World Policy Journal

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Greek Tragedy

IOANNIS N. GRIGORIADIS

NKARA—Hubris, Ate, and Nemesis are three minor Greek deities, Amostly remembered today for their function in ancient Greek drama. Hubris symbolizes arrogance, and deviation from virtue. Ate refers to an act of folly, a direct consequence of hubris, which provokes the wrath of gods and precipitates their intervention. Nemesis is the retribution of divine justice—painful, but necessary to restore world balance and order. The ongoing, multifaceted crisis that has torn apart ’s economy and society since October 2009 can also be approached through the lens of this tragic classical trio .

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Today, the country is all but bankrupt, a liberal former prime minister who died in thanks in large part to excesses that have 1968 after being placed under house arrest become endemic in Greek society and gov- by the right-wing military junta that had ernance during the past three decades. Only taken power in Greece the previous year. the last-minute intervention of the Euro- When the junta was overthrown in pean Union and the International Monetary 1974, the younger Papandreou returned to Fund prevented a total meltdown of the Greece and formed a political party, the Pan- country’s economy in the spring of 2010. hellenic Socialist Movement (), which As a result, during the past 15 months, a opposed Greece’s entry into NATO and the new paradigm has been forced onto Greece. European Economic Community (eec). No longer can the profligacy of the past In 1981, Papandreou was elected Prime play any role in the country and its future. Minister, having campaigned on promises to There is no other viable solution for Greece withdraw Greece from those organizations but radical reform. and end the country’s Cold War alignment This realization is the key moment of with the United States. Once in office, Pa- nemesis in today’s Greek tragedy. It is also a pandreou reneged on those promises, chart- reality that much of Europe is being forced ing a more moderate course, at least when to acknowledge. Ireland, Portugal, but it came to foreign policy. Greece remained a also Spain, Italy and Britain—all are now full—albeit often problematic—member of confronting the costs of past excesses, their the eec and NATO. fiscal backs to the wall. If Greece can find Papandreou’s leadership was instru- a way to heal its self-inflicted economic mental in healing the wounds still fester- wounds, it may offer a model for economic ing from the 1946 to 1949 Civil War that reinvention in Europe. If not, it may be- pitted Greek against Greek—the conser- come a cautionary tale. vative right and center versus the commu- nist left. Exiled left-wing insurgents who The Roots of Hubris left Greece in the aftermath of the Civil The contemporary Greek political elite War were allowed to return, while their bears a large burden of responsibility for earlier contributions to the anti-Nazi re- the country’s current woes. Yet the funda- sistance were officially recognized. Bureau- mental origins of Greece’s problems can cratic posts ceased to be a privilege offered be traced to the era of Andreas Papandre- exclusively to right-wing . But very ou, a hero of the Greek left who served as rapidly, Papandreou’s government began the country’s prime minister from 1981 to go off the rails. Unprecedented levels of through 1989, and again from 1993 until borrowing and spending created massive 1996. Before entering politics, Papandreou government debts. While debt-to-GDP was a well-regarded economics professor ratio was 30 percent in 1980, it skyrock- in the United States, teaching at Harvard eted to 90 percent by 1990. and the University of California at Berke- The new funds were spent to subsidize ley. His father was , private consumption rather than promote

Ioannis N. Grigoriadis, who was born and raised in Greece, is an assistant professor of political science at Bilkent University in Ankara, Turkey.

