World Policy Journal is proud to share our revived weekly podcast, World Policy On Air, featuring former Newsweek On Air host David Alpern and Eurasia Group President Ian Bremmer's latest commentary on global "Winners & Losers." Click here to subscribe on iTunes!
(Subscribe to World Policy Journal here)
From the Winter Issue "Africa's Moment"
By Nikos Konstandaras
ATHENS—Greece’s deepest wounds are not the ones appearing on the world’s television screens. It’s not the neo-Nazi thugs ambushing migrants, hooded youths clashing with police, or the spreading decay of crumbling buildings and abandoned stores. The greater damage lies beneath the surface. It’s the silent despair of pensioners who cannot pay their utility bills but try to support younger, unemployed family members; the many Greeks who, by losing their jobs, lose their social security and are forced to rely on charity for food and health care. Just three years ago, our society was proud to take care of its citizens, immigrants, and visitors. Everyone was on the national health plan; even injured tourists received full treatment with no charge and no questions asked. Now, the safety net has been withdrawn—just as we need it most.
It is not just the sacrifice of lower incomes and higher taxes, the hunger, and the fear that debilitate Greece. Above all, the greatest insecurity stems from the dawning realization that three years into the biggest bailout in history, the country is still not taking the necessary steps to escape the crisis. Each installment of borrowed funds is preceded by a crippling negotiation within the three-party coalition ruling Greece, further negotiations with our creditors and more virulent attacks on the reform process from extremists on the left and right. Each day is worse than the previous, with even healthy companies running out of funds as banks wait for emergency recapitalization. Hospitals struggle to do more with fewer funds. In the end, the only certainty left is of more upheaval as the country slides deeper into recession and despair.
The drama playing out in Greece concerns the whole world. This small nation on Europe’s southeastern fringe, with barely 10 million of the European Union’s 500 million people and 2 percent of its GDP, is on the frontline of changes facing a continent that must deal with huge imbalances between its countries and regions. From Washington to China, officials fear that a collapse of Greece could trigger further turmoil in the EU, affecting their own prospects for growth. But it is not only the shockwaves it sends through the global economy that make Greece important. Domestic developments serve as a laboratory for the forces at work and their consequences when a modern society comes under intense economic, social, and political pressure. In the worst case, we will see chaos or dictatorship; in the best, we could work out policies that will ease the greatest dangers faced by individual countries and fortify their collective efforts.
Forced to seek a bailout from the EU, the European Central Bank, and the International Monetary Fund in 2010 because of huge public debt, Greece’s economy has shrunk by 20 percent over the last five consecutive years of recession. One in four workers is now unemployed. Every day, we see more evidence of how politics and the economy are entangled—how bad politics ruined the economy, how a ruined economy poisoned politics, and how difficult it is for a democracy to find its way when presented only with the choice between the pain of austerity (leading to an unpredictable future) or certain collapse. This raises a host of questions—the answers to which could lead Greece to become a model to lead a troubled Europe out of the financial wilderness. Quite simply, economies are unable to grow when they cannot afford to provide citizens with a decent standard of living, when large numbers of unemployed and aging populations create an ever-greater burden on state treasuries. Efforts to curb debts are only likely to provoke instability that leads to anarchy or authoritarianism. In short, if democracy can first survive, then thrive, in Greece, then it can certainly do so in a host of other nations that face similar challenges.
In today’s world, every nation is tied to others (like climbers on a rope that is at once a lifeline and mortal threat), so what happens in one nation can trigger developments elsewhere. This is not only because of the globalized economy, but also (as there are no obvious political solutions to today’s problems) because there is no template for dealing with such problems as those faced by Greece. By observing Greece, with its half-hearted reformers and passionate adherents on the left and right, others can learn from their tactics and mistakes.
