As I write this post, the Greek government faces a deadline. It needs
money from its European partners to counter capital flight from its banks, meet
the demand of its creditors, and funds its activities. The two sides disagree both on the terms of
bailout, for example should the EU extend the maturity of Greek bonds, and on
how Greece should restructure its economy and fiscal policy to regain its
creditors’ and partners’ confidence. The Greek government, under the leadership
of the left wing party, Syriza, raised the minimum wage, froze privatization
and rehired public servants, all steps which contravened its partners’ demands for
restructuring and austerity. But Syriza was
elected on a platform of resisting European imposed austerity and for good
reason. Greek privation is significant. As of
January 2015 the economy had shrunk by more
than a quarter, incomes collapsed by nearly a third, and one in four Greeks —
and one in two young people - were unemployed.
It is clear that an austerity program, even if
successfully implemented will not help Greece significantly reduce a government
debt of over €400 billion. In 2013 Greece ran an export surplus of 1
billion. If it met its partners’ criteria of running a primary budget surplus
equal to 4.5% of GDP, which is about €250 billion,
its budget surplus would be about €11 billion.
Adding the two numbers together, the export surplus and the government surplus,
and assuming for simplicity that the value of the debt does not grow, it would
take, €400/12, or 33 years at current levels
of economic activity for Greece to pay off its debt. As Paul Krugman writes,
“at this point Greek debt..is not a very meaningful number. After
all, the great bulk of the debt is now officially held, the interest rate bears
little relationship to market prices, and the interest payments come in part
out of funds lent by the creditors. In a sense the debt is an accounting
fiction; it’s whatever the governments trying to dictate terms to Greece decide
to say it is.”
Moreover, as many economists
have written, targeting the budget deficit as signal of the Greece’s fiscal
discipline is misplaced, because when a government reduces spending, the economy
contracts, taxes collected fall, unemployment benefits rise and the deficit may
in fact grow, as happened from 2008 through 2010
Greece Government Budget
So what is the meaning of
the political and economic pressure the EU has imposed on Greece? One
conventional narrative is that the pressure reflects the unfair demands of a
German government, ready to punish the Greeks for their profligate spending
between 2000 and the Great Recession. In that period, Greek households borrowed
money to import goods and services from the rest of Europe. Living standards
rose but so did household debt. Moreover, in that same period, investment was
limited and imports were greater than exports. In effect, as happened in the
United States during the run-up to the sub-prime housing crisis, growth was fueled by debt.
But, so the story continues,
consumer spending grew because cheap German loans financed Greek borrowing. The
Euro's creation as a common currency in 1999 meant that lenders to Greek banks
no longer faced a currency risk; the risk that at one time the Greek Drachma
would depreciate as Greek consumers imported goods and services from the rest
of Europe. Moreover, at the turn of this century, Germany itself went through
its own difficult economic period. Called at the time the “sick man of Europe,”
it experienced a recession, partly in response to the IT bubble of the late
90’s. Instead of spending, German companies and households focused on
rebuilding their balance sheets, becoming
net savers. German lenders therefore looked for new borrowers and Greek
households were ready to take on new debt. So Germany, in this narrative, is responsible
for Greek profligacy!
There is some truth to this
story but I think it is too one-sided, creating a stereotype of the German as
an oppressor without a moral claim, a familiar cultural trope, to match the
stereotype of the Mediterranean Greek as lazy and profligate.
So, what in fact is at
stake, and what accounts for the difficulty, severity and at times intractable
conflict between Greece and its partners? As I write this post, the New York
Times reports
that, “Far from giving Greece a break, the Governing Council (of the European
Central Bank) is expected to tighten the screws next Wednesday by placing further
restrictions on emergency cash the central bank provides to keep the Greek
banking system from collapsing.” I propose that we need to symbolize the
situation as a Russian doll, where one level of reality gains its salience from
the context that subsumes it. We cannot
understand the debt crisis without considering its widest meaning.