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GREEK TRAGEDY development of infrastructure, which could Meanwhile, young Greeks became more have boosted growth. Salaries in the public interested in securing well-paid and unde- sector kept rising, without generating any manding government jobs, rather than im- parallel growth in productivity. Economic proving their skills through education and assistance from the eec increased the size seeking success through entrepreneurship. of the pie without encouraging investment These flaws remained fixtures of Greek in long-term growth or fostering a cul- society and governance long after Papan- ture of accountability. Under Papandreou, dreou left office. Still, for nearly three de- Greeks became accustomed to a perpetually cades, Greece escaped any real economic improving standard of living. Yet it was reckoning. It was aided by an exceptional financed not by genuine and sustainable amount of eec/EU financial aid, in amounts economic growth, but by an ever-growing that exceeded even those Greece received mountain of debt. Politicians who warned from the post–World War II Marshall Plan. of the potentially disastrous consequences These funds were were repeatedly defeated in parliamentary disbursed with the critical elections and marginalized. At the same aim of narrowing deficiencies time, the state bureaucracy became infected the gap between by inefficiency, nepotism, and corruption. Greece and the of the Greek Large swaths of the private sector, in- more developed state had been cluding the construction and telecommu- EU member states. cleverly hidden nications industries, became dependent Despite the ineffi- on the state. Public health and education ciency of the public from view for increased in scope but not in quality, and sector, those funds too long. became tainted by rampant corruption. did help improve Pharmacists would bribe physicians to the country’s infrastructure. Greece’s private prescribe unnecessary drugs to their pa- sector also benefited from the post–Cold tients, paid for by the government. Public War opening of economies in the Balkans. high school teachers would violate their Throughout the 1990s, Greece’s most oath of exclusive public service and earn competitive economic sector, shipping, extra money by offering private courses to took advantage of worldwide trade liber- students preparing for the university entry alization and steady growth in emerging exam, depriving less-fortunate students of markets like China, India, and Brazil. their attention in the classroom. As this And between 1989 and 2000, the arrival kind of behavior spread, the social fabric of more than one million immigrants from was slowly shredding. southeastern Europe, the former Soviet Official tolerance of corruption encour- Union, the Middle East, and the Indian aged public acceptance of rule-breaking. subcontinent revitalized the Greek econ- Tax evasion became the norm, and honest omy and gave a critical—if only tempo- taxpayers were often penalized by paying rary—boost to its competitiveness. ever higher taxes on the income they volun- Spurred by those factors, the eco- tarily declared. Increasingly generous pen- nomic growth of the late 1990s allowed sions and social benefits, combined with the Greece’s entry to the and its country’s aging population, undermined the adoption of the euro as its currency. Ques- stability of the Greek social security system. tions of fiscal reform, responsibility, and

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competitiveness were far from the minds cheered by both political leaders and vot- of politicians and voters alike. The convic- ers. It was, indeed, a big national suc- tion that the country could indefinitely cess. Yet the Greek government failed to live beyond its means and enjoy a debt- make clear to the electorate that Eurozone financed “Greek dream” was the defining membership came with strings attached. moment of hubris. By voluntarily relinquishing national monetary policy, Greece could no longer Two Moments of Ate periodically devalue its currency to in- While Greece was pressing forward with crease competitiveness—a common prac- its efforts to join the Eurozone in the late tice for decades. Greek political elites 1990s, it also embarked with great fanfare continued to compete for the popular vote on a project that would most lucidly reveal using the same old tricks, while European its structural weaknesses and pave the way authorities failed to develop the supervi- for a dramatic shift of fortunes—hosting sion mechanisms that would ensure the ac- the 2004 Olympics in . The return curacy of Greek financial statistics and the of the Olympics to its ancestral home was compliance of Greek economic policy with greeted by the public with jubilation and the Eurozone standards. In the absence of pride. Still, there were a few skeptics who innovative policies to promote competi- doubted the wisdom of the multi-billion- tion and reform, the prospects of the Greek dollar project. They were right. economy remained bleaker than ever. The Athens games went smoothly. The left-leaning Papandreou era may But the costs of hosting them far out- have been the origin of contemporary weighed the benefits. Today, many build- Greece’s hubris. But Greek governance tru- ings constructed for the Olympics remain ly hit its nadir during the 2004 to 2009 under-used, even abandoned, since there administration of , was no comprehensive plan for their future leader of the center-right after the games ended and the world de- (nd) party. As the nephew of the conser- parted. A rare opportunity to reshape Ath- vative Prime Minister who had hauled ens was squandered. Even worse, colossal Greece into the eec in 1981, Karamanlis cost overruns and astronomical budgets appeared to enjoy impeccable pro-market were financed through reckless borrowing. reform credentials and promised to reign Estimates of the overall loss from the in the out-of-control public sector. Yet his Olympics range from $15 billion to $20 government was arguably the most profli- billion. Yet it is hard to tell how much gate in recent Greek political history. Greece lost, thanks to “creative account- Low interest rates secured through ing.” (Several of the generous sponsorships Greece’s Eurozone membership allowed that appeared as revenue, for example, the Karamanlis government to increase originated in Greece’s own public sector.) borrowing sharply in its efforts to support Far from restoring Olympic glory, the a growing and increasingly inefficient pub- Athens games exposed critical deficiencies lic sector. This proved to be a very popular of the Greek state that had been cleverly and vote-winning policy. Salary and pen- hidden from view for too long. sion increases, subsidies, and tax rebates Like the Olympics, Greece’s entry appeased powerful interest groups like into the Eurozone, in 2000, was initially farmers, trade unions, and civil servants.