Greece is at the epicenter of today’s European crisis, but many countries—in Europe and beyond—will likely experience similar upheaval as they try to adapt to a changing world. At the start of the crisis, and for many months, Germany, which calls the shots in today’s Europe, presented Greece as a “unique case”—a country solely responsible for its problems and for its inability to stick to the program that would have extricated it from the morass. The idea was that if Greece became too expensive, too unpredictable, the rest of the euro countries could cast it overboard and sail onward without a heavy conscience and without suffering any consequences themselves.
The failure to save Greece, however, sowed doubts about the EU’s own ability to deal with broader core issues. While EU leaders fretted about contagion from Greece’s debt crisis, the greater disease was latent in their inability or unwillingness to see the extent of Europe’s structural problems and take measures to remedy them. Those problems are as responsible for Greece’s mess as its politicians, whose profligacies we are just coming to understand as the crisis plays out. Several eurozone countries are in recession. Ireland and Portugal have joined Greece in taking bailouts; Spain and Cyprus are on the brink of doing so; Italian debt casts a long shadow; even Germany, the EU’s powerhouse, posted an anemic growth of 0.3 percent in the second quarter of 2012. It is difficult to see how Greece—a tiny, “unique case”—wrought so much damage on its own. Though, German officials now describe Ireland, too, as a “special case.”
Very simply, the power of the single European currency, and the unprecedented drop in interest rates this brought, allowed individual countries to punch far above their weight, spending as though they were global powers. But none was able to withstand the counterpunch when it came, because the eurozone did not forge a collective response, forcing those embedded in the crisis to deal with their problems with their own resources. Clearly, eurozone members and the IMF have offered Greece help, without which it would have sunk, but only to the extent that they protect their own interests while forcing a woefully unprepared Greece to undergo a revolution of deprivation. In addition, the imbalances caused by the varying tension between national and collective interests in the EU, which first allowed Greece and other small countries to act like big players, has now swung in favor of the fiscally strong, allowing Germany to borrow money for next to nothing and to increase exports because of the weaker euro, thereby papering over its own weaknesses and need for reform.
When interest rates or the euro return to more natural levels—or if the euro were to fall apart entirely—Germany will have to deal with the loss of some significant markets in the poorer EU countries, such as Spain, Greece, Portugal, and others, not to mention the broader reality that a stronger currency will make its exports more expensive outside the eurozone. Sixty percent of Germany’s trade is with its EU partners. This will force Germany to confront another tense issue—the need to achieve economic competitiveness abroad while safeguarding social harmony at home. Political tensions in the Netherlands (which along with Germany and Finland are the only eurozone nations retaining a top investment ranking of AAA) are most enlightening. Faced with protests, Dutch officials recently shelved two reforms aimed at reducing spending.
Whether rich or poor, no European country will be able to weather the storm on its own, but collective action so far has been short-sighted, haphazard, and hesitant. At the heart of Greece’s problem is its people’s insecurity, as all they once held as constants are changing for the worse. They fear lower incomes and higher costs, health and social security systems under siege, savings in jeopardy, and their peaceful society suddenly wracked by rising crime and vigilantism. For a country that was, broadly speaking, center-left politically, the emergence of the neo-Nazi Golden Dawn party, which this year entered Parliament and appears to be gaining support after years of polling barely several thousand votes, has been nothing less than shocking. Golden Dawn, like Islamic militants providing services at a grassroots level in developing societies, has gained in strength by stepping in where the state has collapsed—providing security, food, and the bombastic absolutism craved by those who feel disenfranchised. Their answer to Greece’s problem is to promote themselves as the only “clean” and “patriotic” party, while presenting all their opponents as a single entity that must be swept away—from immigrants to the current political system. “The Greek state is doing absolutely nothing” to protect citizens. “The Greek people have to protect themselves,” declares Ilias Panagiotaros, one of Golden Dawn’s leaders. The party slogan is “Vote Golden Dawn to get rid of the scum,” referring to immigrants, many of whom have been attacked and injured by black-shirted thugs.