Consider
for example that one simple solution to the Greek crisis is to allow Greece to implicitly
default on its bonds, for example, by extending their maturity, reducing the
interest rate, asking private creditors to take a “haircut,” linking principal
payment to Greece’s GDP growth, and enabling the Greek banks to borrow money
from the European Central bank (ECB) using devalued Greek government bonds as
collateral. This would be a default in all but name. In fact, private
creditors have already taken a substantial cut, and the ECB had accepted Greek
government debt as collateral for Greek bank loans until this past February.
But
calling it a default, as opposed to a restructuring, suggests that the European
Central Bank (ECB) has become a “lender of last resort” to all banks and
private creditors who hold devalued sovereign bonds. This was the role the U.S.
Federal Reserve bank played as a lender to those U.S. banks and financial
institutions whose assets evaporated in the subprime crisis. But if the ECB keeps public and private
creditors whole, this means each European country becomes in effect “too big to
fail.” The anxiety is that countries and their creditors will then experience
few constraints to lending and borrowing in the future. This is why on Monday,
May 11 the ECB stated explicitly that the, “Bank cannot act as a lender of last resort
to countries in the Eurozone.”
This
anxiety helps explain why in fact the “Troika”—the European Central Bank (ECB),
the International Monetary fund (IMF), and the European financial stability
facility (EFSF), insists that Greece restructure its economy before it gets its
next tranche of aid, some €7.2 billion, even though, as one analyst notes, “Compared to what has already been disbursed, the 7.2
billion euros are a small amount.” In other words, the financial stakes are not
high. Moreover, as he points out, the value of Greek’s maturing debt spikes
this year, 2015, and then stabilizes through 2033. “It is thus surprising,” he
notes, “that the Euro zone governments and the ECB put the whole exposure of
their citizens to Greece at risk just for this issue.”
Moreover, the Eurozone governments,
particularly Germany and France, have taken steps to reduce their own banks’
exposure to Greek public debt. As the French Finance Minister noted, “We have learned to build walls to protect ourselves, to protect the banking system to protect other countries
which could become fragile. So Europe is much stronger. Europe has sheltered
itself from turbulence. The danger is for Greece.”
In this sense the overhang
of Greek debt has become a symbol, rather than the measure of a substantial
financial risk. But a symbol of what? One
hypothesis is that should the European Central Bank become officially and
explicitly a lender of last resort, supporting deficit spending countries, the prime
minister of Germany, Angela Merkel, worries that the German people’s commitment
to the grand European experiment of a single currency will weaken.
One
survey
showed that Germans’ support of economic integration across Germany fell five
percentage points between 2012 and 2013. Support in France fell fourteen
percentage points! I believe that Merkel’s
personal commitment to the European project of integration is inviolate, and not for
economic reasons alone. It has been a vehicle for strengthening the democratic
practices of the post-Soviet Eastern European countries. It is also a symbol of
a democratic capitalism at a time when China and Russia are developing the
practices of an authoritarian version.
But the economic
difficulties facing Greece, Portugal and Spain are undermining Germans’ belief
in the viability of an integrated Europe.
Indeed, should Greece’s debt be forgiven, or should it in fact exit from
the Eurozone, “The German people," one analyst writes, would discover instantly that a large sum of money
committed without their knowledge and without a vote in the Bundestag had
vanished. Events would confirm what citizens already suspect, that they have
been lied to by their political class about the true implications of ECB
support for southern Europe, and they would strongly suspect that Greece is not
the end of it. This would happen at a time when the anti-euro party,
Alternative fur Deutschland (AfD), is bursting on to the political scene, breaking
into four regional assemblies, a sort of German UKIP nipping at the heels of
Angela Merkel.”
