The causes of the Greek crisis are in Greek politics

The Greek crisis came out of marrying a European project with a specifically Greek political culture of populism and clientelism. These have roots in the post-1974 settlement and the left's positioning against the centre right's pragmatic, European statism
Takis S Pappas
29 November 2010

To most observers, the current Greek crisis has primarily been a fiscal one. There is by now an impressive number of accounts about the deficits and public debt accrued by successive Greek governments, the conditions of the bailout package offered the country, the bond spreads in Greece and elsewhere. Such a focus is of course understandable when taking into account both the enormity of the problem the Greek economy is faced with and the possibility of a spill-over in other Eurozone economies or, indeed, the world economy. But what has caused the crisis? Was that a matter of disastrous economic management or did the crisis originate in the malfunctioning of the country’s political system? The question is not inconsequential. For, if the crisis were simply due to economic mismanagement, then an economic prescription, no matter how bitter the pill, should be enough for putting the house in order. But if, as I am going to submit, the crisis has its origins in grave pathologies of the political system over the last three decades, recovery will require much more than wise economic management. It will in fact require the remaking of Greece’s whole political and institutional system.


Initial choices

For a country like Greece, where politics has always been marked by personalities, it is only fitting that the political arrangement of the period which began in excitement after the fall of a military dictatorship in 1974 and has just ended by near fiscal default originates in the clash between two political leaders with radically different ideas about how to constitute the new post-authoritarian polity. Constantine Karamanlis, first, founder of the conservative New Democracy (ND) party and prime minister between 1974 and 1980, pursued a pragmatic policy of gradual change and political moderation to bolster democracy and promote Greece’s chances for accession to the European Community (now EU). The political project he proposed, and single-mindedly tried to implement, had three basic components. The first was the creation of a solid institutional framework meant to produce a two-party system yielding strong governments, and including a new constitution that reinforced the executive in order to enable governments to work more efficiently. The second component of Karamanlis’ project was a strong state that was geared towards national economic development. So insistent was Karamanlis on the pursuit of this goal that he dared apply a massive program of nationalizations in the Greek economy which both friends and foes dubbed as ‘social-mania’. The third component of Karamanlis’ political project was Greece’s Europeanization. Firmly believing that membership in the EU was the best way for both consolidating democracy and achieving further economic growth, he made it the major goal of his government and a key component of his party’s platform.

Opposite to Karamanlis stood Andreas Papandreou, a brilliant public speaker and political charmer, who, already by 1974, had founded the Panhellenic Socialist Movement (PASOK), a radical party openly opposed to mainstream European social democracy. Papandreou’s project, replete with leftist ideological rhetoric and political utopianism, was the direct antipodes to that of Karamanlis in all of its own three chief components. The first was the elevation of the people (rather than citizens) to center stage at the expense of political institutions. To this purpose, Papandreou promoted a program of imprudent economic expansion based on the manipulation of the state and its resources without providing for a stable tax basis able to fund such a policy. The second component was the backing for a large and expansive, albeit not necessarily strong, state geared towards patronage politics. The state, in other words, rather than promoting collective national welfare, was meant to provide jobs and social benefits to selected individuals, mostly PASOK’s supporters. The final component of Papandreou’s proposed project was ethnocentric nationalism, which was expressed either as a strong belief in the superiority of the Greek nation or as antipathy, let alone fear, towards other stronger nations. Fervently anti-American, early PASOK also opposed Greece’s accession into the EU, a stance it modified later in an often ambiguous way. 

As prime minister during the period 1974-80, Karamanlis could claim considerable success in all three aspects of his political project. Within a relatively short time, Greece became transformed into a pluralist polity with a democratic constitution, brand new political parties, and a working party system. Its state-led economy brought the country a real GDP growth of 4% a year between 1975 and the second oil crisis of 1979. Crowning his achievements, on January 1, 1981, Greece became a member of the EU, well ahead of her southern European competitors, Spain and Portugal. When in 1980 Karamanlis resigned from the premiership to move to the presidency of the Republic, his successor, George Rallis, a moderate politician with impeccable democratic credentials, promised to carry on Karamanlis’ political plan. Yet, in the critical national elections of 1981, the Greeks decided in favor of Papandreou’s proposed project and against the completion of Karamanlis’ one.

