The debt crisis suggests that not much has changed in Greece since the first performance of the Oresteia in Athens in 458 BC. Similarly to the Oresteia, there are no good choices available. Whatever path is chosen, politicians will be tormented by the Furies making it impossible to have a peace of mind. You will be damned if you do, damned if you don’t. Greece is cursed.
The choices are complex and difficult because it is not a temporary crisis of liquidity but that of solvency. Throughout the last decades Greece has not been able to raise sufficient government revenue to match its growing expenditure. The constant gap between expenditure and revenue was exacerbated by the financial crisis. As Dr. George Pagoulatos, Associate Professor of Politics at Department of International and European Economic Studies of Athens University of Economics and Business, pointed out in his presentation on March 24 at Harvard University: “This is crisis of our own doing.”
According to Dr. Pagoulatos, Greece lived through “the decade of complacency” after the euro entry in 2001. There was rapid credit extension because interest rates were lowered and it was cheaper to borrow. This concealed structural weaknesses of the economy. GDP growth relied on consumption which was fuelled by bank credit. Dr. Pagoulatos argued that this is really a crisis of Greek economic model.
The nature of crisis shows that Greece has operated like a huge socialist enterprise under what Hungarian economist Janos Kornai called “soft budget constraint”. The decision-makers have not had incentives to impose financial discipline because government was always able to issue more bonds with low interest rates in order to finance its debt. There seems to have been implicit assumption that if the situation turns worse, then assistance can be given by fellow eurozone governments. Dr. Pagoulatos pointed out that there is no rationality in budget process of many Greek government agencies. For example, public hospitals have accounting problems and do not submit balance sheets to government. Similar problems exist in local governments. The situation is made worse by wide-spread corruption.
The key to understanding the crisis and offering solutions is to figure out how to change incentive structure of and institutional constraints faced by Greek decision-makers. Dr. Pagoulatos argued that “Greece was not adequately monitored and sanctioned by the EU and the Greek government did not receive enough pressure from the EU.” This sounds like blaming murders in the House of Atreus as characterized by the Oresteia on the Trojan War. There might be indirect connection but this is not a cause of the tragedy.
Certainly, EU governments should have enlightened self-interest to assist Greece. Many of their financial institutions hold Greek government bonds. Greece is a small country but its crisis may have contagion effects on other EU countries. For instance, the Asian financial crisis in 1997 started in Thailand and spread from there to larger economies such as Indonesia and South Korea. However, at the same time EU governments must not create moral hazard and keep in mind that the whole Greek economy needs fundamental restructuring.
Most importantly, many macroeconomic analyses of the crisis ignore basic political economy. The root cause of the crisis stems from the nature of Greek interest groups. These groups are militant and narrow-minded demanding fulfillment of their pockets without any consideration of the consequences of their actions on overall economy. Greek politicians have found it easier to cave in. They have raised public sector wages, created more jobs in public sector and increased benefits. No wonder that government increased wages and pensions by 10.5 percent in 2009 – even if signs of the crisis were hard to ignore at that time.
It is hard to imagine that IMF and EU can impose conditionality, which would fundamentally alter this existing political economy equilibrium. Hence, the change has to come within Greece. The internal devaluation by cutting wages by 20 % or more could bring about “Creative Destruction” and get the Greek economy out of death spiral. The Oresteia is untypical tragedy because Athena intervenes and the play ends on a happy note. Why shouldn’t the Greek economic tragedy have a happy ending?