Wednesday, November 30, 2011

Greece’s Political Philosophy Challenge

In the chaos of an economic crisis, it is easy to frame success or failure in the context of narrow economic targets: is the budget deficit shrinking; is spending being cut; is GDP falling; and so on. But when a country faces a political, economic and social crisis, as Greece does, success is only partly a function of economics. Instead, Greece’s future will be determined by the kind of political economy that emerges from the ashes of a system that has clearly failed. Appraising Greece’s future is about looking beyond quantitative targets to broader questions of political economy and political philosophy. 

Greece’s current debt problems are largely the result of the political economy of the 1980s, when state spending became a vehicle for bringing the hitherto persecuted left into the political mainstream (see here). Over time, political allegiance morphed into a quid pro quo and became a matter of parochial or even personal interest – relations between the citizenry and politicians have since been governed chiefly by clientelism. The political economy challenge of the Greek state is to retain legitimacy while dismantling that system of patronage and clientelism – to create a new social contract founded on ideology rather than personal exchange. The battle in today’s Greece is largely a battle for that new social pact and the forces that favor it being pitted against the forces that resist it. 

That is the political economy challenge; but that political economy, practiced over a generation, has created its own political philosophy in Greece. Changing that political philosophy is no less important. What I mean by political philosophy is the set of boundaries that the body politic places on public life. It defines what is and what is not acceptable; it delineates what the public can tolerate and what it cannot; and it contains the language and symbols that the public uses to make sense of political life. To make matters more concrete, here is what I mean by Greece’s political philosophy. 

First, Greece has a clear leftist tilt. This is evidenced by the fact that the socialists have ruled Greece since 1981 for twice as long as the conservatives and also evidenced by the fact that leftist parties have gained a majority in every election except one (April 1990). In several ways, the Greek public is left of center: in its slogans, in its anti-Americanism and anti-globalism, in its political instincts and its sense of victimhood – these portray a society are more left than right. 

Second, Greeks believe in and perpetuate a weak state. Associated with this is an aversion towards state-sponsored violence (even when needed to restore “order”) and weak compliance with the law. That latter attitude can be seen from minor instances (traffic laws) to tax evasion and more serious infractions that often go unpunished. Few Greeks see the state as a place to go right wrongs. Greeks join political parties and enter into the public sector more for personal gain than for pursuit of a broader political agenda and ideology. That, in turn, further weakens the state and saps it of legitimacy and effectiveness. 

Third, Greeks have a strong sense of entitlement (see here). It is no surprise to see loud and often violent protests from people whose pensions are being cut, whose jobs are in jeopardy, whose salaries are being slashed and whose benefits are being rolled back. What is surprising (or, at least depressing, if not surprising) is how little Greeks talk of fairness. Clearly, someone whose salary is being cut 50% will be mad. But neither the old salary nor the new one is necessarily fair – fairness is a function of utility and a salary should be based on one’s contribution. A great tragedy in modern Greece – and perhaps the biggest political philosophy challenge – is the decoupling of effort from reward. When reward is based on political connections or on how loud you can scream at a political rally or on the power of your union, then meritocracy is merely an abstraction, and what one expects is disconnected from what one deserves. 

Finally, Greeks have lowered their expectations. One thing that Michael Lewis got right in his portrait of Greece is the sheer volume of the tales of corruption: “The extent of the cheating—the amount of energy that went into it—was breathtaking. In Athens, I several times had a feeling new to me as a journalist: a complete lack of interest in what was obviously shocking material” (here). Coupled with an unimpressive *supply* of politicians has come also a lack of *demand* for serious politicians – Greeks have effectively given up and choose to participate in the corruption rather than fight it. The stigma against doing something wrong is almost absent – and so the country lacks the most vital element of social self-correction: the ability to shame people into honest dealings. 

This is the political philosophy that needs to change: with the exception of leftism (which can and will persist but which would benefit from a counter-balancing conservativism), Greece’s future will depend on three changes in political philosophy: in the faith that the Greek people place on a strong and functional state; on rediscovering meritocracy and the link between work and reward; and on remembering how to be ashamed of dishonest behavior and expect better from each other and from our political leaders. Those are the benchmarks – not for whether the debt will be repaid but on whether Greece will be a country worth living in around 2025.