Andreas Papandreou promised allaghi, the great change, in Greek politics and society and, to bring this about, he presented his policy package as a binding “contract with the people”. With PASOK firmly in power during the 1980s, Greece experienced the rise of irresponsible populism, unrestrained patronage politics, and a powerful culture of ethnocentrism that worked against the country’s full europeanization. To the extent that Greek society had willingly accepted the terms of the contract offered to it by Papandreou, most of his successors in power felt no need to reverse them. So it was that the project originally devised and put forward by Papandreou became hegemonic in Greek society and, within the system of alternance that became established between the two major parties, was fully adopted by rival ND as well. PASOK remained at the helm throughout the 1980s and, save a brief interval during 1990-93, for most of the 1990s and early 2000s. Papandreou had meanwhile died in 1996 and was succeeded in PASOK leadership by Costas Simitis, a mild-mannered technocrat aspiring to substitute Papandreou’s populism with a new reformist spirit. He consistently pursued convergence, so that in January 2001 Greece was able to join the eurozone, but failed miserably to reform his party, which was eventually defeated at the polls in 2004. What was to prove more remarkable, however, was that victorious ND, led by Costas Karamanlis, a nephew of that party’s founder, far from trying to restore some of the latter’s project, followed PASOK’s well-charted path of irresponsible populism and free-spending ways, patronage politics and toleration to corruption, ethnocentrism and further divergence from Europe. It was the combination of those three factors that, irrespective of party in office, simmered for a long time until it exploded in the form of the fiscal crisis that has just hit Greece.


Ask any early PASOK nostalgic in Greece today about that party’s greatest achievement and the answer you will most likely get is that it offered ordinary Greeks better lives. Indeed, once in power, Papandreou's first government abandoned all fiscal discipline by introducing sharp pay rises and an unprecedented increase of employment in the public sector. Real wage increases were moreover supplemented by the introduction of universal healthcare and pensions, the rise of social security contributions, and various other fringe benefits. In the decades to follow, any attempts made to halt that extravaganza were either annulled under social pressure or had no lasting effect. Of all efforts towards public-sector pay restraint, the most noteworthy has been the Convergence Program that was applied in the second half of the 1990s for purposes of fiscal housekeeping before Greece could join the economic and monetary union (EMU). Once Greece had joined in, however, there was once again a sharp rise of salaries and pensions in parallel with considerable acceleration of employment in the public sector. Demands were also raised in the private sector for higher pay to compensate for the years of austerity ahead of EMU entry, and were satisfied. Public-sector wages rose quite strongly under the second PASOK government of Simitis (2000-2004) and the two ND governments that followed (2004-2009). When things finally came to a head in the summer of 2009, prime minister Karamanlis was forced to call a new election proposing an economic plan that included the freezing of all public sector wages and pensions and the halting of recruitment in the public sector (except in education and health). Amazingly, despite Greece’s ballooning budget deficit and public debt, George Papandreou attacked that plan, promising instead a fiscal stimulus package for boosting, as he said, domestic demand and, thus, increasing government revenue. Although by then it was clear that such a package could not be funded, Greek voters, long accustomed to almost uninterrupted pay rises, chose to bring PASOK back in office by an impressive 10-percent margin. It was not long thereafter that the new government, unable to deliver on its promises, would invite the IMF in Greece.

Continuous pay rises and other redistributive income policies since the early 1980s, far from boosting productive investment and entrepreneurship, helped create in Greece a leisure middle class attracted to almost unrestraint consumerism, especially of imported European manufactures and food. Existing Greek firms declined as they failed to compete in both product price and quality, and retailing, once dominated by small family concerns, was overtook by large wholesale companies, many of them European chains. The Greek market was saturated by foreign branded products, particularly electrical goods and automobiles, imported under exclusive distributorships. Private consumption increased even further after the mid-1990s as a result of the Athens stock market boom. Most of it has been in fast foods, designer clothing and other luxury goods.

