by Theodoros Sakellaropoulos, Panteion University, Greece
The current Greek fiscal or debt crisis -putting at risk the euro and the modern welfare state- as well as the policies developed as a response to the crisis can be understood only when taking into consideration firstly some specific characteristics of the development model adopted in Greece since the 19th century and secondly those phase of the international capitalist system over the past 20 years which took the form of globalization and in particular its European “version”, i.e., the Economic and Monetary Union.
In relation to the first point:
A study of Greece’s economic history during the 19th and 20th centuries shows that the development model followed was a capitalist modernization “pushed” from abroad and characterized by slow progress, an economy characterized by a weak industrial base, the long existence of agricultural structures and institutional backwardness. In the context of the international division of labor, Greece remained at the periphery of innovation and technology; it did not and could not seek to acquire an autonomous and independent role based on the production of international values, competitive to those of other countries. The different phases of economic progress have been closely linked with the growth of the international capitalist system, in the sense of the spill-over of growth and the expansion of enterprises to the South, the expansion of the import-export sector and foreign trade imbalances as well as the increase of international public borrowing and debt. Its distinct position within the international division of labor has made Greece extremely vulnerable to international fluctuations and turmoils, especially in relation to the monetary/ exchange rate and fiscal sector. It is in these sectors where the signs of the international crisis were evident very early on.
These distinctive internal circumstances are reflected in a very clear way in the character and the nature of the economic crises. With few exceptions, the majority of the crises during the 19th and 20th centuries were exchange rate, monetary or fiscal ones. In other words, they are linked with significant turmoils in the international market and the global economic system, forcing the Greek state to circulate Bank notes (4 times during the 19th century) and to abandon the rule of gold or to dissociate the drachma from the international exchange rate (English pound, 1932). In certain cases, monetary- exchange rate crises were linked with the occurrence of important fiscal expenditure, in turn linked to ambitious development programs (Trikoupis period) or with military preparations and expenditure for the achievement of national unification.
Economic crises in the sense of industrial crises of overproduction –as described by political economy- are difficult to identify up until 1970. Even the crisis of 1929-32 did not lead to a crisis in the real economy as a result of the agricultural character of the Greek economy. In sharp contrast, in the 1930s one can witness –as in other less developed countries- an industrialization that pushed forward the internal market and which has been independent of the international one. The real economic crises are either crises of underproduction (that is crises of the old type 1830-1857) or crises related to the overproduction of basic agricultural products in the framework of the prevalent model of monoculture farming and monoexport (e.g. raisins in the 19th century, tobacco crop and cotton in the 20th century). In the latter cases the crises were due to the sudden fall in the international demand (raisin crisis of 1893, tobacco crisis of 1930). An industrial crisis of overproduction leading to a significant de-industrialization took place as late as 1970 and the depression that started with the oil crises of 1973 and 1979. The result of this crisis was a process of de-industrialization that in a period of 10 years resulted in the closing down of almost half of the Greek industry.
The study of the history of economic crises in Greece shows that –with few exceptions- all originated abroad, from the international economy. In most cases, they took the form of monetary, exchange rate and fiscal crises that in turn affected the production of goods and services and the real economy. This finding, through its repetition and the cyclical nature of the phenomenon, highlights the distinctive characteristics of the Greek economic structure and the way in which the country is placed in the international division of labor.
In relation to the second point:
Following the accession to the EC/EU and the euro-zone this model has been consolidated even further. Community funds and the international growth of the 1990s and 2000s have resulted in a dynamic growth which was in turn based primarily on consumption and imports and less on a domestic production effort. Important production sectors have literally disappeared from Greece as they relocated in neighboring countries with lower labor costs. Technological innovation was not promoted. The competitiveness of the Greek economy fell. Nevertheless, the cheap euro and the fall in interest rates -following the adoption of the euro- resulted in abundant public and private borrowing, in over-investment in properties, the expansion of private consumption, and generous wage increases. In parallel the restrictive wage and social policies implemented in other economically strong countries, such as Germany, created conditions of uneven growth and social dumping in Europe, resulting in the emergence of advantages and the accumulation of export surpluses in them (see Heiner Flassbeck’s Interview “Deutsches Lohndumping sprengt die Waerungsunion” in Manager Magazin 19.2.2010). Economically weak countries, such as Greece, which did not succeed in adapting their economic model to the new conditions, the European and international competition, and to new technologies, have seen their external balance worsen, the comparative advantage of cheap labor disappear and potential investors choosing other countries. The crisis which has emerged in Greece and puts in danger the euro originates in this uneven growth witnessed in the framework of the European integration process.
The crisis took nonetheless the form of a fiscal and debt crisis. It emerged when markets estimated the Greek deficit and debt to be very high; and not just the Greek one but also those of the rest of southern European countries and that of Ireland. Yet, up to that point both the markets and the ECB had financed governments, banks through the provision of credit, the bond market, leverage, and low interest rates. History repeats itself once more. The rise and fall of the global capitalist system does not leave Greece unaffected; the crisis that inevitably follows affects in very harsh way the weakest link- country of the system and especially the sectors which had financed its growth, i.e., the banks and the fiscal sector.
The debate on and the search for the appropriate remedies for the debt crisis and the euro-zone crisis in the framework of globalization, EU, and the need to remain part of the euro-zone needs to take into consideration one basic finding in relation to the real causes of the global crisis which started with Lehman Brothers Bankruptcy in 2008. Globalization –starting in 1989- has resulted in an unprecedented unification of financial markets at global level. At the same time, this has not been coupled with supranational regulatory mechanisms that would protect the global and national economies from monetary and exchange rate crises created by the power of limited but powerful financial centers. This contradiction, highlighted by Soros, lies at the heart of the current global economic crisis.