Η Αλλαγή Πολιτικής Φιλοσοφίας Που Χρειάζεται η Ελλάδα

Στο πανικό μιας οικονομικής κρίσης είναι εύκολο να κρίνουμε την επιτυχία ή την αποτυχία από στενούς οικονομικούς στόχους: αν το έλλειμμα συρρικνώνεται, αν οι δαπάνες περικόπτονται, αν το ΑΕΠ πέφτει, και ούτω καθεξής. Αλλά όταν μια χώρα αντιμετωπίζει μια πολιτική, οικονομική και κοινωνική κρίση, όπως αντιμετωπίζει η Ελλάδα, η επιτυχία είναι μόνο εν μέρει συνάρτηση οικονομικών συντεταγμένων. Το μέλλον της Ελλάδας θα καθοριστεί από την πολιτική οικονομία που θα αναδυθεί από τις στάχτες ενός συστήματος που έχει σαφώς αποτύχει. Πέρα από τους ποσοτικούς στόχους, το μέλλον της χώρας θα κριθεί από ευρύτερα ζητήματα πολιτικής οικονομίας και πολιτικής φιλοσοφίας.

Το πρόβλημα του χρέους στην Ελλάδα είναι σε μεγάλο βαθμό απόρροια της πολιτικής οικονομίας της δεκαετίας του 1980, όταν ο κράτος χρησιμοποίησε δαπάνες για να ενσωματώσει την διωκόμενη αριστερά. Με τον καιρό, η σχέσεις μεταξύ των πολιτών και των πολιτικών έχουν μετατραπεί σε κυρίως πελατειακές σχέσεις. Η πρόκληση του ελληνικού κράτους είναι η διατήρηση της νομιμότητας σε μια περίοδο οπού το σύστημα των πελατειακών σχέσεων έχει διαλυθεί και όπου καλείτε η δημιουργία ένα νέου κοινωνικού συμβόλαιο με βάση την ιδεολογία και όχι τη προσωπική ανταλλαγή. Η μάχη στην Ελλάδα του σήμερα είναι σε μεγάλο βαθμό μια μάχη μεταξύ των δυνάμεων που στηρίζουν το νέο κοινωνικό σύμφωνο έναντι των δυνάμεων που του αντιστέκονται.

Αυτή είναι η πρόκληση πολιτικής οικονομίας. Αλλά η πολιτική οικονομία των τελευταίων 30 χρόνων έχει δημιουργήσει τη δική της πολιτική φιλοσοφία, η αλλαγή της οποίας είναι εξίσου σημαντική. Με «πολιτική φιλοσοφία» εννοώ το σύνολο των ορίων που θέτει το πολιτικό σώμα στη δημόσια ζωή: Ορίζει τι είναι και τι δεν είναι αποδεκτό, σκιαγραφεί τι μπορεί και τι δεν μπορεί να ανεχτεί το κοινό, και περιέχει τη γλώσσα και τα σύμβολα που χρησιμοποιεί ο κόσμος για να ερμηνεύσει την πολιτική ζωή. Πιο συγκεκριμένα, πιστεύω ότι η πολιτική φιλοσοφία στην Ελλάδα χαρακτηρίζεται από της εξής τάσεις.

Πρώτον, η Ελλάδα έχει σαφή αριστερή κλίση. Αυτό αποδεικνύεται από το γεγονός ότι το ΠΑΣΟΚ έχει κυβερνήσει την Ελλάδα από το 1981 τα διπλάσια χρόνια απ’ ότι έχει η Νέα Δημοκρατία, ενώ τα κόμματα της αριστεράς έχουν κερδίσει την πλειοψηφία σε κάθε εκλογική αναμέτρηση εκτός από μια (τον Απρίλιο του 1990). Άλλα δείγματα αριστερής κλίσης είναι το το αίσθημα του αντιαμερικανισμού και της αντι-παγκοσμιοποίησης, τα διάφορα πολιτικά ένστικτά του κόσμου, και η αίσθηση της θυματοποίησης.

