Cadmus

The Greek Financial Crisis: Theoretical Implications

Abstract
The world we live in is a product of the way we think. Our conception of reality determines what we see and what we achieve. The Greek crisis is not simply a case of high public debt, economic mismanagement or weak political will in Greece or the Eurozone. It is underpinned by economic premises, constructs and resulting practices that promote exactly the type of dilemma Greece faces today. Without addressing these conceptual issues, no lasting solution is possible. Rather it can be expected to repeat and spread to other countries and regions. This article is based on views presented by participants in a WAAS webinar examining the Greek financial crisis in the light of economic theory and practice. Wherever there are unmet social needs and underutilized social resources, such as high levels of unemployment, the potential exists to stimulate economic activity, enhance human welfare and promote resilience and sustainable entrepreneurship. Both conditions prevail in Greece today, but neither current nor anticipated policies are likely to result in near term benefits to the Greek people and the local economy nor for Europe and the world economy. It supports the view that a permanent and effective win-win solution can be found to the Greek crisis, compatible with the financial stability of the country and the welfare of its citizens within the framework of the Eurozone, but that such a solution will require a rethinking of fundamental theoretical issues and adoption of innovative policy instruments beyond those presently being contemplated.

For the past five years, the Greek financial crisis has loomed as a recurring threat to the integrity and future of the Eurozone, as a dire reminder of what might occur in other Eurozone countries, and as a powerful and persistent downward drag on employment, real incomes, public services and human welfare in Greece. Whatever the final outcome of the recent measures to prevent default and keep Greece within the Eurozone, none of the plans now on the table offer a permanent solution to the Greek problem, to the long-term viability of the Eurozone, and to the prospects for other successful currency unions in future. At best the current settlement will alleviate immediate pressure on the Greek financial system, while severely aggravating efforts to reignite the Greek economy, create jobs, raise incomes, and expand the Eurozone in future.

A real and permanent solution relevant specifically to Greece and in general to the Eurozone requires a deeper examination of fundamental premises on which the current international economy and European banking system are founded. It must include inquiry into the role and responsibilities of commercial banks, central banks and national governments in promoting both financial stability and human welfare. It must also consider the relationship between the prevailing financial system and the underlying social forces and productive potentials, which alone can ensure a continuous rise in living standards, job growth and economic welfare for people.

The World Academy of Art & Science is engaged in an in-depth inquiry into economic theory, institutions and public policies in order to evolve more effective theoretical and practical solutions to the challenges confronted by Greece and other nations. Following the highly successful XII International Economics Colloquium at the University of Florida this May, WAAS and World University Consortium constituted the NET (New Economic Theory) Working Group to engage a wide range of scholars, policy-makers and partner institutions in examination of the fundamental premises on which current economic theory is based, the urgent need for a new theoretical formulation, and identification of core principles and perspectives of NET. The project team presently includes nineteen institutional partners and more than forty individual scholars.

Our research supports the view that a permanent and effective win-win solution can be found to the Greek crisis, compatible with the financial stability of the country and the welfare of its citizens within the framework of the Eurozone, but that such a solution will require a rethinking of fundamental theoretical issues and adoption of innovative policy in­struments beyond those presently being contemplated. Fresh thinking and innovative action are urgently required. On September 15, 2015, WAAS conducted a webinar exploring the theoretical and practical implications of the Greek Financial Crisis. The objective of the webinar was to examine the Greek Crisis for insights into fundamental deficiencies in current economic theory, to identify principles on which a more stable, resilient and equitable international financial system can be founded, and to explore potential solutions to the Greek crisis and related problems based on a wider political, economic and social perspective of European and global society in the 21st century.

The Greek crisis is not simply a case of high public debt, economic mismanagement or weak political will in Greece or the Eurozone. It is underpinned by economic premises, constructs and resulting practices that promote exactly the type of dilemma Greece faces today. Without addressing these conceptual issues, no lasting solution is possible. Rather they can be expected to repeat and spread. Indeed, many developing countries have experienced similar crises in recent decades after the same economic principles were applied via the IMF/World Bank structural adjustment programmes. One objective of the webinar was to identify and examine the theoretical premises that impede or obstruct effective solutions to the problem in Greece and similar problems elsewhere and formulate more valid theoretical perspectives.

Wherever there are unmet social needs and underutilized social resources, such as high levels of unemployment, the potential exists to stimulate economic activity, enhance human welfare and promote resilience and sustainable entrepreneurship. Both conditions prevail in Greece today, but neither current nor anticipated policies are likely to result in near term benefits to the Greek people and the local economy nor for Europe and the world economy. Therefore, the webinar also sought to identify key issues that need to be addressed in order to activate the economy by mobilizing the unemployed and other underutilized social resources to alleviate the downward momentum and hardship imposed on the Greek people.

1. An Inquiry into the Greek Crisis
The keynote address was delivered by Hungarian Economist Zoltan Pogatsa, author of The Political Economy of the Greek Crisis, who presented compelling evidence to debunk many of the common misconceptions regarding the real cause of the Greek crisis. His analysis shows that contrary to the view put forth by lenders, the Greeks are not lazy, prone to indebtedness, more corrupt or more heavily dependent on government subsidies than other European countries. On the contrary, the average Greek worked 30% more hours than his German counterpart and household debt in Greece from 2007-2009 was 20% lower than the European average. Greece scored comparably to South Korea, Czech Republic and Slovakia on transparency and significantly better than Poland. Social spending was considerably below the Eurozone average as a percent of GDP prior to 2008.

