If Greece's crisis has political roots, it will have a solution in wide-ranging institutional reform

Greece isn’t working… Reforms need to turn a people that has accustomed itself to practices of excessive consumption courtesy of EU largess, into a nation of creators and producers, actively participating not only in the economic field but also in the creation of communal welfare and the preservation of Greece’s natural and cultural environment.

Takis Pappas (29 November 2010) has made a fair shot of answering the classic question ‘who is to blame’ for the drama that is unfolding in Greece today. It is of course much harder to come up with an answer to that second question: ‘what is to be done’.

George's vision of things

 

 

 

There are in effect a number of problems that have to be dealt with simultaneously: a debt crisis, and linked to it a massive increase in unemployment which will soon approach 20% of the working population. But underlying these immediate crises there is a more significant crisis of institutions. Thus long term institutional reform must be at the centre of any attempt to pull Greece out of the spiral of economic contraction and societal breakdown. The question of structural issues affecting the Euro-zone as a whole, including plans for Euro-bonds and the development of a limited form of fiscal union in order to mitigate the effects of a-symmetrical economic shocks to particular regions or countries, will not be dealt with here.  

To deal with the immediate problem, Greece would be well advised to renegotiate a part of its debt burden, something which it is in fact doing. The Euro-zone has already offered a maturity extension to Greece’s May debt, which represents a small step in the right direction. Bear in mind that this is not an alternative to reform, but should rather be seen as a prerequisite for its success, for growth cannot come with a debt burden of 170% of GDP or more, with taxes spent to a large extent on sovereign debt repayment.

Apart from anything else Greece is currently swapping low grade debt for high grade debt, which is much harder to default on. Timing is however crucial. The burden of pain between lender institutions and the Greek population should be shared, however, debt repayment extensions, “hair-cuts”, or, in other words, going bankrupt in an orderly way, is anything but easy, it requires the agreement and assistance of other EU member states. Such assisted bankruptcy may need to deal with the question of further support for Greek banks, which will be major losers as they have been acting as intermediaries between the European Central Bank and the Greek state, providing the government with the loans it needs to survive. Such aid should be given only in return for shares, along the lines of the system put in place in the UK by Gordon Brown, so as to ensure that the banks do in fact increase the money supply through lending and help revive the economy, something they have not so far been doing. However, the senior management of such banks should not be changed through political interventions as would have happened in the past – unlike Ireland it was not they who bear responsibility for the crisis in Greece. Furthermore such banks must be swiftly re-privatised to prevent a return to the state-crony-capitalism of the Andreas Papandreou era.

As far as getting Greeks working is concerned, there can be no alternative to massively easing hiring and therefore firing procedures for Greek companies, and reducing the financial burden on small and larger companies offering jobs. The state can no longer afford to provide more and more jobs for the PASOK and ND boys. In fact, the whole Greek tax structure at the moment is a disincentive to the creation of work, leaving young Greeks with little option but to rely on family support, work on the black market, or emigrate. Reforms to the labour market passed over the last week represent fundamental steps in the right direction.  

But if renegotiation of debt, opening up of labour markets, and tax reform are the sine qua non, the immediate measures that the government of the country has to take if it is to give Greeks a chance to come out of the crisis, they are very far from being sufficient. Institutional reform is essential to get Greece on its feet again.

What would such institutional reform look like?

  • Above all, this would mean reform of the Greek state apparatus. This is inefficient and bloated, overstaffed on some estimations by 30% or more. To the extent that support by the EU and the IMF is being used to keep the state bloated, this is money badly spent.

  • This would mean reform of the judicial system which is excruciatingly slow and unpredictable. A judicial system that is speedy and operates independently from the government would be a significant plus in the battle against tax evasion. Separate tax courts are at last being set up. In the judicial system however the problems are to a considerable extent administrative. Government departments are overloaded with underemployed lawyers, and as a result the state takes on too many cases clogging up the system.

  • It would mean vastly reducing the bureaucratic burden on companies trying to do business in Greece, and breaking up and privatising such behemoths as the state electricity company. As Aristos Doxiadis argues (23 September 2010), particular emphasis should be given to improving the business environment for small family based companies that are the backbone of the Greek economy.