The problem was that neither taxation nor other sources such as EU funds and other invisibles (like tourism or shipping) were sufficient in financing the policies that made consumerism possible; the latter remained financed by heavy borrowing, mostly from foreign sources. Throughout the post-authoritarian period, Greece’s tax base remained small relative to that of her EU partners. Two reasons account for this: systematic tax evasion from the part of society and inefficiency to collect revenue from the part of the state. That tax evasion has been endemic becomes evident from Greece’s massive parallel economy (most visible in tourism and construction), which various sources estimate at over 30 per cent of GDP. On the other hand, each and all governments in the three last decades have proved spectacularly incapable to deter tax evasion despite several (mostly unsuccessful) efforts made towards that direction: the introduction of imputed income for certain professional categories and corporations; the establishment of a financial crimes investigation unit with powers of arrest; the introduction of an electronic tax platform for easing the submission of tax returns as well as automatically cross-checking them; consecutive increases in value-added tax (VAT). The other major source of financing fiscal imprudence had been the vast amounts of funding provided by Brussels in the form of Community Support Framework (CSF) programs. While a big part of those funds was used for infrastructure-building and other growth-encouraging projects, another significant part was lost to minor projects and subsidies.

As wages continued to rise unabated through successive governments, Greek society made it clear that austerity measures were simply unwelcome. Significantly, the earliest attempt to re-establish fiscal order was undertaken in 1985, when Andreas Papandreou understood the necessity of freezing wages and introducing a strict austerity program. And yet, under pressure from the unions who demanded immediate pay rises, Papandreou decided to abandon prudence and satisfy electoral clienteles. Thus setting an example to subsequent governments, he opened the state coffers and declared that “the people is superior to institutions”. Since then, having to choose between the pains of fiscal discipline and the prospect of electoral defeat, most Greek governments were in no dilemma. The exception was the government of ND’s Constantine Mitsotakis that came to power in 1990 and dared apply a program of fiscal order including severe cutbacks. That government fell after three years and was the only one in post-authoritarian Greece not to be given a second chance in office.

Inevitably, lack of political will of successive governments to cut fast-rising wages led to increased public debt. Combined with an inefficient tax system and as EU structural funds became reduced when a considerable amount of them became progressively diverted to the ten new states that joined the EU in 2004, central government debt reached enormous proportions: standing at a rather modest 34.2% of GDP in 1981, it is currently projected to rise to 133% this year. When credit rating agencies downgraded Greek government debt to “junk” status, the cost of borrowing reached such high levels that, lest it declare bankruptcy, the country was forced to turn to the EU and the IMF requesting a bailout package.


Patronage, to be sure, has been a time-honored feature of Greece’s political system but, in the past, had mostly involved interpersonal relations between powerful individuals and their political friends. Voters quite simply looked to their same constituency deputy for assistance to their personal problems and, often, with job demands for themselves or their children. Things however changed radically in the post-authoritarian period when large and organized parties came to replace individual politicians as chief polity patrons. Already by the elections of 1981, the Greek party system had been transformed into classic two-partyism, meaning that the two major parties, PASOK and ND, would now compete against each other for the absolute majority of seats and the winner would be able to govern alone. Two-party dynamics fed sharp ideological polarization between the major power contenders and, consequently, the continuous politicization of the Greek state. To win at the polls, each party had to outperform its rival in number of state jobs and other patronage benefits offered to the people. 

Under PASOK governments in the 1980s, the public sector both increased in size and most of its posts were filled with party appointees so that, at the end, the state became essentially subordinated to the party. The situation is well exemplified by the case of numerous public corporations suffering today from chronic structural deficits (and known for this as “ailing firms”). When PASOK first came to power, far from considering the necessity of lay-offs, privatizations, or any combination of both, it decided to keep them all in operation through huge state transfers. The government, moreover, stepped up the hiring of new employees whose earnings, rising as we have seen well above inflation over the decade, became a major factor in Greece’s increasing operational deficit. Not surprisingly, productivity remained low throughout the 1980s, and, at times, even worsened dramatically.