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GREEK TRAGEDY

To disguise yawning current-account defi- young man by a policeman in Athens, cits and a steep rise of public debt, Greek riots wrought havoc on the center of the city. statistical authorities employed creative State buildings and shops were looted and accounting, circumventing or violating set aflame, while the government and police standard accounting practices in order to stood by helplessly. Damage was estimated present a rosy picture of Greek state fi- at €200 million or more. Downtown Athens nances to the Eurozone authorities. To that appeared to be in a state of anarchy for several end, special deals were made with Wall days for the first time since the end of World Street firms like Goldman Sachs. Debt ob- War II, when civil war had broken out. ligations were masterfully packaged and The stage was set for the final act. concealed into complex financial instru- ments, so Greece could appear to be meet- The Moment of Nemesis ing its Eurozone deficit targets. As Warren Buffett once said, “It’s only Meanwhile, corruption reached extraor- when the tide goes out that you learn who’s dinary proportions, even for the standards been swimming naked.” The global finan- of a country with a rather poor record in cial crisis that began in 2007 struck Greece public sector integrity. An anti-corrup- at its most vulnerable and set the conditions tion investigation in Germany revealed for the moment of nemesis. Formerly abun- that the electronics and engineering firm dant liquidity evaporated from global capi- Siemens had bribed both major political tal markets, exposing countries addicted to parties and key ministers throughout the high levels of borrowing to unprecedented 1990s and early 2000s. A scandalous real risks. Greece was at the head of the list. estate deal between the government and a In September 2009, Karamanlis Mount Athos monastery proved to be the announced that he would call early elections, last straw. Despite public outrage, no po- due to the dire state of the economy and litical figures were prosecuted, owing to the need to take harsh, urgent measures. constitutional provisions guaranteeing a It turned out to be a politically suicidal short statute of limitations and thus de facto move, and his party suffered the sharpest impunity for MPs and ministers. defeat of its almost 40-year history. In the summer of 2007, a series of brush Pasok—now led by , fires in the and other parts of son of Andreas—came to power with southern Greece killed 80 people and re- a comfortable parliamentary majority. duced more than 1,000 square miles of for- Soon after, the new finance minister, George est and farmland—some three percent of Papaconstantinou, announced a dramatic Greece’s territory—to ashes. This was by far revision of the country’s financial statistics. the biggest natural disaster in Greece’s re- The current account deficit was revealed to cent history, and highlighted the inability of be 13.6 percent of GDP, more than double state officials to protect individuals and the the official figures of the now-defeated environment. Still, Karamanlis was able to Karamanlis administration. The debt-to- win re-election a few weeks later—thanks in GDP ratio was also modified, from 103 part to a lavish, debt-financed compensation percent to 125 percent—a high number, plan for those affected by the brush fires. though far below, say, Japan. The difference There was worse yet to come. In De- was that Greece was uniquely combining cember 2008, following the killing of a a high public debt with a current account

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deficit and a severe competitiveness problem. In May 2010, the IMF and the EU It desperately needed global capital markets pledged €110 billion to help the Greek gov- to finance this profligacy. And now, thanks ernment refinance its deficit and debt with- to the worldwide financial crisis, the global out recourse to the financial markets, while windows were slamming shut. the country enacted deep budget cuts and Greek public debt was estimated to fiscal reforms. Additional aid was secured a exceed €300 billion. Yields and spreads week later, when the EU and the IMF agreed between Greek and German bonds reached to an even more comprehensive plan. Some all-time highs, and Greece rose to the €750 billion was committed to the rescue of top of the list of countries most likely any Eurozone economy that might face fi- to default. Government borrowing rates nancial difficulties. At the time, Greece was quickly became prohibitive. After some the only country with that level of need. hesitation, Papandreou announced an un- paralleled austerity program aimed at re- Tough Pledges, High Prices ducing the current account deficit to 2.5 Still, some tough pledges were the price percent within two years. Yet the global for access to this enormous aid package. markets doubted the plan’s feasibility. So the Papandreou government committed Given the country’s imminent liquidity itself to the implementation of the most needs, the only way to avert a near-term far-reaching economic and political reform bankruptcy was to seek international sup- program Greece had considered in decades. port. Despite his initial resistance, Papan- The terms of a memorandum signed be- dreou announced on April 23, 2010, that tween the lenders and the Greek govern- his government had agreed to receive fi- ment included promises to rationalize the nancial aid from the EU and the IMF. country’s social security system by raising The announcement failed to head the retirement age and slashing benefits, off Standard & Poor’s decision four days to remove numerous barriers to a free mar- later to downgrade Greek bonds to junk ket (such as archaic “closed professions” level. This was an extraordinary decision rules that limited entry to a wide range of for a Eurozone member and a turning fields), to cut public sector salaries and ben- point for market sentiment, which efits sharply, and to embark on an extensive effectively froze the Greek bond market. privatization program of the telecommu- Fearing that an imminent default nication, energy and transport industries. would lead to the country’s exit from Implementation of the memorandum’s the Eurozone and the reintroduction of terms would be inspected periodically by the drachma, many Greeks withdrew the lenders and would serve as a condition their bank deposits. They transferred for the delivery of the next loan tranche. their funds to “safe havens” such as But there were further barriers to , Switzerland, or Britain, while business as usual. For decades Greek poli- others simply stored them in safe deposit ticians used to employ the devaluation boxes. Severe salary and pension cuts also weapon to deal with the consequences of led to recurrent strikes, demonstrations imprudent economic policies. Yet things and social turmoil. Three clerks died were different now. Since the country when a bank branch was set aflame during had forfeited this option when it entered a demonstration in the heart of Athens. the Eurozone, it now had to pursue a

