govern effectively.”

This flaw is at the heart of the modern Greek state and at the heart of its financial crisis today. The former arguably began in 1974 when Greeks rose up to overthrow the governing military junta that had been in power since 1967. The transition to democracy was peaceful but the price was the establishment of a clientalist political model, specifically the establishment of a welfare state designed to compensate those on the left who had lost under the 1946-49 civil war between the Greek army and communist forces, and then suffered under the junta. “The civil service expanded and unions became hugely powerful,” says Dimitar Bechev, visiting fellow at the European Institute and the London School of Economics. “The other side of the bargain was that those who voted for the center right in Greece, the bourgeoisie and professionals, benefitted from a lax governmental approach to collecting taxes.”

The leaders of the 1974 uprising had formed the Panhellenic Socialist Movement Party (PASOK), led by Andreas Papandreou, that took power a few years later in 1981, giving Greece its first socialist government since 1924. PASOK were populists, now in control of Greece’s democratic and administrative institutions and they greatly expanded clientalism—political favours traded for jobs and positions of influence became the norm.

Greece joined the EU (or the EC, the European Community, as it was then called) in the same year that PASOK took power. Papandreou was able to start a policy of fiscal expansion due to EU transfers—money from EU Mediterranean programs designed to help the poorer member states catch up with the wealthier ones. This windfall allowed him to implement a set of bad policies, including further expansion of an already bloated public sector and poor fiscal management of industry. And because it was all based on borrowing and EU cash, Greece suffered none of the shocks that it should have. Like oil for the Arabs, the EU, says Kalyvas, has been a resource curse for Greece.

The results were predictable. By 1990 Greece had a debt to GDP value of over 100 percent, but it still had its own currency, the drachma, and was able to devalue it and largely offset any significant negative effects. Papandreou returned to power in 1993 and implemented an austerity policy that straightened the economy and drove down debt. Greece also benefitted from the collapse of the USSR and an influx of cheap migrant labour, mainly from Albania, allowed growth to kick in for the first time since the 1970s. It was at this point, says Kalyvas, that everyone thought Greece had become a normal country.

Greece now enjoyed considerable prosperity but because this was largely as a result of foreign cash and favourable geopolitics, its institutions remained weak—hollowed out by the populism of the 1980s. “The public sector became a way to disguise and inflate domestic consumption,” says Kalyvas. Like Arab states, which pay “rents” they receive from oil money to their citizens in the form of salaries, the Greek government was effectively paying its citizens rents from the EU.

Then there was the problem of tax evasion. When I was growing up, each summer I would fly from orderly London to chaotic Athens. Greece is built on small businesses. From the tavernas where I ate slouvakia (a type of kebab) to the periptera (kiosks) where I illicitly bought cigarettes, cash was the lifeblood of business. And no one ever gave out any receipts. The modern social contract by which citizens pay taxes and in return receive benefits ranging from healthcare, to a police force, to the men who come to collect garbage, had completely broken down.

Nonetheless, as the 1990s wore on, it looked (superficially at least) like Greece was in good shape to join the monetary union that was increasingly discussed in EU circles. Letting Greece into the EU in 1981 had made sense. But as it turned out, the 1990s, when the Euro was designed, would be the critical decade. The Eurozone, as Bechev explains, “was only a partial monetary union with partial safeguards. It relied on countries doing their homework but had no strong safeguards in place [to ensure that they did].” This is because the Eurozone concentrated monetary power (the ability to print money, deal with inflation etc.) at the EU level, but fiscal power (the ability to deal with budgets, deficits and collecting taxes) at the national level. The system of financial oversight was egregiously inadequate from the outset.

Greece subsequently met the necessary criteria for admission to the Eurozone, most importantly the requirement that member states should not have a deficit—the difference between spending and income—of more than three percent of GDP. But Greece had presented false figures to hit the target (the real figure was actually around 15 percent). When Greece’s finance minister, George Papaconstantinou, eventually announced on October 29, 2009, that Greece’s deficit would be 12.5 percent of GDP that year, everybody panicked.