Patronage politics, to be sure, anything but subsided after PASOK lost power to ND in 1990. The new ND government, now under pressure from its own electorate for precious state jobs and other state-related benefits, and despite its effort toward state reform through privatizations, did nothing to curb patronage. In 1993, when PASOK once again returned to power, it had become quite obvious to everybody that patronage had gone out of hand and that it should be contained. This led the government to establish in 1994 the Supreme Council for Personnel Selection (ASEP), an independent authority intended to be the watchdog over the hiring of civil service staff. Alas, the political parties at both central and local levels developed new ways to come around ASEP and continue their traditional patronage practices. Such ways have been  setting exemptions from ASEP’s jurisdiction; recruiting personnel on the basis of renewable, fixed-term contracts; promoting the privileged gaining of work experience through temporary employment in state-funded programs, which is then used to meet the criteria set by ASEP; utilizing at discretion the personal interview with candidates.

Today, party patronage is particularly evident at both the bottom and top ends of public administration area, but also flourishes at the middle level in the form of preferential intra-state transfers. At the state’s bottom, each party has tried while in office to allow in the largest number of individuals possible. This has led to the inflation of civil service either through the hiring of large numbers of state employees or through the creation of new state institutions and agencies in order to absorb the surplus labor force. As successive governments have brought into the state new masses of employees on the basis of party patronage criteria, the Greek state has come to look like a sedimentary rock, each layer of which represents a particular party government period. At state’s top level, almost all appointments in both the ministerial and the extra-ministerial domains are political and, in the vast majority of cases, their duration equals the longevity of either the party in office or the appointing minister’s stay in the cabinet. Patronage is also clearly evident at the middle level of public administration and includes the selective promotion of public employees within the civil service, as well as preferential transfers to privileged in-state positions.

Large-scale patronage, besides causing a large and ineffective state, is also responsible for widespread, and costly, corruption in Greece. Shortly after coming to power in October 2009, new prime minister George Papandreou was obliged to admit that the Greek public sector suffers from “systemic corruption” and identified cracking down on it as necessary for reducing the country’s public expenditure. That was hardly an exaggeration. A forthcoming Brookings Institute study shows that patronage, bribery and other corruption cost Greece 8 percent of its GDP per annum. Similarly, the results of a recent study by Transparency International, a global organization fighting against corruption, show that corruption and fraud are in Greece quite pervasive, let alone costly phenomena. 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.

Of course, the culture of corruption has not been limited to public construction-license or other municipal authorities, hospital doctors, or tax inspectors. It also has spread to top state and party officials with deleterious effects to national public life. During recent decades, many prominent political figures have been brought to justice on charges of corruption and fraud, mostly related to the administration of state funds. An early such case was the 1991 trial of Andreas Papandreou himself and three of his cabinet ministers who were brought to trial accused for corruption. Although at that instant Papandreou (but not his ministers) escaped conviction by a one-vote majority at the Supreme Court, there has since followed a long line of high public officials who have been brought to trial for similar crimes. In recent months alone, several senior politicians of both ND and PASOK have resigned or being investigated over allegations that include bribes for the award of favorable contracts, the employment of illegal workers, and other crimes related to corruption and patronage practices.


The third major component of Greece’s current crisis is persistent ethnocentrism, expressed in recent decades as exaggerated patriotism and xenophobia. Those traits have in effect prevented the full cultural and political integration of the country into the EU and its institutions.

Greek patriotism emerged in its most populist and emotive way in the early 1990s, with the creation of the Former Yugoslav Republic of Macedonia (FYROM) after the disintegration of the Yugoslav federation. All Greek political forces opposed that country’s use of the name “Macedonia” in its title as well as various of its national symbols, claiming that those form part of the Greek cultural heritage and national identity. In 1992, enormous public rallies took place in both Athens and Thessaloniki against the use of the name by the new state and, in 1993, the Greek government imposed an embargo on FYROM which lasted until 1995. To this date, as the issue of the name remains unresolved, the two countries’ relations remain strained to the detriment of mutually beneficial cooperation. Xenophobia is the other strand of Greek ethnocentrism and is expressed as both antipathy and fear towards other people, especially Balkan ones. Many Greeks resent the growing number of foreigners in schools and neighborhoods, and fear that they will be outnumbered by immigrant populations, who are generally seen as the main cause of the significant rise of criminality in Greece.