Δεύτερον, οι Έλληνες πιστεύουν και διαιωνίζουν ένα αδύναμο κράτος. Αυτή η πίστη συνδέεται με μια αποστροφή προς την κρατική βία (ακόμη και όταν χρειάζεται για να αποκατασταθεί η «τάξη») και με μια μη-συμμόρφωση με το νόμο. Η στάση αυτή φαίνεται από παρατυπίες ήσσονος σημασίας (π.χ. κώδικα οδικής κυκλοφορίας) έως τη φοροδιαφυγή και ως και πιο σοβαρές παραβάσεις που συχνά μένουν ατιμώρητες. Ελάχιστοι Έλληνες βλέπουν το κράτος ως ένα θεσμό που θα επέμβει για δικαιώσει αδικίες. Έλληνες συμμετέχουν σε πολιτικά κόμματα και μπαίνουν στο δημόσιο τομέα για προσωπικό όφελος παρά για την άσκηση μιας ευρύτερης πολιτικής ατζέντας και ιδεολογίας. Αυτό, με τη σειρά του, αποδυναμώνει περαιτέρω το κράτος και ελαττώνει τη νομιμότητα και την αποτελεσματικότητά του.

Τρίτον, οι Έλληνες έχουν μια ισχυρή αίσθηση του κεκτημένου. Δεν αποτελεί έκπληξη να διαμαρτύρεται κόσμος του οποίου οι συντάξεις περικόπτονται, οι θέσεις εργασίας είναι σε κίνδυνο, οι μισθοί πετσοκόβονται και οι παροχές των οποίων περιορίζονται. Αυτό που προκαλεί έκπληξη (ή, τουλάχιστον κατάθλιψή αν όχι έκπληξη) είναι το πόσο λίγο οι Έλληνες μιλούν για δικαιοσύνη. Προφανώς, κάποιος του οποίου ο μισθός είναι να κοπεί 50% θα είναι τρελός να μη διαμαρτυρηθεί. Αλλά ούτε ο παλιός ούτε ο νέος μισθός μας λέει τίποτα για το τι πρέπει να παίρνει αυτό το άτομο – αυτό καθορίζεται από τη συμβολή του καθενός. Μια μεγάλη τραγωδία - και ίσως η μεγαλύτερη πρόκληση πολιτικής φιλοσοφίας - είναι ότι έχει αποσυνδεθεί στη σύγχρονη Ελλάδα η προσπάθεια από την ανταμοιβή. Όταν η ανταμοιβή βασίζεται σε πολιτικές διασυνδέσεις ή με το πόσο συμμετέχει κανείς σε μια πολιτική συγκέντρωση ή στα σωματεία, τότε η αξιοκρατία είναι χάσει το νόημά της, και η ανταμοιβή που περιμένει κανείς έχει αποσυνδεθεί από αυτό που του αξίζει.

Τέλος, οι Έλληνες έχουν χαμηλώσει τις προσδοκίες τους. Ένα πράγμα που ο Michael Lewis είπε εύστοχα το πορτρέτο του για την Ελλάδα είναι ο τεράστιος όγκος των ιστοριών της διαφθοράς: «Η έκταση της εξαπάτησης - και η ενέργεια που καταναλώνεται για αυτή - ήταν εκπληκτική. Στην Αθήνα, είχα ένα νέο αίσθημα ως δημοσιογράφος: μια πλήρης έλλειψη ενδιαφέροντος σε προφανώς συγκλονιστικό υλικό.» Σε συνδυασμό με μια έλλειψη *παροχής* έχει επέλθει και μια έλλειψη *ζήτησης* για σοβαρούς πολιτικούς. Οι Έλληνες έχουν πάψει να προσπαθούν να σταματήσουν τη διαφθορά και απλώς συμμετέχουν σ’αυτή. Το στίγμα για τη κακή πράξη δεν υπάρχει - και έτσι η χώρα δεν διαθέτει το πιο ζωτικό στοιχείο της κοινωνικής αυτοδιόρθωσης: την ικανότητα να ντροπιάσει τον άνθρωπο και να του επιβάλλει ειλικρίνεια.

