These are the five basic principles that guide my thinking on the Greek crisis:
#1. This is largely a Greek crisis. It was, of course, triggered by seismic changes in the global financial system, but the roots of the crisis can be found in the choices that Greek society has made over the last thirty years. The bankruptcy of Lehman Brothers, the straightjacket of the common currency, and the lack of centralized fiscal powers in Europe – these factors affected how the crisis has been played out, but they did not cause the crisis, nor can they solve it.
#2. This is largely a political and social crisis whose most apparent manifestation is debt. When a country has a lot of debt it is easy to think that it faces a debt crisis, and Greece does face a debt crisis. But debt is a symptom of a sick political system. Debt was the price Greece paid for political normalcy when our government in the 1980s sought to heal political wounds by spending money on those who had been disenfranchised. Over time, profligacy created and perpetuated practices and institutions that made sustained fiscal consolidation impossible.
#3. Greece should be judged not just on its fiscal targets but on broader measures of reform and change. In a fiscal and debt crisis, a country needs a credible path to a sustainable debt level. Such targets are easy to measure. But in a country facing a deep social and political crisis, the yardstick for success has to be wider. A plan that pays off debt with no reform – for example selling off state assets – is like giving aspirin to someone with a toothache: it provides relief but not a cure. So Greece should be judged by whether its political economy and its political philosophy are changing. A changed country, not just a less indebted one, is the goal.
#4. The best option for Greece to achieve reform is a program along the lines negotiated with the International Monetary Fund, the European Commission, and the European Central Bank (in Greek lingo, the program is called the “memorandum” with the “troika”). This is hardly a popular view. Two-thirds of Greeks (or more) think the memorandum is a bad idea. In some ways, they are right to distrust a program that is inflicting enormous pain, is seen as imposed from abroad and does not offer a clear path out of the crisis. But before judging the program we need to ask two questions: are the alternatives better? And is the memorandum failing because its conception is bad or because it is not being implemented properly.
When it comes to options, Greece has two: an outright repudiation of its debt; or a debt default coupled with an exit from the Eurozone. Many economists see the merits of these two options as so self evident that they are puzzled by why Greece would pick to inflict such suffering on the people to implement a program that is sure to fail. However, these economists tend to think of the crisis too simplistically. If debt is the problem, removing debt is indeed a solution. But in a country where there is endemic corruption, constant protests and civil strife, chronic tax evasion, a weak state whose chief purpose is to dole out patronage, and a private sector that is so heavily protected as to mock basis notions of meritocracy, it is hard to see how a default or a new currency are a “solution.” These recommendations start by asking “how can Greece lessen its debt burden” rather than, “what kind of crisis does Greece face?” Different questions, different answers.
A second issue is whether the memorandum is doomed to fail or whether it is failing because it is not being implemented well. In some ways, the memorandum is not failing: for example, it is producing big changes in political economy, institutions and practices. But more generally, the government has made its position worse through its lack of political will. By failing to shrink the public sector quickly and by being too slow in reforming the private sector, it has fallen back on repeated tax hikes to plug its fiscal hole. As a result, society’s disposable income has collapsed. It need not be that way, and the government has options to rectify this condition. It could offer a tax break that it could pay for by cutting more jobs in the public sector and by allocating some money raised from privatizations towards tax relief rather than merely paying down debt. More importantly, slow progress on reform has amplified the public’s frustration from a perceived return to preferential treatment and favoritism. No society has much patience for such enormous pain so unevenly spread.
#5. Greece is moving in the right direction, albeit slowly and unevenly. This seems counter-intuitive but if one looks above the fray of the everyday noise and onto the big picture, it is easy to see that Greek society is changing extraordinarily quickly. Not all the change is good, of course. There is more crime and civil tension. Health, mental and physical, is deteriorating. Xenophobia could easily mix with loose immigration controls to produce an explosive keg.
But the true measure of reform is to assess Greece’s social and political dialogue. Few subjects are taboo any more. A country pushed the brink has no time for political correctness or for niceties; it has no time for diplomacy or for doublespeak. It has to confront reality and it has to deal with it. Of course, reality is not universal – different people have different views about how Greece got into this mess and what is best way to get out of it. But the dialogue has been enlarged in big ways and it is now possible to say things that would have been unthinkable even two years ago. Society is more open to ideas than ever before. This openness can be dangerous of course, and not all ideas floating around are constructive. But there are many ideas that are constructive and several of them are contained in the memorandum that the government has pledged to follow. And that is a promising sign.
In a way, Greece is in Purgatory. Our country is divided into those who think that we were in Paradise and are on our way to Hell. The people who benefited from the old system fall into that group. There are those who think we came from Hell and are going back to Hell – these are the pessimists and they have reason to be so. I doubt anyone thinks we came from Paradise and are going back to Paradise. My view is that we came from Hell and have a good shot at reaching Paradise. Oddly enough, Purgatory looks and feels like the reform program that the troika has put in place. Purgatory is no fun but it’s worth going through because of what lies on the other end. At the end of the day, I remain optimistic that we can end up in Paradise. But I won’t be surprised if we do not.