Private psychiatric clinics, hemodialysis units, and other specialized health services have warned that, with social security funds drying up, they will have to evict their patients into the streets or pass them on to a state health system that is already collapsing from inefficiency, lack of funds, and an overworked staff. In October, the country’s private clinics, which provide psychiatric care to nearly 4,000 patients, warned they would have to discharge their patients if they were not paid money the state has owed them since May. After hasty promises of funding, they suspended their threat. Greeks now outnumber immigrants at soup kitchens. With a public sector hiring freeze and thousands pushed into early retirement (as if moving people from one set of books to another will relieve the state’s burden), many former employees offer to work without pay, so that services won’t collapse. Everyone knows of people who have chosen to stay at their jobs, even without being paid, rather than have nothing to do. Private health care workers, who have not been paid since May, borrow from friends and family members and hold off on paying debts. Retired professors regularly help out colleagues with coaching and evaluating papers. Volunteers staff underground clinics that help people with donated medicines. The demand has become acute, as people who have been unemployed for more than two years lose their health care benefits.
Unemployment was at 24.4 percent in August, second only to Spain’s 25.1 percent. With 55.4 percent of Greeks under 25 without jobs, youths must choose between poverty, living off their parents’ dwindling resources, or emigrating. The minimum monthly salary of €751 ($967) has been cut to €586 ($758). Overall, wage cuts in the past three years have erased the 33 percent increase achieved between 1995 and 2009. Unemployment benefits are €360 ($464) per month, for up to a year. Consider that more than half of each active worker’s salary goes toward taxes and social security, and it is easy to see why there is so much anger at a system that has collapsed under decades of mismanagement.
The crisis has been devastating not only for individuals, but also for the private businesses that are expected, one day, to lead the recovery. The unemployed are all from the private sector, though the public sector, too, has shrunk by some 100,000 jobs since 2009, mainly through retirement. Banks, which have suffered from a lack of liquidity since the international crisis triggered by the collapse of Lehman Brothers, have sunk under the weight of losses from debt restructuring. With the issue of Greece’s euro membership still unresolved, with each tranche of the bailout delayed, banks have failed to receive the recapitalization funding they so desperately need. For three years, businesses have been bled dry through the inability to raise capital, higher taxes (often retroactively imposed), lower turnover, and the inability to import materials without cash, while the government withholds some €7 billion in outstanding payments. So it’s hardly surprising that even healthy businesses have been devastated. Before the 2012 elections, when it appeared possible that an extreme left-wing party might gain power and renege on the bailout agreement, €70 billion were withdrawn from bank accounts. The €160 billion that remained are testament to a large number of Greeks’ stubborn hope that the country will remain in the eurozone.
For Greeks, the crisis is not just economic. It is a crisis of personal and national identity. As a colleague says, “I never thought that at 39 I would feel like this, like my life is on hold. I can’t plan anything. I can’t do anything. I don’t spend, even to put a frame around a poster, not knowing what tomorrow will bring. We can’t even think about having children.”
Greeks are keenly aware that what they thought of as a tolerant, progressive society is no longer something to be taken for granted. The social tensions, the image that has been cultivated abroad of a nation of spendthrifts who refuse to implement unpleasant reforms, and the rise of an insurgent racist and fascist movement are all at odds with the how Greeks once saw themselves in the world. After a long, sweet sleep in the arms of the European Union, which Greece joined in 1981, and the cheap credit brought by being part of the common currency after 2002, Greeks have awakened to a frightening reality that has shaken the very foundations of their world.