Αυτή είναι η πολιτική φιλοσοφία που πρέπει να αλλάξει: με την εξαίρεση της αριστερής κλίσης (η οποία θα παραμείνει άλλα η οποία θα μπορούσε να επωφεληθεί από μια αντιστάθμιση συντηρητισμού), το μέλλον στην Ελλάδα θα εξαρτηθεί από τρεις αλλαγές στην πολιτική φιλοσοφία: (α) στην πίστη που οι Έλληνες πολίτες θα έχουν σε ένα ισχυρό και αποτελεσματικό κράτος, (β) στην επανεύρεση την αξιοκρατίας και τη σύνδεση μεταξύ προσπάθειας και αποτελεσμάτων, και (γ) στην ικανότητα να ζητάμε περισσότερα από των συνάνθρωπό μας και από τους πολιτικούς μας ηγέτες. Αυτά είναι τα σημεία αναφοράς για το μέλλον - όχι για να απαντήσουν αν το χρέος θα εξοφληθεί αλλά για το αν η Ελλάδα θα είναι μια χώρα στην οποία θα αξίζει κανείς να ζει ο 2025.

Thursday, November 10, 2011

Greece: New Prime Minister, Old Problems

Public frustration and anger had centered so much on George Papandreou that his departure is sure to elicit some relief. But the lengthy and, at times, comical process of selecting Loukas Papademos as his successor should dispel any notion that there is any consensus among the political elite. The problems that made Papandreou fail have not gone away - much has changed and much has remained the same.

Papandreou was a problem but he was not "the" problem. His failure was a failure to create and sustain a political and social coalition in favor of reform, either among his party or among the public. But his failure reflected the enormity of his task - Greek reform collapsed, as they say, under its own weight. And so those who rejoice that Papandreou is gone ought to ask themselves one question, why are you happy he is gone?

There are two answers to that question. The first is that Papandreou, by signing a pact with the troika devil, forced on the Greek public excessive austerity and ultra-neoliberalism (whatever that means). If anyone is rejoicing for that reason, then rejoice no longer - the prescription for the next few years calls for more of that medicine, which the patient needs desperately. The second answer is that Papandreou was ineffective. He was unable to sell the party or the people on his agenda, and he was never strong enough to punish the members of his own party that did not support him. His chief political maneuver was to elevate his rival into the second highest position, evidence of his inability to check internal challenges.

A new administration does little to change the hard math of reform - its mandate, after all, is too narrow and focused on negotiating a new memorandum rather than implementing reform. The country needs a second bailout, to be sure, but it also needs serious political commitment to the first one. A transitional government cannot provide that commitment.

What the government can do is create a second bailout package that the Greek people will vote on by February. In theory that process will grant more legitimacy on the second package. But in practice, what is curious is that there is no real disagreement among the former PM and leader of the opposition for a troika-like reform agenda, at least for those who can distill the conflicting messages of the leader of the opposition. The discord comes in the "policy mix" to implement it. And so the Greek public is not faced, credibly, with two alternative policy options as much as it is faced with slightly different paths to the same destination, plus a lot of rhetorical noise.

Those who have been reading my blog know that I judge political events by a single yardstick: to what extent do events facilitate the public's recognition that Greece needs to change. That is the reason, for example, I welcomed the taxi strike this summer - because it was so crass and unjustified that it was bound to expose the illegitimacy of the demands made by various special interests. So what to make of this change?

The pessimist in me will see this as evidence that protests work. Those who are opposed to reform may feel emboldened - "we fought and brought down a prime minister" they might say, and keep up the struggle. The optimist will see this as a necessary step in a process of political maturation - as evidence that reform and further EU support will not come from half measures, that Europe will let Greece collapse if it has to, and that the country's political elites will no longer be able to hide behind rhetorical ploys. So the change in leadership and the coming elections will help only if they reinforce in the mind of the Greek public the need and inevitability for radical reform - which it can but is not necessarily going to do.

Sunday, November 06, 2011

Greece's Choice: Undo or Format?

