The Greek Financial Crisis: Theoretical Implications

2. Theoretical Perspectives
The webinar illustrated and reinforced several fundamental perspectives that have emerged from the work of the New Economic Theory Project thus far:

  1. Resurgence of Neo-liberalism following the End of the Cold War: The present crisis in Greece and the global recessionary trends that have spread to China, Brazil and other nations cannot be viewed in isolation. They are only the most recent consequences of a fundamental shift in economic theory and policy that gained dominance following the end of the Cold War, but originating in the rise of the neo-conservative movement in the USA during 1970s inspired by the theories of Hayek and Friedman. The orthodoxy of extreme free-market liberalism prevalent in the 1920s and largely displaced by the rise of public intervention in the economy during and following the New Deal gained a new lease of life during the period of rapid globalization that followed the Fall of the Berlin Wall, the founding of the WTO and the global spread of the Internet. The dismantling of tariff barriers facilitated a tripling of world trade in current dollar terms from 1990 to 2008. During the same period daily financial transactions multiplied more than six-fold. In the absence of effective international regulation, a virtual Wild West of global finance emerged. Under the pressure of increasing international competition, financial institutions in the USA, Europe and elsewhere lobbied for the dismantling of domestic regulatory constraints which had effectively insulated commercial banks from the speculative financial markets for seven decades. Unconstrained global financial markets coupled with computerized trading led in turn to growing instability, precipitating the Argentine crisis of 1989, the structural collapse of most African economies during the 1990s, the East Asian financial crisis in 1998 and the much broader global crisis in 2008. Effectively addressing the problem at the national level necessitates urgent efforts to stringently regulate the rapid movement of short term, speculative investments at the international level.
  2. Divorce of Financial Markets from the Real Economy: A recurring theme of the Academy’s work resurfaced during the webinar. Financial markets, which originally evolved as a means to pool the resources needed for large industrial investments and commercial enterprises in previous centuries, have now become a world apart and are increasingly divorced from the real economy they are, in theory, intended to serve. Public policies designed to attract and retain high-frequency speculative funds have been a major source of instability, undermining the environment for medium and longer term investments in real productive assets and inflating nominal GDP, while contributing only nominally or negatively to human welfare. Financial markets must be reoriented and incentivized to serve the real economy and society. Re-embedding the market within society is the single-most important policy measure needed to revive growth of employment, reduce inequality and promote ecologically sound investments.
  3. Austerity and Wealth Creation: The Greek crisis is only the most recent in a long list of compelling instances that demonstrate the poverty of current theory and the destructive impact of austerity programs. The only difference in this case is that even many key players within the Eurozone, the IMF and leading economists internationally are predicting that the latest round of austerity measures will prove as flawed and ineffective as the earlier ones. And yet they have not come with an alternative, because this would mean breaking from their own conceptual assumptions about the nature of the economy. The source of the problem lies not merely in the policy itself, but more deeply in the theoretical framework on which it is based. Society is the true source of wealth creation, not the liquid flows of finance that get reported via the news bulletins of the world. Creative relationships and organized interactions between people for invention, production, distribution and consumption generate real wealth and enhance human welfare. Austerity programs have the opposite effect of squeezing and stifling productive initiatives and reducing the entire economy and society to equilibrium at a lower level. Economics has become divorced from the society. Economic theory is divorced from the wider theory of society of which it is a subset.
  4. Development, Self-reliance and Political Will: The rapid expansion of the EU and Eurozone has revived the mentality of dependence generated in Europe by the Marshall Plan after World War II and throughout the developing world during the heydays of foreign aid dependent development strategies prevalent during the lost development decades of the 20th century. Development is a human process. Real development is self-development. Foreign lending and investment can play a positive role when they come in response to domestic aspirations and commitment, never when they try to act as a substitute. The promise of instantaneous benefit has been an irresistible lure for the recent expansion of the EU and one of the reasons for the Ukraine crisis. Pogatsa documents the original entry of Greece into the European Economic Community came at a time when it had the fastest growing economy in Europe. Kyriakou suggested that this was probably more strongly motivated by a desire for political integration than economic benefits. But the recent negotiations with the ECB were dominated by the aid mentality of both donors and recipient. The refusal of the government and people of Greece to go begging was an encouraging sign that Greece was recovering the sense of self-reliance and self-respect it demonstrated before joining the European Community. That and that alone can turn around the country. Anything less is doomed to failure.