Pogatsa traces the roots of the debt crisis back three decades to the time when Greece entered the EU. From 1960 to 1980 the Greek economy grew considerably faster than the EU average. According to entry conditions, Greece was compelled to open up its vulnerable economy to European manufacturers and to give up essential tax revenues in exchange for massive subsidies to its small farmers whom it was very difficult to tax. Deceptive accounting practices by earlier governments with the aid of leading international investment banks disguised the debt problem for two decades leading up to 2008. The public debt problem arose not because of excessive wages or high expenditure on the welfare state, but due to the government’s incapacity to collect sufficient taxes from a largely agrarian economy. Therefore, austerity programs designed to weaken labor and cut welfare expenses could never hope to solve the problem.

Pogatsa concludes by pointing out inherent weaknesses in the Eurozone, which is not an optimal currency area. Marked differences in economic cycles between its northern and southern members make it impossible to adapt a uniform economic policy suited to the needs of all its members at any given time. The inability of Greece to allow its own currency to depreciate relative to the rest of Europe prevented wages from reaching competitive levels after the 2008 crisis. Its inability to erect tariff barriers to protect its highly vulnerable, but very large small business sector, resulted in a massive hollowing out of domestic industry and increasing dependence on imported goods.

The remedy adopted by the European Bank, IMF and lending banks consisted of massive interest payments to bail out the four biggest banks, without penalty for their reckless lending. At the same time it nearly doubled Greece’s debt to GDP level. The demand for new taxes will only further suppress the growth of the Greek economy and severely undermine social welfare. It will further weaken the negotiating position of collective bargaining on wages, which is practiced by 12 EU member states.

Dimitrios Kyriakou, Chief Economist, European Commission’s Institute for Prospective Technological Studies, described the Greek crisis as a perfect storm. Greece was lured into the crisis by the promise of rising levels of prosperity through liberalization. Entry into the Eurozone meant sacrificing the exchange rate instrument and monetary policy instrument. From a very low debt level until the mid-1970s, it resulted in rising levels of debt in the 1980s when it reached 68% of GDP. Four years later it crossed 100%.

Recent experience with bubble-driven growth raises serious doubts about the sustainability of ever-higher indebtedness driving decreasing rates of growth. Sluggish growth combined with rising inequality calls into question the role of financial markets as well as the validity of the traditional trade-off between equality and growth. We have reached a point where the two need to move in tandem. The trap which Greece fell into was easy borrowing and cheap credit coupled with a Greenspanesque belief in a brave new Goldilocks economy, where hard landings were a thing of the past, and where, as a consequence, heavy borrowing was condoned, if not outright encouraged. The agreement reached includes tough fiscal measures, along the lines of the previous IMF-inspired loan packages since 2010. However this one includes two potential countervailing elements, which may justify a modicum of optimism, provided they are upheld in practice: a large investment package from EU sources and a debt restructuring deal over the next few months. Finally, it is noteworthy that the negotiations for this new loan package were carried out at the highest political level with the other Eurozone member states within the context of the Euro Group (composed of Eurozone countries finance ministers), and summits of heads of governments. Of course, the IMF, European Central Bank, European Commission, European Stability Mechanism played a key role in implementation issues.

Aldo Martinez, Professor at St. Peter’s University and former Vice President of Market Surveillance at the New York Stock Exchange, emphasized that current international efforts seek only to address the symptoms rather than the real source of the problem in Greece. He argued that the Greek economy has lost its national autonomy and has become subject to the dictates of international financial forces. He also concluded that the strong dealings with Greece, which is a very small economy, may be intended as an example to other countries that consider rebelling against the dictates of the unbridled application of prevailing neoliberal economic dogma. Governments and financial institutions should be careful to ensure that the prescribed medication dosage addresses the cause of the illness to restore health without killing the patient in the process.

Hazel Henderson, founder of Ethical Markets, called for a concerted effort to downsize the unbridled financial markets that are skimming off all the rewards of labor productivity into the capital and banking sector. She referred to the implications of the adoption by the UN of the Sustainable Development Goals that call explicitly for a “transformed world”. By recognizing the need for what the SDG documents refers to the “people-prosperity-planet-peace-partnership” approach, the SDGs are effectively a rallying call to develop a new economic theory that does not prioritize prosperity over people, planet and peace.

As Robert Hoffman stressed, the Greek crisis represents an egregious failure of conventional economic theory and the prescriptions of austerity, deregulation, and the sell-off of state-owned assets. The sell-off of state-owned assets will lead to flows of income to oligarchs and international financial institutions to the detriment of the well-being of Greek citizens. As was the case with the crisis of 2007-08, macro-economic theory, with its focus on equilibrium and flows of purchasing power, was blind to financial bubbles associated with asset stocks and prices. Because of membership in the Eurozone and the policies of the European Central Bank, the instrument of quantitative easing available to the US government (though misused in that case) was not available to the Greek government. The current crisis is the practical outcome of a bankrupt theory applied in a manner that is fatal to the patient. We need a new paradigmatic framework of thinking in transdisciplinary terms about the economy, which means treating people as an integral component of the earth system. The Greek crisis represents in a profound way the bankruptcy of a particular paradigm.

Garry Jacobs: CEO, World Academy of Art & Science; Vice President, The Mother’s Service Society
Mark Swilling: Professor, Sustainable Development, School of Public Leadership of Stellenbosch University, South Africa; Project Leader, Centre for the Transdisciplinary Study of Sustainability and Complexity


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