The word "referendum" ended George Papandreou's career. I came out very strongly against the referendum because I saw it as a crass political maneuver to create "consent" by offering the people a choice that was too narrow to be meaningful. Does that mean I am afraid to hear what the Greek people have to say? No. I just want to make sure we ask the right question. And that, in turn, requires an honest presentation of the alternatives available.

Broadly speaking, the Greek people are faced with two sets of choices. The first is a narrow decision over default. At this stage, there are two options: a 50% haircut on privately held debt (which amounts to a ~30% haircut overall) or an instant and disorderly default. Perhaps there could have been other choices, but such is reality that these are the only ones available right now. The referendum, at least as it was conceived at first, was meant to pose this question: haircut or disorderly default? The problem is that this is not a very profound question. It is like asking whether you would like me to break your legs or kill you - you will likely say, yes, break my legs, but you hardly "consented" to that.

More fundamentally, this is not the difficult choice. The issue is not whether or not to default but rather, how far are you willing to go to avoid default? What kind of Greece do you want to see emerge from this crisis? Those are the only meaningful questions, and it seems to me that the Greek people have two options: they can press "undo" or they can press "format."

"Undo" is basically about going back to the status quo ante. Let's say you rewind back to 2007 or 2004 or even 2000. The "undo" option assumes that this crisis was the result of one or two bad turns and that it was exacerbated by Lehman Brothers and the global financial crisis. If it were possible to return to the "good old days," let's do it. This choice, in practice, means default and, most likely, exit from the Eurozone. After a period of immense upheaval, life would return to "normal." The Greek people would lose much of their wealth, but a sharp currency devaluation would stimulate growth. Call this the Argentina option.

"Format" is different. As with computers, you only press "format" when you run out of options and when it is the underlying structure, rather than one or two pieces, that are flawed. According to this view, Greece is rotten to the core and nothing sort of a complete wipe will work - anything less and you merely reset the clock for another crash a few years later. In practice, "format" means restructuring Greek politics, economics and society. It means shrinking the state, introducing competition in the private sector, and ending privileges; it means a transition from clientelism and protection to accountability, meritocracy and less shielding from the uncertainties of life. In short, it means a Greek revolution.

I would love to hear the people's answer to that question: undo or format. Of course, a referendum cannot ask such a question - only elections can do that. Except that is not really the choice being offered to the Greek people by the political class. Too bad because that is the only question that matters - everything else is just nonsense to pass the time.

Saturday, November 05, 2011

Greece: Towards Life After Papandreou

Greek PM George Papandreou appears to have finally gone too far and exhausted the patience of both his own party as well as the public. The most likely scenario (at least for now – things are changing all the time) is that he will resign in favor of a coalition led by the finance minister and deputy PM, Evangelos Venizelos. Mr. Venizelos' mandate will be to negotiate the second bailout with the EU/IMF and hold elections by February 2012. So far, it is not clear how much of a "unity" government this will be – the leader of the opposition wants elections within six weeks and has repeatedly ruled out co-governing. But after a chaotic last few days there is some order emerging and so I wanted to step back and ask two questions: How did we get to this? And what does it mean for the country?

The why is both easy and difficult to answer. It is easy because there are two obvious answers. First, Greece is getting worse: fiscal targets are being missed, capital markets remain closed, the economy is in a deep and prolonged recession, the public is angry, continuous strikes are paralyzing the country, the international media is vitriolic in its criticism of Greece, the country is isolated and debt restructuring is underway. As PM, Mr. Papandreou is responsible: "the buck stops here."

Second, Mr. Papandreou dragged, for the third time in a year, the country into a multi-day travesty that he himself set in motion. First he did it in November 2010 by threatening to call national elections if he did not "win" local elections. The second time was in June 2011 when he reportedly offered to resign and then retracted that decision and merely reshuffled his cabinet. So when he announced a referendum before saying there will be no referendum after all, it was just too much. Everyone got tired of him.

These are the easy answers, but as I said, they do not tell the whole story. And they also fail to answer the deeper the questions: Why did Mr. Papandreou fail? And what does Greece look like after him?

Mr. Papandreou will be remembered as the man who signed the "memorandum" with the troika in May 2010. But his legacy will be split between two opposite views: some Greeks will blame him for signing the memorandum; and others will blame him for not implementing it. Where one fits on that spectrum depends on one's political leanings.

