External and internal factors of the Greek failure

2012-02-07

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Greece will have to be built anew otherwise more of the same malpractices will continue to hinder the country’s prospects. Image source: The Guardian

Greece has been missing one “critical deadline” after the other, without achieving any real progress on its troika programme. Ever since the European Council summit of July 21, 2011, when the first debt restructuring plan was agreed upon — the so-called Private Sector Involvement (PSI) — the Greek people have been the recipients of an unprecedented psychological war that sows the fear of bankruptcy/default every few weeks. The reasons Greece has been failing to cope with its troika programme can be divided into internal and external.

**External factors:**

• Greece was the first country to fall in the domino effect that commenced in 2008 and is still underway. For that the country has received most of the attention all these years, as it is (correctly) considered the weakest link in the euro chain. As such the treatment of Greece should “necessarily” have the following features:

• The European Union needs to show that it does not violate its own rules – the no-bailout clause for instance, or the “prohibition” of debt monetization or eurobonds by the ECB.
• Any support to Greece must be done in such a way so as to avoid moral hazard. In other words Greece must not be given away money which might seem like a “reward”. Instead it has to be “punished” (though such a word will never be used officially) for not complying with the rules governing the Euro architecture.
• The European Union needs to handle the situation in such a way that markets do not lose faith in its capacity to deal with its own issues. Therefore even if the situation in Greece deteriorates, it will be because of the “special” circumstances that apply to Greece – not due to the narrow-sighted troika policies.
• For as long as the broader eurozone is facing its systemic crisis (listen to 30-minute podcast) Greece must not be allowed to default on its creditors as that would (a) trigger a payment of the CDS contracts, with negative implications for the financial system, (b) would mortally wound several European banks that are directly or indirectly exposed to Greek debt, (c) it would create uncertainty about the prospects of other countries mired in recession or under bailout programmes.

• The troika officials are focusing only on the fiscal finances of the state without any real concern about the effects of their policies on the real economy. For instance they only ask for the reduction of the budget deficit even if that requires unprecedented tax hikes that increase costs, decrease demand and create uncertainty about the tax regime, hence new investments are held back.
• European politicians who will soon be running for elections, have found an easy victim in Greece that they can attack in order to raise their “popularity”. As such many have “threatened” to kick the Greeks out of the euro in case they do not comply with what “leaders” say, even though that will never happen (see Greece will not exit the Euro – Groundless threats and speculation).

To conclude on the section of the external factors, Greece is trapped in — or is part of — a highly complex political system, namely the EU. For as long as this system lacks all those mechanisms/institutions/tools that would allow it to function as a unified entity, instead of the now-sectarianated patchwork of squabbling states; the situation will remain extremely difficult and more failures will definitely follow.

**Internal factors:**

• For reasons that go far beyond the scope of this article, the Greek state has always been ill-designed. The public administration of the country is very big and highly inefficient, while the resulting bureaucracy creates several problems:

• It retards economic activity as even routine procedures require considerable time to materialize.
• “Fakelaki” and “miza” (Greek words for corruption payments) become the only way for citizens to get their job done. As such corruption becomes a “vital part” of the broader political system.
• Because political parties and the main body of the state’s public administration operate in Athens, the Greek state has gradually become Atheno-centric, since exponentially more powers are brought to the capital, leaving the periphery underdeveloped and thus the country less competitive and productive on aggregate.

• Decades of ill advised policies have created series of distortions in the economy, in the political system and the social order; while they have produced perverse incentives that lead to several unpleasant phenomena – such as the ongoing strikes of civil servants or special interest groups who wish to cling on to their privileges; or a highly ineffective and unfair tax system that puts the burdens only on the lower parts of the income distribution; or even economic cartels that do not wish to see their state-sponsored monopolies/oligopolies be liberalized (professional drivers, pharmacists, public universities etc.).
• Greece entered the EEC in 1981 even though it never complied with the criteria. The decision back then was political and had to do with the balance of power between “West – USSR” in the broader region of the Balkans and the Eastern Mediterranean. Nonetheless, the European funds that suddenly started flowing in to the underdeveloped country, gave the impression that the European Community is a cornucopia, an infinite source of wealth that will be feeding the Greeks for decades to come. In short Greece started growing (not a robust growth, but a bubble really), without making any reforms in its economy and state. As such the European funds ended up in unproductive expenses, instead of improving key sectors of the economy, or accumulating technology and other industrial goods that increase productivity.

**Conclusion:**

Decades of malpractices cannot change within a few months, especially when several interests are involved. For Greece to escape from the greatest economic crisis of its history the entire Greek polity will need to be redesigned. This requires deep reforms in the economy, so that individual genius replaces bureaucratic interventionism; changes in the internal structure of the state, allowing peripheries to control considerably more power that will allow for balanced growth all across the country; modernization of the public administration so that procedures become fewer and faster and costs diminish.

The Greek nation will have to be constructed anew. The problem is that the Greeks are not willing to accept that, while the inane policies of the troika are only making things worse, as the crisis deepens, thus supporting the (insane) idea that Greece would be better off outside the Euro. The Greek failure represents a conundrum that none seems able to solve.