Understanding the Greek Tragedy

What is happening in Greece?

The economy is collapsing. Society is also under great strain, as many people are becoming too poor to look after their families. Unemployment is now more than 20%. Many parents are taking their children to orphanages because they can no longer afford to feed them. The numbers of homeless people are growing day by day. Many of these are people who used to have good jobs and seemingly solid incomes before they lost everything in the recent crisis. Many observers are comparing this situation to the Great Depression of the 1920s/1930s.

Why is Greece in such a mess?

For three main reasons. First, the ongoing recession since 2008, which has caused economic hardship across the Western world. Second, as a result of the failures of successive Greek governments: for instance, there was too much tolerance of both tax evasion and corruption, ranging from the petty to the more serious, for too long. The gap between what Greek companies and the Greek state have borrowed and their ability to pay it back was exposed when the last government came to power, and made public the findings of their audit of the Greek public finances. Third, because the restructuring of the European economy that has been undertaken in the last 25 years, and which has accelerated since the introduction of the euro, has increased the gap between the core and the periphery of the European economy. As it is part of the single currency,Greece cannot devalue its currency, and economic orthodoxy holds that the only way it has to balance its books is to slash public spending to the bone.


What is the EU doing about it?

Arguably, the EU is doing a lot. Particularly if you are inGermany, it will look this way: the EU has contributed billions of euro to a bail-out fund forGreeceso that it can pay its debts. This money has all come from other member states, either via the EU’s bail-out fund, or indirectly via the International Monetary Fund (IMF).The  great majority of this cash has come fromGermany.


Why isn’t it working?

Because it’s not enough, and because it’s being spent on the wrong things. The money is largely being spent to pay off the interest on Greek debts. So the Greek government has no money to invest in anything that might help the economy grow. What’s more, the bail-out money comes with strings attached: public sector spending has to be slashed, which is adding to the unemployment figures and increases the need for welfare payments to citizens, and state assets have to be privatised, which means the state will get a one-off payment with which to pay off some debt, but lose assets against which it could borrow in the future. It’s a vicious circle.


So why aren’t the EU and the IMF changing tactics?

Because dominant economic thinking says what they are doing is right – despite the evidence. Very little has been done to challenge the prevailing so-called wisdom in economics – neoliberalism – despite the system-wide crisis of the last four years. These economic ideas have had what is called hegemony, or dominance, in policy-making circles since the 1980s and their grip is not yet lessening. This means that alternative proposals for getting ourselves out of the crisis – such as those derived from Keynesianism or other economic thinkers – find it hard to get traction. The reforms to EU policy – including the so-called fiscal union –  that have been discussed for years now are still lost on the horizon, and even they are more a reflection of current thinking than a new departure.


Aren’t there political factors too, not just economic ones?

Absolutely. It is becoming almost impossible in the countries that are contributing most to the bail-out fund to argue that thatGreeceneeds to have even more help than it already receives. The spirit of cross-country solidarity seems to be on holiday; in return for their help, other countries are demanding savage reforms fromGreece, and have even suggested that they might get certain Greek assets – even Greek territory – as collateral! For a real solution to the crisis, EU leaders will also have to take on the markets and make the private sector take far bigger losses than they have so far been willing to take.


So what’s going to happen to Greece?

At the moment it’s very difficult to see a bright future in even the medium term, unless there’s a miracle. It’s becoming more and more likely thatGreecewill default on its debts, in either an ordered way (which means it would be negotiated and up-front), or a disorderly way (which would be chaotic). The general elections, currently expected in April, will indicate something about how the short-term future will unfold, but given the opinion polls just now it may well be that no government is capable of being formed after the election, even a coalition. Even if there is a stable new government, it almost definitely be weak.


And what will that mean for the rest of us in Europe?

A Greek tragedy could well become continental. It depends in part on how well the EU manages to contain other countries from the ‘contagion’ effect as and whenGreeceleaves the euro. If panic or speculation set in, the financial markets may well push countries likePortugalandIrelandinto a similar fate asGreece. Even if the EU manages to build a firewall aroundGreece, the euro-zone will tremble, and the impact on the EU’s recovery from recession is bound to be harsh.