One view is that Mr. Papandreou took Greece down the wrong path from the start. According to this view, the mistake was to sign the first bailout in May 2010 - that is the original sin. Having sacrificing Greek sovereignty to bail out foreign banks, Mr. Papandreou took progressively harsher measures that punished the middle class and promised to sell out the country – all in defense of a flawed economic model and merely in the interest of “foreign capital.” According to that view, there is some alternative, which is not precisely clear, that would prevent such misery being imposed on the Greek people. Readers of this blog know I don’t buy that view at all.

On the other end, the critique against Papandreou will be not that he signed the “memorandum” but that he could not execute it fully. His failure was twofold: he never won over the Greek people and he was never able to retain discipline in his party. The electorate was split, broadly speaking, into three groups: those who opposed reforms because they were threatened by them; those who supported reforms because they saw them as necessary; and those who were indifferent. In his party and administration there were clearly those who were highly supportive of change and those who feared bold reforms that would undermine their political careers. Party division further slowed the pace of change.

What happened is that Mr. Papandreou’s reform agenda went too fast for the anti-reform group but too slow for the pro-reform group – thus, he alienated both. And that alienation, and sense of stalemate and frustration, trickled into the population at large. The failure was thus a failure to create momentum for reform. And by failing to win the people, he gradually lost his party too, creating a vicious cycle where lower popularity weakened political control which in turn created ineffective government that fueled unpopularity.

So where are we now? The problem is that the split in the public between those who favor reform and those who oppose it is as alive as ever. I, for one, expected that this period of making the case for change and of exposing the naked self-interest of the protesting class would have created greater critical mass favoring reform. Instead, the prevailing mood has been disappointment and disengagement, mostly centered on the PM and accusing him of incompetence. In other words, this latest political upheaval responds to the increased demand for competence, but it does not resolve the underlying question of what reform trajectory the country should be following.

What’s next? It seems Greece is headed towards elections. In the meantime, the focus will be on finalizing the details of the second bailout. It is not clear how “political” that process will be – what additional demands will be required for that second bailout and whether a fragile government would be able to negotiate and assent to those conditions. More importantly, elections can be a savior or they can be disastrous – as I noted in a previous post, the disappointment of the Greek public is so great that the two major parties are getting less than 50% combined in polls. If Greece needs a national unity government, how will it come about? If the streets are any sign, there is considerable opposition to reform and there is considerable fatigue with the current path – how can such widespread opposition produce a political configuration that is conducive to the type of aggressive reform that the EU and the IMF will require?

These are the questions that are yet to be answered. Greece needs serious leadership to get out of this mess. It has gotten rid of a leader widely seen as unserious. But what comes next is not necessarily better. It can be – but it can also be worse.

Wednesday, November 02, 2011

Was Greece Joining the Eurozone a Mistake?

Nicolas Sarkozy knows how to spice things up – his comment that it was a “mistake” to let Greece into the Eurozone has ignited much commentary, mostly in support for his statement. And yet that’s a silly thing to say – and it is also an unhelpful thing to say because it focuses attention on the euro as the chief problem, when it is not. 

First things first: today’s crisis would not be alleviated if Greece exited the Eurozone. Europe’s problem is that banks hold Greek debt – whether that debt is denominated in euros, drachmas, gold or goats makes no difference. Think about the United States bailing out Mexico in 1994 – the problem is exposure, not the currency in which that exposure is denominated. Second, throwing Greece out of the Eurozone would trigger a massive banking crisis elsewhere. Spanish, Irish, Italian, and Portuguese depositors would wonder whether their euros will overnight turn into pesetas, pounds, liras or escudos. They will move their money abroad. Their banks will face imminent collapse. Third, would a devalued currency help Greek exports? Yes. But it would do by merely offering a lower price, when instead, Greece needs better products not bad products at a lower price. And fourth, there is of course a political dimension - the period to prepare for entry into the Eurozone, for instance, was also the period when public finances were at their healthiest. 