But should Greece default, would
the Germans incur substantial losses on both private and public debt? Are their
anxieties based on the prospect of material losses? I suggest again that the threat to Germany is
more symbolic than real. During the
normal course of business the Bundesbank is exposed to claims on Greek banks,
as all the central banks of Europe net out their claims on each other every
day. Like the Federal Reserve Bank, the ECB is the clearing and settlement house for all central banks. Writing in December of 2014, one writer notes, that Bundesbank claims on the ECB system as a whole,
“Have jumped from €443bn in July to €515bn (though down from €750 in 2012-LH). He writes, “Most of this is due to capital outflows from Greek
banks into German banks, either through direct transfers or indirectly through
Switzerland, Cyprus and Britain.” To be sure, this represents 14% of Germany’s
GDP, through in the event of the collapse of the Eurozone, Germany would be
liable for only 27% of the debt, or 3% of its GDP. But should the Eurozone
remain intact, as is most likely, these claims, as The Economist notes, “are merely bookkeeping entries.” The ECB can effectively print Euros through Quantitative Easing, buying soverign debt to cover its
central banks’ liabilities. Strikingly, while yields on short term Greek
Government debt are very high, the yield on its ten-year bond has fallen over the past month, while the
yields on other sovereign debt within the Eurozone have risen only slightly.
The bond market is not panicked about the long run.
Let me propose the
following hypothesis. The sense of the Euro’s fragility is linked to fears that
the European project of integration and modernization, writ large and beyond
finance, is losing its legitimacy. Indeed, from 1974 to
2004 belief among Europeans in the European Union as a “good thing” declined. 
What is the basis for these feelings? One scholar suggests that Europeans increasingly resist the union because it has
developed undemocratic practices of governance, that there is a "democracy deficit." She writes, “In democracies public policy
requires the ability to generate and sustain consent among the ones who are
affected by a generally binding decision. Without such consent the European
project will remain fragile. Besides, growing skeptical views on the European
union will reduce the willingness of citizens to support the European
integration process and to show solidarity throughout Europe” (p. 115). It is important to note in this regard, as two authors
write, “Few nations sought popular support to create
the euro. The German leadership avoided a referendum, and in France, the
Maastricht treaty was passed with a thin majority of 51 percent.” Denmark voted against the Euro and Sweden chose not to joing the European Exchange Rate Mechanism (ERM)
It is also striking in this regard that just as Pan-European
institutions have offered their citizens the prospect of an integrated polity
extending from Portugal to Romania, there has been a countermovement of
devolution and fragmentation, for example in Catalonia, Scotland and among the
Walloons of Belgium. These are not movements against Europe per se but rather movements in the search of conditions of more local governance. As a Wikipedia
entry on the 2014 elections to the European parliament notes, “These elections saw a big anti-Establishment vote in favor
of eurosceptic parties taking around
25% of the seats available. Those who won their national elections include:
UKIP in the UK (the first time since 1906 that a party other than Labor or the
Conservatives had won a national vote), National Front in France, The Peoples
Party in Denmark, Syriza in Greece, and second places taken by Sinn Fein in
Ireland. Following the election, European Council President Herman Van Rompuy
agreed to re-evaluate the economic area's agenda and to launch consultations on
future policy areas with the 28 member states.” Moroever, David Cameron, the winner in the recent British elections for Parliament has pledged to hold a referendum on Britain's membership in the EU. In this sense, we can say that Greece has become a symbol of a much wider
process that is undermining the European Union’s political and psychological
legitimacy.
This development is striking because the original European
Common Market was a triumph. It was an instrument for rebuilding Europe after
World War Two, for modernizing the continent’s economies, for securing the
peace between Germany and France, for resisting prospective Soviet incursions
and-- by sustaining welfare state policies -- for reducing the political appeal
of indigenous communist parties, particularly in France and Italy. To be sure, it originally consisted of only six countries. But its success demonstrated that countries could modernize by integrating their economies. This conception was based partly on the United States as an example of a country that developed economically by expanding from "sea to sea." The question
is why would this modernizing and integrating thrust be jeopardized today? What
delegitimizing process is at work?
It is interesting to look at the Greek economy and society
here. There is a general consensus both among Greek and non-Greek economists
and sociologists that Greece harbors an only partially developed economy. Compared
to the other advanced economies in Europe, Greek wages are low, but not as low as it
prices, so that production costs are high while the profit share of national
income is relatively low. As the following table from a Mckinsey report shows, Greeks work more hours, earn less income and are strikingly
less productive than their European counterparts. This is partly due to the fact that Greek
workers support a proportionately larger number of people who do not
participate in the workforce, one result of its generous pension system. As one
analyst writes, “The average age of retirement age in Greece was 61; in Germany
it was 67.”
