Greece’s experience these past two years has made me into an even stronger believer in markets and in capitalism. Here’s why.
It is easy to paint a picture where poor, defenseless Greece is fighting against the forces of global capitalism, where evil banks and greedy markets want to profit from Greece’s demise, and where the urge to “rise up” and “resist,” so wedded into the Greek psyche, puts our current crisis on a morally equivalent basis as the Revolution or the Resistance. Certainly many Greeks feel that way, as did our former prime minister who often lashed out against speculators and the markets. But such a reading of the crisis is deeply misleading and it is ultimately wrong. If this crisis is to produce real change in Greek society we need a correct diagnosis of what happened and why. And markets are hardly to blame for our current condition.
In a way, the Greek crisis is a typical sovereign debt crisis. A profligate government was able to sustain excessive spending through continuous borrowing; at some point, faith in its ability to repay debt is shaken and so it can no longer borrow at reasonable rates. At that point, an international coalition gets together to offer a solution – at first, this comes in the form of a financial lifeline (bailout); if that does not work, the country may either seek another bailout, it can negotiate a debt exchange with its creditors or it can outright repudiate its debts. This is exactly the path that Greece has followed.
The background of the global economic crisis and Greece’s participation in the Eurozone only affect the particulars of that trajectory, but they do not alter its fundamental character. Some of these forces have actually aided Greece. The exposure of European banks to Greek debt has been a constructive force in favor of an orderly resolution, as has been the fear that Greece could be another “Lehman Brothers.” Greece’s membership in the Eurozone has raised the stakes of failure and has given the creditors a level of patience that they might not otherwise have had. And the fact that Greece does not have an independent currency has shielded the country from pressures that put enormous strain on Asian or Latin American states during their own crises.
In other ways, however, the international financial environment is making life harder for Greece. After years of lax lending standards, investors have become very risk averse, which means that it is harder for almost anyone to borrow, not matter what their credentials. And by virtue of its membership in the Eurozone, Greece cannot create growth the way that countries in its position tend to create growth: by devaluing their currencies. As a result, Greece’s exit path is somewhat more complicated.
But the big picture is straightforward: Greece’s fiscal problem is its inability to borrow at low rates in order to finance its budget deficit and to roll over its maturing debt. The reason is that markets demand a prohibitively high premium to lend money to Greece. Of course, markets can be sheepish, fickle and whimsical; and they can move wildly based on sentiments rather than fundamentals. But in this case, markets are delivering a message that is identical to the message that the majority of the Greek people are delivering: “leaders of Greece,” they are saying, “we don’t have faith in your promises, we doubt your commitment to change and we question your competence.” How many Greeks really disagree with that?
The difference is that when markets deliver a message, it is heard. While people complain about “undemocratic markets,” in this case, markets have forced lots of democratic discipline in a state that had little. We finally know how many people the state employs; we have some semblance of honest numbers; we have some effort to rein in exorbitant salaries in the broader public sector; we might finally sell or utilize some state assets (which everyone agreed were being wasted until the IMF said so); we are under pressure to tackle tax evasion; and we have a demand that closed professions be opened. One could only wish that our democratic institutions could deliver so much pressure for change so quickly! Of course, in a country where democracy often means mob rule, market discipline is an inconvenience. But it’s such a welcome relief from the sclerotic politics that have paralyzed Greek society for years.
The truth is, we did not get into is mess because of capitalism. We got into it because for three decades we have systematically bent every rule of capitalism; we have bought into a leftwing philosophy that says markets are bad, companies are evil, and profits are dishonorable. We have become a terrible place to do business and we have broken the relationship between work and reward, which lies at the center of the market system. We have given the state an exorbitant amount of power – power which it has abused, often in tandem with corrupt private interests.
In a country where corruption is so endemic, an infusion of capitalism would be a potent counterforce. As Clive Crook once wrote, “limited government is not worth buying. Markets keep the spoils of corruption small. Government that intervenes left and right, prohibiting this and licensing that, creating surpluses and shortages—now that kind of government is worth a bit.” The demand for corruption comes from the fact that the normal path to success – making good products and selling them – is so laden with problems. You only cozy up to politicians because they have so much power. Take away their power, and corruption would fall.
Support for markets, of course, is not the same as support for big business, much as it sounds like that to many people. To quote The Economist again: “Economic liberalism, much like political liberalism, puts great weight on checks and balances, on limits to power and hence to abuses of power. In economics, the most potent checking force bar none is competition. Bosses, shareholders and pro-business politicians all loathe it. They stand to gain, in one way or another, from conspiring to gull the public into regarding competition as a threat to the greater good, rather than to themselves.”
Greece’s experience is a painful reminded that when so many decisions pass through government hands, we end up with lots of corruption, waste and injustice. The markets that people bedevil are, in fact, a force for change. Not only are markets forcing change in Greece but they are securing reforms that successive electorates have been unable to for years. Markets are asking for a less corrupt society, a more competent leadership, and a more competitive and meritocratic economy. Who can argue with that?