 “People suspected the figures were ‘problematic’ at the time,” says Bechev. “But nobody wanted to rock the boat. There was no interest in enforcing the rules. It was assumed that the markets would underwrite the risk.”

Greece was now in serious trouble. Its spending had been out of control for years. Public sector wages, for example, rose 50 percent between 1999 and 2007, while the state had consistently failed to claw back revenue due to pervasive tax evasion. Its spiraling deficit was the inevitable product of irresponsible spending stretching back decades and could no longer be concealed.

Get The Beast In Your Inbox!
By clicking "Subscribe," you agree to have read the Terms of Use and Privacy Policy
Thank You!
You are now subscribed to the Daily Digest and Cheat Sheet. We will not share your email with anyone for any reason

More importantly, the country could no longer pay its debts and was forced to ask the International Monetary Fund and its EU partners, notably Germany, for massive loans. These duly came. In May 2010, the EU and IMF provided Greece with a $140 billion bailout loan and a second, $137 billion bailout came in 2012. More money followed. But it came with conditions, namely that Greece would have to implement a series of austerity reforms designed to slash its spending to reduce its deficit.

The Greek government duly did what was required and unleashed wave after wave of drastic cutbacks, including freezing pensions, increasing sales tax from 19 percent to 21 percent, as well as raising taxes on a variety of goods and services. Critically, public sector jobs were cut and those workers that remained in employment had their salaries slashed repeatedly (many today are faced with the near impossible task of living on 300 euros per month).

The social effects of all this were as predictable as Greece’s financial irresponsibility. People took to the streets in the tens of thousands to riot. In mid-2011, I took refuge in a restaurant on Monastiraki Square in central Athens as protestors hurled missiles at police, who were busy covering the center of the city in tear gas in response. Trash cans were strewn across the streets as demonstrators wearing gas masks tried to block the oncoming police and used poles and sticks to try to knock them off their motorbikes. As the Greek parliament passed each new package of austerity measures, more violence ensued. Buildings were burned; large numbers of protestors and police were injured.

Wide-scale disgust at the political class, which Greeks blame (not unfairly) for getting them into this mess, gradually reordered the landscape of national politics. Most notably, mass disaffection with the two main parties, PASOK and New Democracy, which had governed Greece since 1974 lead to the emergence of Syriza, the far-left political party that took power in coalition with the hard-right Independent Greeks party in elections held on January 25, 2015

The party’s leader and Greece’s new Prime Minister, Alexis Tsipras, in conjunction with his dapper and charismatic Finance Minister, Yianis Varoufakis, campaigned on an anti-austerity platform, promising to the end the suffering of Greece by re-negotiating the terms of Greece’s bailout with its creditors. They suggested they might even undo the entire austerity package, which caused international panic.

But early signs are that despite the tough talk, the two men are taking a pragmatic approach. Kolotoumba, the Greek word for somersault, has become the political catchphrase of the moment. Syriza has already backtracked on most of its demands, no longer calling for a restructuring of Greece’s debt nor claiming they will not pay it. “They are trying to negotiate in the margins,” says Bechev. “They want the right to spend more money and they have managed to negotiate an extension to the most recent agreement with Greece’s creditors [which meant bailout funds would have ended on February 28], which gives them access to funds from European Central Bank for several more months.”

The country remains in bad shape. But the positive is that, due to the financial mechanisms of the EU, the holders of Greek debt are sovereign states not banks. This means EU taxpayers—mainly German ones—are underwriting Greek debt. The problem thus becomes political not economic (German voters and newspapers now watch Greek politics intently), which means the EU is far less likely to allow Greece to go under.

How will the Greeks respond? The most likely scenario, says Kalyvas, is that “Greece avoids the worst, gets its acts together and reforms those parts of the state that need reforming but never, truly overhauls its institutions—this would be very much in line with its past history.”

As with over 100 years ago Greece’s problems are once more global. And once more the pattern is repeated. “Greece, like a baby, was plunged into a monetary union [it was ill-equipped for],” says Kalyvas. “It was obviously unable to swim and just before it drowned it was bailed out once more.” The question now is: will it finally learn and do what needs to be done?