US
|
EU
|
Greece
|
|
GDP per capita
|
$46,000
|
$35,000
|
$31,000
|
Dollars per hours worked
|
$58
|
$49
|
$35
|
Hours worked per capita
|
793
|
706
|
882
|
Hours per employee
|
1,700
|
1,600
|
2,100
|
Participation rate in labor force
|
74%
|
73%
|
66%
|
There is a sense in which Greece retains some of its pre-modern cultural
characteristics. Both Greek and
Non-Greek critics refer to what they call the culture’s “clientistic” sense of
government and its services, which enables interests groups to exploit
government programs to increase their own standing and well being, for example
through patronage, bribes, special favors, tax evasion or avoiding license
requirements. Lacking is a sense of the government as an impartial arbitrator,
setting standards for efficiency and supporting economic development. As one
Greek critic notes, “Greece is ranked 69th in the world on the Corruption
Perceptions Index
alongside Bulgaria, Italy and Romania. Greece also has the
EU's lowest Index of Economic Freedom and Global Competitiveness Index, ranking
130th and 81st in the world respectively. Citing a Transparency International
study, he notes that, “In 2009 alone, the Greeks paid an average of €1,355 in bribes for such
services as speeding up the process of obtaining a driver’s license or building
permits, getting admitted to public hospitals, or manipulating tax returns.” Greece
also has the largest informal or shadow economy in Western Europe, and as a
result a very poor record of tax collection.
This is one reason for its persistently high budget deficits.
Similarly, a 1995 study of
Greek family life, suggests that, “although affluence has been increasing in
recent years, the traditional extended family has not decomposed into isolated
nuclear families, but has changed its configuration. Its morphological
equivalent is the extended family system in the urban setting with a
continuation of contacts with its network of kin. Indeed, in comparing the
frequency of these contacts with other cultures, Greece has one of the highest
rates of visits and telephone contacts with relatives.” The scholar goes on to
note, “This explains why such a
large proportion of Athenian families live in the same apartment building.” To
be sure, this study is two decades old, but it does suggest that when Greece
households began to run up their debt at the turn of this century, Greek family
life had some of these pre-modern characteristics, with overtones of attachment
to kin displacing attachment to the polity. This is why they could exploit
government services. [1]
There is little doubt that
Greece must modernize its economy, but let me propose the following hypothesis.
Greek resistance to modernization, for
example reducing pensions, privatizing industry and increasing productivity,
has stimulated some wider anxieties about what we can call post-modernization or what some critics call, “Neo-liberalism.” This trends and its vicissitudes are germane to
all advanced capitalist countries. In this sense Europeans, as well as
observers in the United States, are projecting onto Greece, feelings and
anxieties stimulated by their own emerging difficulties.
Consider for
example, the experience of Germany when, at the turn of this century, it was
characterized as, “The sick man of Europe.” As one German journalist wrote in June 1999, five months after the Euro was
introduced, “The social-market economy devised in Germany after the Second
World War, with its careful blend of market capitalism, strong labor protection
and a generous welfare state, served the country well for several decades. But
it is now coming under pressure as never before. As economic growth stalls yet
again, the country is being branded the sick man (or even the Japan) of Europe. ”
The journalist goes
on to catalogue a host of obstacles to efficient market functioning, such as,
“a byzantine and inefficient tax system, a bloated welfare system, excessive
labor costs” and the disincentive to hiring workers because the cost of firing
them is too high. “Getting rid of workers is costly too. Severance pay is
typically a month's salary per year worked, plus generous retirement pay-offs
for older workers. ‘The jobs market doesn't really deserve to be called a
market,’ says one disgruntled company manager.’” Moreover, he writes, “Germany
is still smothered in regulations that crimp markets. Many prices are still
regulated, and consumers remain “protected” in bizarre ways: shops can be fined
for discounting or making three-for-the-price-of-two offers if these are deemed
to send confusing signals to consumers.” Shades of Greece!