    The Eurozone prospered for a decade after its establishment by generating trust and confidence among smaller economies and facilitating more efficient large scale exchange and cooperation. It now suffers from the lack of political commitment to the welfare of its own members. The petty accusations and infighting have undermined precious social capital in the region. Restoring that trust, confidence and cooperative spirit should be the highest priority. The current crisis should be mobilized to develop the political will needed to assume responsibility for promoting the welfare of all members of the currency union, combined with a determination of each member country to exhaust the potentials for its own self-development. It is true that the Greek crisis can only be resolved by international cooperation. It is equally true that the starting point must be commitment to self-reliance at the national level. The two are complementary rather than contradictory elements of a solution.

  5. Economy, Governance and Society are inseparable: Social aspiration and social capacity generate the potential for wealth creation and human welfare. Political institutions and political will generate the power for collective action. Economy provides the instrumentation to make them effective. It is time to restore the Political term to Political Economy and add the Social dimension without which neither the one nor the other can accomplish anything. A solution to the Greek crisis is plausible, possible and achievable. But it must begin with a change of thinking and a rejection of the outmoded ideas and policies which have failed in the past and offer no hope for the future.
  6. Towards greater resource efficiency and sustainability: It is now widely recognized, as expressed now in the SDGs, that we live in a carbon- and resource-constrained world. This means that economic growth as we know it can no longer assume the unlimited availability of natural resources (especially metals, fossils), ecosystem services (such as soils, water, fisheries, bees/pollination) and carbon space. As the New Climate Economy Report of 2015 made clear, a fundamental structural transformation of the global economy is required. Even mainstream bodies like the OECD and World Economic Forum have echoed this view. What we mean by economic growth will need to be completely redefined. Austerity is regarded as a non-solution for Greece without a ready alternative because the pursuit of economic growth in an infinite world remains the yardstick for measuring progress. If GDP is replaced with a well-being indicator, the result will be policies that simultaneously protect the resources people depend on for their well-being and which prioritize human needs rather than speculative investments and shareholder profits. Resolving the Greek crisis by replacing austerity economics with another theory of growth that ignores planetary boundaries will run into the same problems, especially given that Greece is not a resource-rich economy. African economies went through what Greece is going through now, but Chinese demand for African resources became the driver of growth, thus saving African economies from the Greek syndrome. Now that this demand is dropping, the fundamental structural weakness of African economies will be exposed. Ultimately, a new economics of well-being will have to be post-extractivist, resource efficient and sustainable.

3. Conclusion
The Greek Crisis is more than just another national economic crisis, following those that have come before in Latin America, Africa and Asia and since 2008 globally. It has, in effect, become a symbol of the failure of a particular economic theory and policy prescription. Its irresolvability on terms dictated by the ECB and IMF starkly exposes the bankruptcy of these policy frameworks. It also exposes how disrespectful of democratic autonomy the major debt holders of this world can really be. Today’s extractive institutions are the powerful lenders of gigantic amounts of debt to those who everyone knows cannot possibly repay their loans. The result is increasing concentration of power in the hands of an unaccountable few with devastating consequences for the majority of the world’s population. How the Greeks resist occupation of their lives by these powerful institutions will set an example for the rest of the world. However, resisting will not be enough. Unless an alternative economic theory is proposed as the basis for viable pragmatic policy alternatives, resistance may be heroic but it will remain quixotic. Those who have opposed neo-liberalism for so long now need to collab­orate to ensure they have more to say than merely rejection of what clearly does not work. Another world is possible, but only if we do the hard work rather than assume it will emerge spontaneously from the ashes of the old.

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