So much for the present – what about history? To what extent is the current crisis to blame on the euro? In one way, it is hard to blame the euro. The debt problem emerged from the fact that the European periphery was able to borrow at interest rates that were too low relative to their fiscal health. The euro is to blame in a round-about way - although bailouts for fellow Eurozone members were prohibited by the Monetary Union, the markets treated all European debt equally – Greece and Spain were the same as France and Germany. The convergence in bond yields was the result of that treatment. 

This was a view that the market is regretting these days – and yet, the market may not be altogether wrong. Germany is indeed stepping in to guarantee some of that debt – and in a slightly better scenario, investors in Greek debt would have seen no haircut at all courtesy of the German taxpayer. So the problem came not from the adoption of the common currency but the widespread assumption (legally wrong but, in retrospect, politically right) that European countries would step in to support each other’s debt. And much of the crisis now emerges from the uncertainty about exactly how much debt Germany and other countries will really shoulder. Again, nothing to do with currencies. 

So much for debt – what about the broader question? The guiding principle here is an economic theory about “optimal currency areas,” which lays out characteristics that entities must share in order to form an “optimal currency union.” The two key ideas are: (a) countries in a monetary union may end up with monetary policies that are too expansionary or restrictive, either fueling a bubble (if money is too cheap) or slowing down growth (if money is too dear); and (b) with a fixed exchange rate, countries lose currency appreciation or depreciation as a way to correct imbalances. 

There is, in fact, evidence for both propositions. Greece’s inflation rate was above the Eurozone average, and so the interest rate set for the Eurozone was too low for Greece. So people and companies over-borrowed. And there is no also no doubt that with no ability to devalue its currency, Greek exports suffered. Neither of these two statements can be denied. But these points take you only so far; they don’t answer the crucial questions: did membership in the Eurozone push the country to crisis? And second, what would have life looked like outside the Eurozone? 

Cheap money fuels borrowing and Greece’s above average inflation fueled borrowing. But Greece’s debt problem is public, not private – and while cheap money can raise private borrowing, public borrowing is determined by the appetite that markets have to lend to a sovereign. And there the problem was not membership in the euro but, as I said above, the presumption that this membership entitled Greece (and others) to interest rates that were almost identical to Germany. 

At the same time, Greece benefited from the euro with lower inflation and exchange rate stability. More generally, the argument against the currency union betrays the economics profession’s love with monetary policy, trusting that that no matter what the problem monetary policy can solve it. Guess what? It can’t and it hasn't. For example, monetary policy was flawed in the early 2000s in the United States. So yes, Greece gave up the right to conduct monetary policy but there is no guarantee that it would have exercised that right much better than what the ECB did – it would likely have ended up with more inflation and little else. 

A second way to look at this question is to distinguish between inflation as a monetary or a micro-economic phenomenon. Monetarists such as Milton Friedman say that, “inflation is always and everywhere a monetary phenomenon.” The problem is with “always” in that sentence since inflation also has micro-economic roots from the lack of competition in product markets and services and in wage-setting practices. In the case of Greece, in particular, inflation was very much rooted in entrenched and quasi-monopolistic structures as well as in strong unions that allowed for wages to be set without due regard to productivity. 

Why does this matter? Because it takes us to the adjustment issue – with a fixed exchange rate, overvaluation is “internal” which means prices start getting out of sync with underlying productivity trends. But allowing the price to fall is, in a way, the wrong way to correct this problem – you are saying that you are changing too much for something and you should lower the price. By competing on price, you end up not competing on other things such as quality. It also does nothing to correct these micro-economic distortions such as monopoly or improper wage-setting practices – by merely altering the price, you preserve these practices. 

So if you put all these things together, you get the following: (a) excessive borrowing driven by a perception about sovereign risk that was linked but not necessarily connected to membership in the Eurozone; (b) monetary policy under a Greek government is unlikely to have been that much better; and (c) successive devaluations would have done little to correct the underlying problems that produced higher inflation and lack of competitiveness. Plus solving the crisis has little to do with Greek membership in the Eurozone and everything to do with who holds Greek debt. That’s why the question of whether Greece should have entered the Eurozone and whether it should stay in it is more of a distraction.