These foundations have been decades in the making. After the Cold War ended in 1989, the rest of the world may have moved on, adapting to the challenges of a new era, but the Greeks seemed stuck in 1974, their own year of monumental change when the ruling right-wing military junta collapsed and Greece returned to its roots as a democracy. The Greek people never forgot that they stood resolutely by their Western allies in World War II and paid the price with a brutal occupation by German, Italian, and Bulgarian forces. This was followed by a civil war of merciless barbarism between right-wing government forces (backed first by Britain and then by the United States) and the Communist forces that had borne the brunt of resistance to the Nazis. The government forces won in 1949, establishing a repressive, fragile right-wing state that was itself overthrown by an even more brutal right-wing military dictatorship in 1967. The junta collapsed in 1974 after its venality and incompetence triggered Turkey’s invasion of Cyprus and the occupation of the northern third of the island republic. As a NATO member, Greece had expected its allies, including the United States, to support it against the aggression of fellow NATO member Turkey. This expectation was dashed, reinforcing the deeply held belief that great powers toyed with Greece at their pleasure.
So in 1981, when Greece joined the European Economic Community as its 10th member, it saw itself taking a huge step toward national emancipation. As a member of perhaps history’s greatest experiment to create a political and economic power out of the enthusiastic participation of democratic nations, Greece could, for the first time, look forward to the rule of law, to its release from the fear of dictatorship, and to freedom from being a plaything of imperial forces.
The European framework guaranteed Greece’s democratic development and made its people feel that they were now equals among equals. After the wars, dictatorships, poverty, and national division that had plagued the nation since its founding as a modern state in 1832, after a long war of liberation from the Ottoman Empire, Greeks found unprecedented peace and prosperity as part of the EU. They could be forgiven for thinking that their long struggle was over. Sadly, the comfort that Greece found within the EU set in motion today’s whirlwind. EU entry coincided with a political revolution in Greece, as 1981 saw the election of the country’s first left-wing government. Andreas Papandreou, an American-trained economist and calculating firebrand, led his socialist party, the Panhellenic Socialist Movement (PASOK), to power with the slogans of “Change” and “Greece for the Greeks.” Even though he’d vowed to take Greece out of NATO, evict U.S. military bases, and block entry to the then European Economic Community, Papandreou kept Greece in both NATO and Europe. But PASOK based its political hegemony on cultivating a culture of entitlement and complaint, and now Greeks remain in a permanent state of agitation against the old order.
The passions of 1974, with the Turkish invasion of Cyprus and the fall of the dictatorship, created an egalitarianism and nationalism that broke down hierarchies and discipline at many levels, including the public administration and the education system. PASOK gave the mass of disenfranchised Greeks an opportunity to join the middle class. It created a generous system of social benefits and liberalized society, repatriating exiles from the losing side of the civil war and reinstating their citizenship, promoting women’s equality, allowing civil marriage, scrapping outdated laws (such as a ban on adultery), and adopting a non-aligned foreign policy (while remaining a member of NATO and the EU). Unfortunately, these positive developments were undermined by the haphazard implementation of laws, a lack of accountability, an explosion in the number of public sector jobs provided in exchange for votes, and a sense that every pressure group could have whatever it wanted, as long as it pressed hard enough. So, even as the EU provided a framework for reform and prosperity, to a great extent, Greece leaned back, enjoyed the benefits, and, with those benefits, avoided adapting to Europe.
With generous EU funds and loans, successive Greek governments could give every pressure group whatever it wanted, without going to the trouble of calculating the consequences. Omnipotent unions called the tune, forcing some multinational companies to leave and discouraging investment. Shuttering the Pirelli tire plant in the city of Patras in 1991 was a watershed. The Italian company moved its operations to Turkey after a long strike called to protest the layoff of 200 of the Greek plant’s 1,000 employees. When Goodyear left a few years later, as part of its global restructuring after the fall of the Berlin Wall, the country that had produced 75 percent of the tires it used now produced none. With unions empowered by their ties with the ruling PASOK party, with easy money from the EU, through subsidies and low-interest loans, Greek productivity dropped, imports increased, and the country sank into debt.