One response to
this economic crisis was that labor, business and government together agreed to
progressively dismantle the system of centralized wage bargaining by industry,
so that wages would be set according to local conditions, in others words, to
further “marketize” the labor market. As
two authors write, “The fiscal
burden of German reunification, coupled with an immediately more competitive
global environment, made it increasingly costly for German firms to pay high
union wages. The new opportunities to move production abroad, while remaining
still nearby, changed the power equilibrium between trade unions and employer
federations, and forced unions and/or works councils to accept deviations from
industry-wide agreements which often resulted in lower wages for workers.” One
result was that from 2003 to 2007 unit labor costs in Germany fell (the green-lowest- line) while they rose in the rest of the
Eurozone.
This was also the period in which the German government “loosened”
the labor market by lowering unemployment benefits, reducing welfare payments
and, when the jobless fail to follow through on their commitments to look for
work, cutting benefits. In other words, the Germans went through their own period
of privation, of what the authors call “painful reforms.” Income inequality
rose in this period as well.
John Kenneth Galbraith, the economist, published a book in
1967 titled The New Industrial State.”
It proposed that Big Labor, Big Capital and Big Government, particularly in its instantiation as the Welfare State,
oversaw national economic and social development. This was also the time when
in Europe, central economic planning still appeared as a viable strategy for
building economic wealth. [1]
We could call this the “corporatist” form of capitalism. One way to interpret
the German experience, and indeed the North American experience, is that
countries today are dismantling corporatism. Today, Big Labor is losing its clout throughout the western world, and Big Capital,
in the form of the global corporation is less vested in the interests of any
particular locale or even country. Moreover, in facing the global competition
for jobs and investment, states have less discretion over their welfare
programs. The tripartite system of power sharing, which once characterized
modern or advanced capitalism, has unraveled. I want to call this unraveling process,
post-modernization, and suggest that
the Germans have connected this new process and the social pain it stimulates,
to the more classical challenge Greece faces in modernizing its own somewhat
pre-modern economy and society. Indeed, facing post-modern conditions, Greece
itself can hardly modernize by simply lowering unit labor costs or reducing
wages. Its challenge instead is linked to the technical sophistication of its
products and services. As two economists note, “German exports are concentrated in
the most-complex products of the complexity scale while Greece and Portugal’s
exports are concentrated in the least complex." The potential trauma facing
Greece is that its economy is in fact outmoded.
My critical reader may ask why I reference a
process of “post modernization” rather than “neoliberalism.” The latter term is
customary and proposes to describe a new phase in the developmental of
capitalism, hence the term, “neo.” It
also carries with it a critical edge, suggesting that this new phase is perhaps
not really new, that it simply represents a new form of classic liberalism
based on our continued and even more pervasive subordination to market
processes. In this way of thinking, by dismantling the welfare state,
neo-liberalism returns us to the market of the 19th century. And today,
all job-holders, facing uncertain prospects in the labor market, become the new
proletarians.
I use the term “post-modernism” because the term
“neoliberalism” does not express the broader cultural changes, the changes in
sensibility that are reshaping Western countries everywhere. The rebellion of
the Scots, the decline of big labor, Europeans’ resistance to the EU’s
undemocratic practices, weakened state power and the marketization of society, are all cut from the same cloth. They
reflect I propose, profound trends of decentralization and devolution at every
level of society, and contests for authority in every institution. This is one
reason for example that some economists focus increasingly on the city rather
than the nation as the new locus of economic development. The city has become
the hothouse for innovation producing dense networks of association among
technologists, crafts people, service professionals, investors, and financiers.
These networks are intensely local in character. That is one reason why it is
so hard to “reproduce” a Silicon Valley anywhere else. It must emerge
spontaneously or not at all. Density replaces scale.
Nonetheless the term “neoliberalism” highlights the dark
side of post-modernity and helps account for the resistance to an integrated
Europe, often expressed by the right rather than left. Should every person become a cipher in a network
of market exchange, investing in his or her individual “human capital,” to
hopefully survive the obsolescence of not simply jobs, but entire industries
and professions?