  • It would mean tackling the crony capitalism that has characterised the relationship between the EU, the Greek state and the country’s construction companies head on. Rampant corruption requires drastic measures, perhaps through an official institution with external EU participation specialising in uncovering corrupt practices with the power to sack corrupt officials. It also requires reform of party financing and the electoral system, including breaking up huge Athens constituencies that compel candidates to be beholden to particular interests in order to get elected.

  • It would mean redoubling efforts to preserve Greece’s main competitive advantage, its natural environment, which supports Greece’s biggest industry, tourism. Above all, a proper land registry and transparent land-use regulations would help Greek companies and the tourism industry know where building may and may not take place, thus preserving Greece’s high-end competitive advantage in the medium and long term. A proper land registry would also make clear where green energy projects could proceed, thus eliminating the need to pay intermediaries for preferential positions, a form of corruption that is characteristic of the way in which energy companies pay the state (or bribe state officials) and pass on the extra cost to the taxpayer.

  • It would mean redoubling efforts to encourage innovation; that means opening up the Greek educational system by allowing NGOs and foreign institutions to run officially recognised schools and universities in Greece, along the lines of reforms that have been carried out long ago in neighbouring Turkey.

  • It would mean encouraging NGOs to increase employment through preferential tax rates for donations, and encouraging them to take up part of the social costs of a society in transition, costs that the Greek state has been so inefficient in meeting. Apart from anything else, Greece has a large off-shore shipping community that would want to finance pet projects, provide they are not boxed into a corner by the state, as is the case today.

  • Along similar lines, the Church should be separated from the state and taxed as a NGO, thus releasing the state from a considerable burden on its coffers, and the Church from its role as a hand-maiden to Greek state ideology.

Such institution-building measures would aim to turn a people that has accustomed itself to practices of excessive consumption courtesy of EU largess, into a nation of creators and producers, actively participating not only in the economic field but also in the creation of communal welfare and the preservation of Greece’s natural and cultural environment. Their success will however depend to a considerable extent on continued economic growth in the EU and in the other countries neighbouring Greece.

Is it possible to introduce such measures while at the same time fostering a renewed sense of trust between Greeks and their state? Probably not, at least in the short term. But being open about past mistakes and misdemeanours would help. Thus former Ministers and Prime-Ministers should be encouraged to talk openly about the environment in which they operated, and helped to create. Given the distrust of the Greek court system, openness is in this respect more important than convictions in court, which are in any case unlikely to take place any time soon. The trial of most politicians is time-barred, so almost all would be acquitted on procedural grounds. Rather a truth and reconciliation commission should be set up to encourage openness about past corrupt practices, above all party financing, in return for amnesty.

Finally, the question has to be asked, what if the Greek government and people do not succeed. What if they do not take the necessary measures in the next months, and then years, to give Greeks a chance? What if it becomes clear that all we have succeeded in doing is deflating our economy, in effect taking the long hard road to nowhere.  

There is one last measure that the Greek government and people could take, thought it would mean full bankruptcy of the state, the full nationalisation of the banks (combined with regulation preventing the withdrawal of savings), and a return to the practices of the 1970s and 1980s…

Greece could choose to leave the Euro, thus making its economy competitive (at least in the immediate short term) through devaluation. This will happen eventually if George Papandreou’s government does not act swiftly to deal with the debt problem, reform the labour market and reorganise the tax system. But it will be accompanied by a slump in the income of all Greeks, by long term corrosive inflation and will pose a serious threat to Greece’s main achievement since the 1970s, the creation of a pluralistic democracy.

Greece’s future is in George Papandreou’s hands: he will need to be crafty and tough to weather the storm. Recent local elections have shown however that he has sufficient support among the Greek population to push reforms through if he is willing to take on the barons in his party, not to mention the spectre of his father, Andreas…

Quite possibly George’s brother, Nikos Papandreou, is already busy writing the sequel to his novel on Andreas Papandreou… Let us hope he casts “little George”, as the current Prime-Minister is often called to distinguish him from his grand-father of the same name, Prime Minister in the 1960s, as a latter day Henry V, not a modern-Greek variant of Hamlet.

About the author

Iannis Carras is an economic and social historian of the 18th century Balkan and Russian worlds. He is active in Greek NGOs and has been a parliamentary candidate in the Athens region for the Greek Green Party.