When the dream ended, Greeks found themselves with weakened institutions, an economy in ruins, and a political system comprised of either discredited mainstream parties or insurgent extremists from the left and right. This has only accelerated the exit of foreign companies, with French banks cutting their losses in local banks and oil giants Mobil, BP, and Shell pulling out entirely. Even Greece’s biggest company, Coca-Cola Hellenic, has moved headquarters from Greece to Switzerland, while local dairy group Fage has left for Luxembourg. Both companies cited high and unpredictable taxation in Greece.
RUNNING IN PLACE
That is where we are today and that is why the situation is so desperate for many Greeks. For the first time, we are facing an enemy who will not leave—ourselves and our own weaknesses. Our institutions and political system are still rooted in the past and are struggling to meet the present challenge. We suffer from neither foreign occupation nor an economic crisis that will blow over. The good times are over, and they have left us with a huge bill to pay, while our society, our politics, and our economy are in no position to deal with the challenge. This sense of insecurity has deepened over the past year in the face of intermittent questions over whether Greece will remain in the eurozone. In fact, this question has been tied to an even more basic one: Will Greece be able to remain part of the European Union itself?
German Chancellor Angela Merkel and then French President Nicolas Sarkozy first posed these questions in October 2011. This, together with a German-inspired plan to restructure over $200 billion of Greece’s debt, with an overall loss of 75 percent for private investors, set off a crisis of confidence in the more fragile eurozone nations, pushing up the cost of borrowing in Spain and Italy to unsustainable levels. Having cracked the façade of euro unity by forcing investors to take a haircut on a euro country’s debt, European policymakers then broke more taboos as they now tried to defend the common currency against even greater threats. The haste of EU leaders and of the European Central Bank (ECB) is demonstrated by the way they have undermined their own decisions.
First, there was the EU summit decision to recapitalize Spanish banks directly from the EU rescue mechanism, rather than load another €100 billion onto the debt of that nation’s already fragile economy. Second, there was the ECB’s declaration that it will “do whatever it takes” to support eurozone members, including a policy of buying struggling countries’ bonds if they started to implement strict reforms. Both decisions remained sufficiently vague as to be interpreted differently by all interested parties. They failed to end fears of the euro’s disintegration, simply adding to the EU’s venerable tradition of muddling through. Compare this to the U.S. Federal Reserve’s very specific announcements whenever it announces quantitative easing or the purchase of mortgage-backed securities in its bid to increase employment.
Starting with the revelation of Greece’s collapse, every time the euro crisis got worse, the EU’s response has been to underestimate the problem, waste time until things get worse, talk big, and then hesitate to act. This monumental mismanagement stems from the fact that the “union’s” nation states are still acting on the basis of separate interests, each choosing what is best for itself and not for the whole.
The most profound lesson of the crisis so far has been the need to develop a cohesive plan for the EU—one that will allow a vision to take shape regarding the union’s future. The steps aimed at achieving banking union, fiscal coordination, and debt management are in the right direction, but if they are not implemented quickly and unequivocally, some states will be in so much trouble that they will not be salvageable. This is why Greece, beyond being the catalyst for current changes, remains an important testing ground for the future.
TESTING, ONE, TWO, THREE...
The immediate problem that Greece faces is how best to carry out reforms that will make its economy more efficient. Under intense pressure from our creditors and with the government fearing the consequences, we are within a few billion euros of balancing the budget. This, however, is undermined by the question of political legitimacy—how a political system that has been thoroughly discredited by its disastrous mismanagement of the country can implement painful austerity and reforms under foreign pressure and in the face of virulent opposition from extremist, populist forces. For the moment, the jury is out on whether Greece will be able to implement reforms that will give it even a modicum of the means it needs to preserve its position within the European monetary system. The weak three-party coalition ruling Greece must face down growing public anger that benefits those political forces bent on halting or reversing the reform process. It is not enough to say that Greeks deserve what they get because they did not enact reforms when they still had the time. We are dealing with reality—with an EU member facing the kind of meltdown that any other country might face when its debts cut away at the foundations of its society.
