“The first thing the government does in an election year,” former Greek finance minister George Papaconstantinou admitted in 2009, “is to pull the tax collectors off the streets.” I think this statement has a lot to say about Greek debt, and perhaps even more revealing than a numerical breakdown of the government’s balance sheet.
Papaconstantinou’s statement is another strong evidence for why we can’t separate politics from economics: such a drastic strategy of halting tax collection without altering government spending signals that the government is probably spending more than it collects as revenue—most likely a budget deficit. But how did this practice begin? What does it say about Greek political culture? In this week’s post, I hope to share with you my meager knowledge of modern Greek political history to point to what I think is an important political root of today’s economic crisis.
After the fall of the Junta dictatorship in 1974, Greek leaders with radically different political orientations put forward their vision of a post-authoritarian regime. Easily put, Greece’s post-authoritarian political system was constructed so that the winner of the majority of seats could govern alone, and as such, each party had to outperform its rival in the number of advantages offered to its supporters to remain in power. A direct consequence of the young democracy was a political practice that I think is tightly connected to debt.
Andreas Papandreou, leader of Panhellenic Sociallist Movement (PASOK) elevated the people at the center of his political program, introducing sharp pay rises, public-sector jobs, and tax cuts. This type of voter-friendly policy, often referred to as party patronage, helped PASOK remain in power throughout the 1980s and 90s; it very briefly handed over power to the rival New Democracy (ND) party in 1990 and in 2004. Such privilege-based relationships and the Athens stock market boom in the mid-1990s led to a culture more focused on consumerism than on industrial production. An inefficient tax system and the gradual decrease of European adjustment funds accentuated the problem, and the Greek government lost a sustainable tax base to fund its generous policies. Greece continued to rely on heavy borrowing, and we see an unavoidable legacy of public debt from this social-democratic phase. When the worldwide recession hit Greece, revenues from shipping and tourism slumped and so did the flow of cheap credit, hitting harder on Greek public balances. The Eurostat release reveals public debt at 127% of GDP in 2009 and 132% today, a level that is clearly unsustainable. The project initially began by Papandreou as a means to gain popularity for his fledgling party became deeply entrenched in the Greek political culture as the PASOK party continued to hold office.
The specific tales differ, but the eurozone periphery arguably shares a common socio-political experience. Greece, Spain, and Portugal were latecomers in the democratization trend in Europe, and governments during the 80s and 90s failed to enact the reforms that were necessary to strengthen their economies. C.K. Polychroniou at the Levy Economics Institute goes further in his analysis. He claims that socialists in the south—the PASOK in Greece, the PSOE in Spain, and the PSP in Portugal—who ruled from the 80s well in to the 2000s failed to adopt a progressive agenda usually common to left-wing parties. Rather, they adopted a neoliberal program with smaller social benefits and a regressive tax policy, cutting taxes for the rich and large corporations. According to Polychroniou, this phenomenon did not rise out of thin air. Regressive policies served the interest of the powerful domestic elite who helped the party remain in power. As trade unions declined and ideological confusion arose with the fall of the communist block, ideology served opportunistic goals. When things got difficult, socialists were not hesitant in putting forth neoliberal programs to regain popularity.
Polychroniou puts forward an interesting argument, but it seems to be directed towards the socialists. It is unclear, however, whether things would have been different had the conservatives ruled instead. The more important conclusion to draw from his analysis, is that strong macroeconomic programs and strong government-labor union relationships failed to develop in the young Greek, Spanish, and Portuguese democracies. Imposing austerity in this environment could have a stronger impact on the already fragile lower class and the young, as the upper class still retains strong privileged bonds with the government. Continuing austerity could lead to a political turmoil and pit classes against one another.
The eurozone’s economic troubles have deep political roots, and economic reforms on their own that fail to incorporate the political story behind balance sheets are dangerous and insufficient, no matter how harsh and austere.
In my next post I will discuss Spain, where the problem is linked to private, rather than public debt.
Always good to read about PIIGS and their woes. I don’t think the Greek debt crisis can be explained without reference to a) the euro’s role making Greek bonds as appealing as German bonds, and b) Goldman Sachs’ secret loans.
I agree corruption is a big issue in Greece and your article lays out the problem very well. But extending Greece’s problems to Spain and Portugal is inaccurate. Fiscal pressure in Spain might not be as strong as in Scandinavia, but it is certainly progressive and much more extensive than it was under Franco. A key difference is the Spanish and Portuguese states have the capacity to increase taxation, whereas Athens is barely capable of doing this.
I know the Spanish case better than the Portuguese although the party you refer to is PS, not PSP. As for PSOE, it liberalized the economy and created a modern welfare state. I don’t see a huge failure to adopt a progressive agenda. In any event, neither PSOE nor PS can implement neoliberal programs to regain popularity –because that’s the kind of thing that gets them kicked out of office.
That's all, and sorry for the looong speech. If you are interested in party patronage, Italian Christian Democracy is the textbook case. An insider-friendly party from the 1940s all the way to Tangentopoli. Looking forward to your article on Spain.