In the case of Europe, this lag of supranational institutions is evident through the absence of pan European policies and economic institutions. As a result, Europe and the national economies of the Eurozone do not dispose of the necessary institutional means for dealing with crises such as the one currently witnessed. This structural weakness had been highlighted by many researchers and politician during the creation of the euro. The current Greek debt crisis is the most visible aspect of this inconsistency. Neither the EU, nor Greece disposes of the mechanisms necessary for protecting the euro (the former) and its economy, i.e., its competitiveness (the latter). The loss of an important instrument of economic and monetary policy, such as the national currency, has not been substituted in the case of Greece with other positive interventions of the same effect as in the case of a currency devaluation which can bring, albeit temporarily, competitive advantages.
The road chosen in the Greek case is that of internal devaluation. The “internal devaluation” in euro terms as was called the recourse to the price mechanism that is the classic mechanism for tackling real economy crises, in theoretical and practical terms can work to some extent. It cannot though guarantee immediate results, while it also has important direct effects on the economy. A large scale internal devaluation is economically disastrous and jeopardizes social cohesion and peace. Germany experienced a similar situation from 1929 to 1932 in relation to war indemnities and led to the rise in power of the Nazis and war.
The dilemma currently faced by Greece and Europe in relation to Greece (and perhaps with the rest of southern Europe in a short while) is the following: a return to the drachma and the national currency in order to allow through the currency devaluation the price mechanism to work again and give a boost to the economy? Or bringing one step further the European integration process with European federal institutions (for example a European Ministry of Economy, common social policies ) that will protect national economies?
There is no doubt, that as European, Greek and socially sensitive citizens we aspire to the deepening of the European integration process, the common currency accompanied by common economic and social institutions. The creation of a European Social Model is compatible with the founding goals of the Treaties –wellbeing and equal participation to all Europeans- but is also necessary for coming out of the crisis.
Common rules and social standards can avert social dumping, unfair competition and the uneven economic growth in the Eurozone and the EU. This goal was set in the 1950s from the founding fathers of the EU and the trade unions. It was restated at the Maastricht Treaty and the creation of the euro, although in a verbal way, but the predominance of the neoliberal doctrine left limited space for its implementation. It is obvious that we need a new European Social Model, different from the one followed over the past decades. We need a real common social space where obligatory rules are being implemented and where countries cannot exercise social dumping practices. A common EU economic and social governance is the most effective instrument for the protection of the euro and the European economies, including that of Greece. If such initiative is not put forward at EU level then the economic recovery of Greece will be almost impossible. The recently adopted mechanisms (haircut, EFSF etc.) are not in a position to revive the Greek economy in terms of social peace and economic dynamism. Therefore, an exit from the euro remain still a potential yet realistic choice, according to some economists, to Greek economic history and to Greece’s position in the international division of labor.
In the current situation and based on the decisions taken on the 27th October, the haircut of the Greek debt and the rest of the measures will lead to a policy of internal devaluation. Such policy, if pursued on a large scale, will have detrimental effects on employment, wages and social transfers. Social peace and cohesion will be put under threat. The legitimacy of policy and politics will reach an unprecedented low level. The welfare state will be also put under threat as the influx and the availability of public funds will be limited, labor regulations are put under revision or abolished. A series of necessary reforms are either degenerated or not implemented due to the absence of resources and social support. Social administration has paralyzed due to cuts in wages, the absence of meritocracy and the presence of political interventions, the proliferation of cases involving the breach of law. The emergence of social unrest is just a matter of time.
Against this background, the protection of the welfare state and democracy is linked to the adoption of policies for the revival of the real economy and growth. New private investments, new funds from abroad and the use of European funds will contribute to the rise of employment levels and through that the provision of pensions –through the contributions paid, along with the saving of public funds through the reduction of public debt- which constitute the heart of the welfare state.
In order to achieve that it is necessary, as I had already suggested (see “Alliance against the crisis” in Newspaper To Bima tis Kyriakis 30.12.2008) to form an independent social alliance of the labor and entrepreneurial forces which will put forward an exit plan from the crisis that will guarantee the protection of social rights, the investments necessary for boosting employment levels, and the reform of the state machine. All political forces will be called to agree with this platform and implement the necessary reforms immediately.
Yet, we should be realistic. Internal devaluation will not be easily accepted by the Greek society. Even the prospect of its success is put under question as more and more European countries will adopt such policy as the crisis deepens, thereby neutralizing the positive effect very quickly. We will thus come to a fierce race to the bottom, a competitive decrease of living standards in European countries, a social dumping with no end.
In view of such prospect we demand once more the adoption of common European economic, fiscal and social rules as an effective barrier to the uneven growth of the Eurozone. Those opposing such strategy are those of neoliberal aspirations or those advocating economic nationalism. Taking the opportunity from the Greek crisis the German former minister of finance Hans Aichel has replied as follows: “Professors who are now complaining about the German aid to Greece (along with some politicians) lack basic knowledge on EU which functions on the basis of the harmonization of the differences of wellbeing…… Social equality has been the basis for peace in Europe and this was the basic idea of the founding fathers of the EU. And those of the conservatives (Suddeutsche Zeitung, 28/04/2010).