The way to deal with this is to reestablish a sense of security among citizens. Perhaps the greatest unsung story of recent years has been the absence of any run on Greek banks. There were clearly moments (weeks and months, actually), where it seemed very likely that Greece would be forced to drop out of the eurozone, which would immediately destroy the value of deposits in Greek banks. Yet, a scrupulous program of keeping ATMs supplied with cash (provided by the rescue mechanism) prevented a run that would have led to the collapse of banks and the economy. In other words, the situation could have been immeasurably worse.
This is the model for the future. Where economic growth cannot be relied on to maintain benefits, the focus must be on political stability. People who are being asked to live with deprivation have to receive something in return—whether it is political stability, improved services, or the promise that they will not find themselves on the street. In Greece’s case, the EU, foreign officials, and Greece’s political leadership have an obligation to make clear that Greece will remain part of the European Union and its common currency. Most Greeks believe it is firmly in their interests to remain part of the EU. This would certainly be easier if the austerity and reform process were seen to be working. In Greece, three years into the crisis, even the most well meaning observer has to wonder where the program is heading. The country is in its fifth year of a recession deeper than anyone predicted. Some 650,000 people have lost their jobs since 2009 (in a country of 10 million and a work force of 5.05 million). Even after the massive loan restructuring, and thanks in part to the troika of the European Commission, the European Central Bank, and the IMF underestimating the depth of recession, the public debt, which was 120 percent of GDP in 2009, was at 132.4 percent of GDP earlier this year. The trap of diminishing returns is evident also in taxation, where higher direct and indirect taxes have actually contributed to falling revenues because of wage cuts, high unemployment, and a steep drop in economic activity.
Even more ominously, the high unemployment rate, push for early retirement, and citizens’ shrinking ability to pay for private medical care have combined to put a huge weight on the state health and social security systems at a time when workers’ contributions are scaling back. Greece’s demographics are devastating, with only 14.4 percent of the population younger than 14 (ranking Greece 218th among 226 countries), immigrants leaving, and a recent poll finding that seven out of 10 young people would like to emigrate. Fewer taxpayers with lower incomes are forced to support an economy that does not generate enough wealth to support itself. There are no guarantees that Greeks paying into the system will receive health and pension benefits when they need them. At every level, whatever Greece does, the noose keeps tightening.
This is where Greek citizens need to be assured that the EU is taking care of their most important fears. If federal tax collection through the EU were overseen and enforced by a centralized European authority, this could guarantee crucial social services, in the knowledge that people and businesses would no longer try to cheat their way out of paying taxes. If banking union and fiscal discipline were followed by a centralized borrowing mechanism and, most importantly, by a federal health and social security system, then the citizens of every EU member state could be guaranteed the minimum necessary to lead a decent life without fear of the future. Such a unified system would also eradicate the gross inequalities in Greece’s economy and society, where some groups enjoy better social security than others, where tax evaders live at the expense of the rest. Furthermore, the guarantee that Greece’s borders are the EU’s borders would slash defense costs and insulate Athens from having to buy ever larger quantities of armaments from the countries that loan it money.
Providing such security at a level of the most basic needs would compensate for much of Greece’s economic pain and would give its political representatives a legitimacy that is now being undermined.
Greece needs a stable environment in which to revive its institutions. These have been in disarray for decades because of the obstacles placed by a political class that based its power on providing favors rather than facilitating efficiency and fairness. The Greek people need a sense of justice, to know that those who cheated on them (by hiding taxes or taking kickbacks) will never do so again. They need to know they are equals among equals, both in their own country and in the EU. More than 2,500 years ago, the reformers who opened the way toward the establishment of democracy in Athens understood that the only way to achieve social harmony was through equality and justice. Those principles, properly applied here in Greece, will help Europe find its way toward a better future—for the union and all its people.
Nikos Konstandaras is the managing editor and a columnist at the Athens daily Kathimerini.
[Photo by Dom Dada]