Edmund Phelps, the economist, examines
the decline of corporatism in advanced capitalism. He associates corporatism
with “traditionalism.” Linking surveys of traditionalism with job satisfaction
he finds that people in more traditionalist countries such as Portugal, Spain
and France have less job satisfaction than people in less traditionalist
countries such as the U.S., Denmark and Finland.
Mean job Satisfaction
The survey used to construct the index of traditionalism includes
such questions as, “Do you feel that service to others
is important in life?” “Do you think that children should have respect and love
for their parents?” “Do you think that parents have responsibilities to their
children?” “Do you agree that unselfishness is an important quality for your
children to have?” As this set of
questions suggests, we have to ask what price we are willing to pay for job
satisfaction in particular, or for marketization in general.
My sense
is that we carry within us a profound ambivalence about these developments. Job
satisfaction may very well be a marker of an institutional world in which our
skills and interests are acknowledged and respected, and we have a voice in the
development of our settings. In fact, I believe this is true. This is perhaps the
promise of devolution, localization and decentralization. But for the moment,
this transition is very painful, nor is it entirely certain. After all,
signposts of devolution are matched by indicators of the further concentration
of power, for example by national security agencies, and by global financial
institutions, for example the European Central Bank.
I suggest
that we are projecting our ambivalence about post-modernization onto the Greek debt crisis. It has taken
on a meaning that transcends the facts undergirding it. There is therefore a
risk that decision makers and leaders will not take pragmatic steps to resolve
it, falling prey instead to their roles in a symbolized conflict.
Observers
have been puzzled by the provocative stance that the Greek finance minister,
Yanis Varoufakis has taken in the ongoing negotiations. For example, he accused the head of the ECB Mario Draghi of being
afraid of Germany’s hard liners. Draghi’s “soul”
he said, “was filled with fear.” The day before I posted this blog he said that
he wished that Greece, “still had the drachma.” Naturally, he has offended many
of his counterparts, so much so that the Greece’s prime minister and his close
collaborator, Alex Tsipras, has sidelined him in the negotiations. One
conception of group dynamics is that participants are anointed to play symbolic
roles in the wider drama that carries the cultural meaning of particular
events. Of course they have to have a valence for such roles. As a self -described
“erratic
Marxist,” he may relish leading the fight against world neo-liberalism. But this is not really his battle, nor does he have the standing and resources to lead it. And
the Germans, pressed by the stresses of their own post-modernizing situation
may willingly take up the role of taskmaster for others. Where is the
pragmatism?
[1]
Indeed one
reason, that Greece today has many state owned enterprises, is that under the
direction of Prime Minister Karamanlis, the
first post-junta prime minister and the founder of the Conservative New
Democracy party, Greece pursued a policy nationalizing private enterprise as a
vehicle for accelerating
Greek economic development. While 35 years later, such an approach seems
outmoded, at that time it was considered part of the normal practice of
statecraft.
[1]
This reading of the situation however is a partial one and in some
sense unfair. One cannot separate the current Greek experience of government
from its dark history. A military junta ruled the Greek people from 1968 to
1974. As one scholar recounts, “The worst and most visible act of brutality came in November 1973
when students occupied Athens Polytechnic and university buildings in Salonika
and Patras. Coup leader and post-coup Prime Minister (and eventually President)
Georgios Papadopoulos sent in troops and tanks to crush the students; this was
apparently carried out with extreme brutality and at least 34 students and
others were killed, hundreds of others were wounded and almost a thousand
arrested. The treatment of the students in Athens and other locations was met
with extreme revulsion, and although not on the scale of the brutality carried
out in the early Franco regime, this, along with the lengthy period of
repression after the civil
war—Greece was ruled by repressive regimes for more
than twenty-five years—may have been enough to convince citizens and civilian
opposition from all political leanings
that an authoritarian government was to be avoided at all costs in the
future.” In other words the image in Greek mind of central authority was one of
toxicity. Moreover, when in 1980 the Socialist party, PASOK came to power it
expanded welfare state benefits partly as compensation for the suffering and trauma
that Greeks on the left had endured since the defeat of the communists in the
aftermath of World War Two.
