How to fix a “communist” country (Greece)

The latest bailout for Greece is one more product of the prevailing philosophy among EU governments: austerity measures in return for bail-out money. Strongly influenced by the IMF’s prime tenant, bailouts such as these protect primarily the interests of bond investors by transferring costs to societies and citizens. This makes sense because it creates trust in bond markets by minimizing risk for invetors in case of default. Governments can therefore borrow to cover their deficits. Nevertheless, whenever a real crisis hits profits are privitized and risks are socialized, creating strong resenment to citizens and taxpayers.

More austerity for a county in crisis means less ability for that country to pay its way out of debt. This is exactly what has happened with Greece during the past two years, with its economy tail spinning into deeper recession. “When in a hole do not dig”, goes the saying that seems to fall in deaf Brussels ears. But of course Greece does not only have a problem of debt but of deficit too. Which nullifies the effectiveness of a typical Keynsian prescription of increasing public spending in order to spur the economy. It would be like throwing good money after bad. Greece is truly caught in an economic cul-de-sac, and no amount of bail-out seems to have any effect.

It is therefore important to examine why standard economic theory and tools fail in the case of Greece. Everyone in the world seems to understand that Greece is a “special case”. But what does that mean exactly? What is so “special” about Greece?

The real problem with Greece is its model of government. As long as this model persists, the country will keep producing annual deficits that will in turn increase its debt. Its economy will never become competitive. Why? because Greece is the last “communist” country in Europe. Not in name of course but to all intent and purpose when it comes to designing economic policies for change. Like a communist country Greece consumes all its resources in funding the state apparatus which identifies in fact, as well as in the minds of most of its citizens, with the economy itself.

Until today the troika (EU, ECB, IMF) have wrongly assumed that Greece is a western capitalist country with a bloated and inefficient public sector. This is not the correct diagnosis because it crudely underestimates the symptoms and totally ignores the cause.

The Greek economy is run, directly or indirectly, by the State. The only difference from a classic communist country is that the “State” is not run centrally – by say cadre commissars or the “Party” – but by a winning coalition of special-interest groups. These special interest groups are many and include the public sector trade unions, lawyers, engineers, doctors, pharmacists, farmers, and basically just about everyone with some leverage on the weak political system of Greece.

As long as this winning coalition retains its hold of power on the State,Greece will never be able to climb out of the hole. The members of the winning coalition do not have incentives for change. They refuse to be productive. In the name of  “social justice” they protect their privileges and entitlements at all costs, including the possible cost of their own country come to ruin.

Until today, nothing has challenged this winning coalition. The troika applied pressure on the Greek political system and demanded reforms. But Greek politicians are not powerful enough to face down the winning coalitions of Greece, and never will be. Unless helped by external forces Greece will remain forever the perennial beggar of Europe.

Nevertheless, recent history has provided us with many examples where winning coalitions broke down because the economy imploded. These states were the ex-communist countries of Eastern Europe. The European Union managed well in integrating these countries into the Union, and transforming their economies. Germany, in particular, has accumulated much experience in transforming, and absorbing East Germany into the Federal Republic. It is this kind of experience that must be brought to bear unto Greece now. I believe that ultimately it will. Greece cannot be left behind, because if it does it will continue to cause instability in the European Union. Greece must become competitive. Which means that the current model of government will have to change.