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.

11 comments:

  1. Breathtakingly insightful analysis, once again!

    Just like the whole blog is amongst the very few convincing breakdowns on the Greek crisis.

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  2. Niko:

    Didn't we say that you need to give up you feeble attempts at matters that escape your competence and write an article about the Bourgas-Alexandroupolis pipeline instead?

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  3. Niko, thanks for your thoughts, but where would an election get us anyway? Both "big" parties won't win any majority, so they will have to hold coalition talks, there will be a hiatus and any action the country needs will have to wait. So why call for elections when they could join forces right now?

    Dean, "we" didn't say Jack. So stop being a troll and act like a grown man and contribute or just shut up.

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  4. @Anonymous - you're absolutely right, which is why three is an unreasonable faith in elections to correct things. It does seem to be that the political world has settled on elections - the question is whether to have them very soon (6 weeks) or later (3 months). And if that's the choice, 3 months makes a lot more sense.

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  5. I love Greece and I spend a lot of vacations in the islands, often returning twice a year. This fall I decided I can not take any more the disruptions and costs associated with the many strikes. So I went instead to Spain, to the Balearic Islands. Apparently I was not the only one thinking this way. Spain reported a 17 million increase in visitors this year. I wonder how many of those gave up on their Greek vacation and chose Spain instead? Why can't the Greek people and their government protect at least their tourism industry? It is in everybody's interest. Declare all strikes that affect the tourism industry illegal, I am sure the Parliament would go along with that, in spite of the unions. At the very least forbid strikes in the transportation sector.

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  6. Dean,

    having also quietly endured your mean-spirited mutterings on Yanis V's blog, I really do wish you'd go away. Please.

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  7. Excelent analisys. But I think the problem in Greece is not the government or the public debt. The problem is the lack of private investment. The problem lays on the citizens. People from other countries don't invest in Greece, because their are affraid. Afraid of strikes, afraid of bureaucracy, etc. And, from a foreign point of vie, the only things Greece produces, so to speak, is see and sun. And yoghurt. I'm talking about greeks in Greece, not greeks abroad, a dinamic people. Why is that? Italy has a huge public debt, but they have Fiat, Ferrari, a modern and agressive fashion industry, oil ang gas industry, etc, etc. They have industry and global trademarks. What do greeks do?

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  8. You don't buy into the view of a flawed economic model and the interests of foreign capital. That's your good right of course, but is not very credible under the given circumstances.

    I am not a trained economist and won't get into specific arguments therefore but I do know that it is a generally accepted idea among many leading economists (like Krugman and De Grauwe) that the eurozone is a fundamentally flawed idea and that the Greek crisis essentially came about because of its entry into the latter. It is neither difficult for the laymen to see how this is as much a European (or French-German) problem as it is a Greek problem.

    I am sorry for referring to an opposing view, but a very well documented post on what really caused the crisis can be found on http://streetlightblog.blogspot.com/2011/09/what-really-caused-eurozone-crisis-part.html

    It may be difficult to see what a default and euro-exit of Greece would precisely mean for its people (on the short term), but it is hard to argue that on the middle and long term they won't be better of than with the austerity measures.

    You may believe that no alternatives exists or are only vague, but that does not mean they are not in the making. It suffices to look at the protests all over the world to rising inequality and plutocracy. I hope you do take the effort to look into what could really be a more just economic system.

    Jonas

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  9. As you are no doubt aware after a vote of confidence in the government there can be no new vote of confidence for 6 months. Papandreo is free to negotiate and implement the bailout.

    However, Greece will not get out of the crisis unless productivity and GDP go up, and that can not happen unless the people are behind the government. The people are going to have to suffer at least another 2 years of austerity and they are not inclined to suffer another 2 months. So something has to be done to convince the people that the government is doing the best possible.

    Elections are not the answer. The EU has given Greece until 4 Dec to accept the bail out. If the government calls for elections, no party will have a majority, therefore they will miss the deadline and exit the EU.

    The strategy so far has been to play various groups of the populations against each other by publishing (exaggerated or apocriphal) reports of their excessive income. Until recently this worked quite well but people are wising up and it won't work for another round.

    A national unity government with a non political leader is a good idea. provided that the parties agree to support it both in the house and in the press. A more likely scenario is that the parties would criticize the unity government to gain political headway. So I doubt any technocrat would be willing to take the job.

    I thought the whole referendum idea was part of a master strategy to diffuse the political situation but either the plan went south or it always was about political brinkmanship.

    As it is the government is backed into a corner. GAP needs to resign and find someone acceptable, capable, and willing to take the job, and that might be too tall an order.

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  10. @ (previous) anonymous:

    Sorry, but the blog you are referring to has already huge mistakes at the very beginning: Neither Ireland nor Spain have ever spend irresponsibly before they were hit by the first (Lehman Brothers) crisis. And they have fortunately understood very fast that only reforms can help. On the other hand, Italy (better: Berlusconi) has always had too much debt, deficits and is reluctant to reforms. So your blog is comparing apples with oranges and the entire analysis is not only based on this mistake, but also absurd (not written by an Economist either?). The only thing one can say about the roots of the crisis are that Greeks problems are very self-made, while Europe's problems (contagion) are indeed systemic.

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  11. The new roadmap for Greece seems to be copied from recent events in Portugal. Before las spring's elections took place, the "troika" negociated a "memorandum" with mainstream parties. They have signed it, so now, even though the Socialists are formally in the opposition, they do not act like such.

    After October 13, 2011, the day our prime-minister announced harsh salary cuts and tax hikes, the troika's suserainty over Portugal started to buckle under its own weight. The Socialist Party announced it would not vote against the budget, and now it is dropping faster in opinion surveys than the ruling majority parties. The majority is also dropping in polls, only after 120 days of power. The "troika" is learning, in practice, how difficult it is to run a protectorate. They should have spent some of their time with the history books.

    Corruption, bad spending and deficits is the fever, here, not the desease. When the people is unable to make an honest living, many folks -- particularly those whose self esteem and valour is weakest or has been severely weakened -- resort to a piggish existence.

    And the overly proud guys that deride the so called "PIGS" should really worry about their own monstrous piggishness, i.e., the corruption that spreads from their unruly financial industry. They should honestly worry about the ongoing breakdown of valour and self-esteem inside their own battle stations. Anyway, this is a mute point. I do belive the financial industry lost the willpower to honestly worry about anything.

    You know, the fish always rots from the head down.

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