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GREEK TRAGEDY policy of “internal devaluation.” In other to delay repayment terms or forgive words, competitiveness would be restored some interest or principal on outstand- through the collapse of demand, the de- ing loans. One central reason is that the crease of consumer prices, and reduced la- global capital markets that are Greece’s bor costs. Inevitably, this would prove to creditors have priced in all the structural be a recipe for social turmoil. deficiencies they had ignored for so long. In addition to its own self-inflicted At the same time they promptly began structural and fiscal burdens, Greece had questioning not only the willingness but already fallen victim to growing economic also the ability of the Greek political uncertainty throughout the Eurozone, elite to implement the promised reforms. as well as speculation about the viability Having deferred the resolution of deep of the euro itself. Ten years after the in- fiscal and structural problems for nearly troduction of the common European cur- three decades, Papandreou’s government rency, the global economic crisis revealed appeared to be setting itself up for a near- some of the Eurozone’s structural deficien- term failure. By April 2011, a year after cies. Greece has become the financially the bailout was weakest member of the Eurozone and thus announced, it It’s fair to the most susceptible to the whims of capi- was clear that the tal markets. A Greek default would repre- Greek govern- wonder sent a major systemic risk, as several major ment would miss whether European private financial institutions are its target to re- to trust a heavily invested in Greek public debt and duce the current exposed to its credit-default swap market. account deficitpolitical elite Nevertheless, despite the EU–IMF to 7.4 percent. that is the bailout and the commitment of the Greek Privatization product of a government to the most comprehensive revenues were fiscal austerity and structural reform pack- far below the an- dysfunctional age in decades, markets remained skepti- nounced targets, system. cal about the feasibility of the rescue plan. while promised While the bailout plan prevented the risk deficit-cutting reforms in the public sec- of an immediate Greek bankruptcy, it tor were still pending. It also appeared could not by itself address underlying rea- increasingly likely that Greece would sons for the dire state of the Greek econo- be in need for further financing in 2012, my. Critics feared that the fiscal austerity in order to service its accumulated debt. plans would harm indiscriminately both An orderly and pre-agreed debt restruc- the sound and corrupt sectors of the Greek turing was called for, but that would re- economy and thus weaken the chances for quire close cooperation between the Eu- a broad-based economic recovery. rozone, the IMF and Greece. A long debate has ensued over the An already-difficult situation was question of how Greece will repay its further complicated in May, when Domi- debt under the terms set by the EU and nique Strauss-Kahn resigned his post as IMF, without resorting to some sort of managing director of the IMF after his ar- restructuring in the medium term— rest on charges of attempted rape in New for example, an agreement by creditors York City. Strauss-Kahn had advocated