Ethnocentrism, and flag-waving, have been great obstacles for permanently settling a number of issues that remain open between Greece and neighboring Turkey, and strain the relations between the two countries. The major source of the problem is, of course, the 1974 invasion of Turkey in Cyprus, the occupation of the island’s northern part, and the subsequent establishment in 1983 of the so-called Turkish Republic of Northern Cyprus. In addition, there are between the two countries several disputes – such as those over territorial waters, sea-bed rights, and air space control in the Aegean – that remain unresolved. Back in the 1980s, Andreas Papandreou’s governments, spirited by irresponsible nationalism, often displayed a hostile, and even bellicose, attitude towards Turkey that also included threats to sink a Turkish survey ship looking for oil in the Aegean. In 1996, the two countries came close to the brink of war when nationalist civilians from both Greece and Turkey planted their respective flags over the uninhabited islet of Imia (known to the Turks as Kardak) while another bad incident occurred in 1999, when the Greek government helped Kurdish rebel leader Abdullah Ocalan reach Nairobi only to be arrested there by Turkish agents. Greece has often exploited its EU membership to promote its interests vis-à-vis Turkey as when, in 1995, blocked the Association Agreement between Turkey and the EU until a date was set for the commencement of accession negotiations with Cyprus. In the last decade, however, Greece has reversed its long-standing opposition to Turkey’s candidature for EU entry provided, of course, that there will be a resolution of outstanding differences and a settlement on Cyprus.

Ethnocentrism has been a major obstacle to Greece’s full europeanization, which still remains an unfinished process. Although both major parties and the majority in society appear to be firmly in favor of deeper European integration, they  have so far been motivated mostly by economic advantage rather than a desire for deeper political and cultural convergence. Over recent decades, Greece has been a recipient of large amounts of structural funding provided by the EU and channeled via the various Community Support Frameworks. At the same time, however, there are several dissenting voices, both within the parties and in society, that are skeptical, if not altogether hostile, to the prospect of European integration. Particularly important is in this respect the Greek Orthodox Church, which claims to be the true repository of national and cultural identity. As many among its leadership believe, and often publicly declare, further integration of Greece within the EU implies the irreversible loss of national and cultural identity. Incomplete europeanization is responsible for the failure of redefining Greek national identity towards a common European norm, as is shown by countless examples ranging from the visible lack of interest by the Greek national parliament in the EU policy-making process to Greece’s providing the EU with false statistics.

In short, during the last decades, irrespective of government, there has predominated in Greece what Professor Nikiforos Diamandouros has termed “the underdog culture” over a modernizing one. While the latter implies a society that has accepted rationalism along the lines of liberal and solidly institutionalized democracy, secularism, and capitalism, the underdog culture refers to a society dominated by pre-democratic values, such as clientelistic practices or the low respect to established institutions, pronounced statism in combination with a certain ambivalence towards capitalism and the market forces, strong influence in society of the Orthodox Church and, consequently, a widespread, albeit latent, anti-Western feeling. The predominance of such a culture in Greece, has constantly undermined any attempts for institutional and economic rationalization along the common European norm and is a chief cause of the current fiscal crisis.


What has most clearly, and very painfully, emerged from Greece’s fiscal crisis is the realization that the old contract made between Andreas Papandreou and the Greek society, which, after him, was respected by his political successors of both PASOK and ND, is not any longer sustainable. As if in a classical tragedy, it is newly elected George Papandreou, Andreas’ son, who is faced today with the task of undoing his father’s political legacy. Although it is still early for any assessment, the new government looks determined to scrap the old contract by dismantling the ancient social welfare system, re-instituting meritocracy, and turning the country decisively towards Europe. This, to be sure, will be a colossal task for at least three reasons: First, and most obviously, Greece is facing up to a long period of recession which creates an environment averse to reformism; second, the new prime minister must go against the old guard in his own party, and succeed in curbing their strong populist instincts and clientelistic practices; and, third, the Greek society is not willing to accept austerity measures, already showing discontent and public unrest. Reformism is Greece has been met with protests, some of them quite violent, reinforced by the belief of many Greeks that the crisis is being engineered by foreign forces such as European central bankers and other financial speculators. But, clearly, a new social and political contract is necessary if Greece is to exit the current crisis and reconstitute its political system. This seems the only way to do away with populism, patronage, and ethnocentrism, and enter the virtuous cycle of a state with an economy with balanced books, strong and working institutions, and a society fine-tuned to the common European norm. 


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