Thursday, August 11, 2011

GDW @ 100: Five Reflections on the Greek Crisis

This is post #100 on www.greekdefaultwatch.com, and so a good occasion for some reflections on the Greek crisis.

#1. Debt was the price Greece paid for political normalcy. If one were to believe most outside observers, it seems that the Greek people woke up one day and started to spend money they did not have and started to avoid paying taxes that they owed. But where did that behavior come from? The world often treats Greece as a victim of the financial crisis, but it was only an indirect one. For years, Greece lived precariously, and the 2008 crisis merely edged us over.

Our current debt troubles come from the excessive profligacy of the 1980s and early 1990s, and that profligacy had political rather than economic roots. Debt came from state spending whose intent was to resolve the inherent tensions of the Greek political system after World War II. That system, while it delivered economic growth and prosperity, was deeply unjust, chiefly due to its continued marginalization and outright persecution of the Greek left. Spending brought into the mainstream those previously excluded. But with no effort to raise money to pay for that spending, Greece was left with an excessive debt burden. The political goal succeeded - but the economy suffered as a result.

Why does this matter? A right diagnosis makes a difference. When polls ask Greeks who is to blame for the country’s debt, their answers blend common sense (the “politicians”) with ideological and factual incoherence (speculators, the banks, the Europeans). Without an answer to the question “what went wrong” there is no hope to get right the question “what should be done?” Greece has yet to confront why it got into this mess. The fact that the crisis is rooted in the statism of the 1980s is often understood, but its implications are not: that Greece needs less state and fewer restrictions in the private sector.

#2. Judge Greece by reforms, not its debt. It is easy to pigeonhole Greece into a single metric: debt over GDP. Yet that singular focus is also a mistake. The reason is that debt is a symptom, not the disease, and it merely reflects the underlying political economy of the Greek state. That realization, while in some ways obvious, leads to some non-obvious conclusions. Chiefly, it raises the question of whether to judge Greek efforts by the extent to which they bring about debt sustainability versus the extent to which they create a more robust economy.

Selling off land, for example, might raise money that can pay down debt but it does not change the structural deficiencies of the Greek economy. By contrast, firing public sector employees worsens sustainability by depressing state spending and boosting unemployment benefit outlays, but it can aid the economy in the longer term. That tension - between two metrics for judging the Greek economy – is a main reason I have argued against default. Not because Greek debt is sustainable – it probably is not – but because a default without reform is not good.

#3. Empathize with frustration, ignore protests. A crisis is an incredibly unjust period, hurting those who can least afford to be hurt, and it brings forth solutions that are adopted for expediency rather than justice. In that climate, the protesting masses can easily garner sympathy - who can say that the pensioner who worked for decades and who lives on a subsistence income should face a cut in his pension? There is no justice in such act - just necessity.

Yet to think of Greek protests as the rebellion of the masses against an oppressive government or the IMF is an absurd misrepresentation of reality. Self-interest lies at the heart of that rebellion. It is a self interest that seeks to protect privileges that are indefensible and that seeks to transfer wealth from the population at large to the pockets of the privilege holders. For the most part, the protests of the last 18 months have been protests of privilege - and so the government has been right to ignore them.

#4. Greeks are slowly breaking taboos. Greek political discourse is surprisingly sclerotic. New ideas are hard to penetrate the demos: slogans trump critical thinking; party allegiance stems from favor-granting rather than ideological coherence; established practices gain credibility merely by repetition; stories, however distorted, become myths. The iconoclast is the rarest sight in public debate. Plain truths become heresies. Common sense loses to absurdity.

But in an economic crisis, the sanctity of the old crumbles under the weight of its own failure. Old ideas are discredited. The quest for practical solutions obscures ideological or historical purity. Under such pressure, the Greeks have either embraced or accepted realities they would have found unthinkable a few years ago: support for the market, ending tenure for public sector employees, reforming higher education, to name a few. In that sense, Greece has had a healthier debate than ever before – because the stakes are high and because no subject is off the table.

#5. Greece will emerge stronger from this crisis. This is more a wish than an argument, but I truly believe it. In part it is because my expectations have always been low: when you expect so little, even the smallest change will surprise and please you. So my optimism partly reflects my past pessimism. But it is also an optimism founded on the observation that the Greek state suffocates the economy directly and indirectly. It is an optimism that puts faith in markets, much as they out of vogue these days, and sees the reform effort as strengthening those markets. And it is an optimism that believes that once the shackles are removed, ingenuity (what Greeks call δαιμόνιο) will produce big and positive changes.

Far away, at the end of this journey called austerity, I can imagine a Greece that is fair, just and meritocratic. It is a Greece that is actually worth living in, rather than a Greece that one seeks to escape from by moving to London, Paris or New York. It is not the most likely scenario, I admit; but this is the first time in my lifetime that this has been a scenario at all. And the fact that this is at least remotely possible means that Greece is changing for the better.

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