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decisive IMF action to avoid defaults in Yet the stakes are very high indeed. Greece and other debt-ridden Eurozone If this reform fails due to stiff social resis- members, and his departure introduced tance and the IMF–EU memorandum is yet another element of uncertainty into annulled, Greece may face a catastrophe of the picture. Just a week after Strauss- historic proportions that could threaten the Kahn’s arrest, Greece announced it would political and economic accomplishments of speed up a plan to sell off €50 billion six decades. At the political level, this could in state-owned assets over the next five be translated into isolationism, national- years, including a state-owned bank and ism and anti-Westernism. At the economic the country’s two biggest ports. level, a cataclysmic depression could occur. An ever-growing number of skilled Greeks Culture Shock could face no other option but to emigrate. Implementing the demands of the EU– A brain drain that began at the onset of the IMF memorandum not only entailed pain- crisis could assume dramatic proportions. ful economic sacrifices for the vast majority of the Greek people. It also implied a radi- The Moment of Catharsis cal reconfiguration of the country’s social, According to Aristotle’s classic defini- economic and bureaucratic model, which tion, tragedy is “an imitation of an action bore similarities to the transitions under- that is serious, complete, and of a certain taken by the formerly communist states of magnitude…with incidents arousing pity central and eastern Europe in the aftermath and fear, in order to accomplish a catharsis of the Cold War two decades ago. of such emotions.” One cannot be certain The challenges facing Papandre- about the timing of the catharsis in the on- ou go beyond the task of governing. going Greek tragedy. The success of the What’s called for is a transformation of Greek reform plan depends heavily on the Greek society—a sharp reduction in the determination of the current Greek govern- size of the state, as well as its role in the ment to stick with it. Most of the opposi- economy; an end to the corrupt links be- tion parties—including the nd under its tween the state and large swaths of the new leader, —have staked nation’s economic elite; reintroduction of out populist positions that will make them an esprit de corps in a drastically reduced unlikely to lend a helping hand. bureaucracy; a ruthless attack on an ever- Success also depends on the health of growing shadow economy; and fostering a the global economy, and the Eurozone in creative and entrepreneurial spirit among particular. Even if the Greek government young people, through a reformed educa- does everything right, a relapse of the tion system based on meritocracy. All of global financial crisis or the outbreak of a these steps will require courageous politi- major Eurozone crisis might suffice to de- cal leadership, able to withstand volatile rail its program. popular reaction during the initial phases It is too early to argue that the end of the reform process. It’s fair to wonder of this Greek tragedy is in sight. Yet an whether a political elite that is largely a outline of the key features of recovery is product of this dysfunctional system can already clear. First, there is no way to talk be trusted to promote measures that would seriously about economic recovery without eventually lead to its demise. addressing Greece’s decades-long problem

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GREEK TRAGEDY of tax evasion. This will require a radical To convince Greece’s international debtors revamping of the Greek tax-collection sys- that a real shift has taken place, the govern- tem, which is built around arcane legisla- ment must provide a clear schedule for im- tion that leaves plenty of wiggle room for plementing changes—and maintain it. potential evaders. The government will Greece’s path toward recovery will not have to create a highly skilled bureaucracy only involve administrative reform. It also committed to the task of raising public requires a major economic and cultural shift revenues and the meticulous implementa- in people’s lives. Greeks will have to give up tion of legislation. Tax evasion must cease living beyond their means and expecting ev- to be a national sport and be treated for ery unfulfilled need to be met by the state. what it is—a crime. Wages, salaries, pensions, and lifestyles will Another indispensable step is a drastic have to be readjusted according to the real reduction of the size of the public sector, production capacities of the Greek economy, which parasitically extracts resources from as well as the need to service the exorbitant the rest of the economy. Indeed, whole sec- debt. Greeks need to rid themselves of an tors of the economy that escaped liberaliza- infantile dependence on a “father-state” fig- tion and privatization in the last decades will ure and take their responsibilities as citizens have to open up. This will make the dis- more seriously. The virtue of frugality needs tribution of the reform costs fairer and will to be introduced in the public and private also deprive cronyism of its natural habitat. spheres. This can only be accomplished if the A significant part of the Greek private sector political elite leads by example. A reduction has not been infected by the diseases of the of the size of the Greek parliament from 300 public sector and remains the country’s most to 200 seats and a sharp cut of MP salaries are important asset. It would be disastrous for two symbolic steps that would underline the the economy if the government implement- necessity of frugality for all. ed an austerity program that makes every- Finally, the widespread culture of one poorer but fails to address the structural corruption and nepotism needs to be causes of the crisis—most importantly the eradicated at all levels. Honest citizens can no size and the inefficiency of the public sector. longer be the losers. This may not be possible One factor working in Greece’s favor is without a radical reconfiguration of the the cushioning effect of its EU and Eurozone political system, including the replacement memberships, a luxury not enjoyed by other of the entrenched political parties with new countries that went through IMF interven- parties that might more accurately reflect tions, such as Argentina. The systemic risk current sociopolitical trends. and disastrous political consequences that Such a broad reformation could restore the default of a Eurozone member state Greece’s injured international profile and would entail for the future of the European release political and social forces that could project would likely lead to a concerted eventually realize the country’s potential. European effort to prevent a Greek default. Greece has a chance to become a model de- Still, it is not only the implementation but mocracy and a successful Eurozone econ- also the timing and execution of reforms that omy that could serve as a role model in will have a central impact on how the rest of southeastern Europe and the eastern Medi- the world—and most importantly the finan- terranean. That would be the true catharsis cial markets—view the reform campaign. of this modern Greek tragedy. l

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