A political economist based in the Faculty of Economics at the University of Western Hungary,  Zoltan Pogatsa spent a year in Greece researching the crisis for his recently published book The Political Economy of the Greek Crisis (Sit Lux Academic Publishers; 2014). Taking a more comprehensive and long-term view of the root causes of the crisis than most conventional accounts, he challenges the dominant narrative about what caused the crisis and consequently how to get out of it. Austerity, he says, simply will not work.

Mythbusting – The social aspect

One of the myths Mr. Pogatsa is at pains to debunk is that of ‘Greek exceptionalism,’ the idea that Greece amounts to a special case that is somehow hardwired to be a free-spending basket case of a country.

“Greece is more of a case study than an exception,” he told TPPi.  “I think it is a case study of how a middle income country that is trying to converge with the core of the global economy runs into all kinds of difficulties.”

In his book Mr Pogatsa targets damaging cultural as well as economic myths about Greece. For instance one commonly held view is that Greeks are particularly lazy and unproductive. However, as Pogatsa points out, “according to the OECD, the average Greek worked 2,120 hours in the crisis year of 2008. That is 690 hours more than the average German, 467 hours more than the average Brit and 356 more than the OECD average.” Greeks on average also have fewer days’ vacation per year and retire later than both the British and the Germans.

Similarly he also refutes the idea that Greeks are inherently more profligate than the thrifty Northern Europeans. ECB data from 2007 -2009 shows that Greeks had significantly lower levels of private debt than the Eurozone average. German households were found to be 10% more likely to get into debt than Greek households.

Yet despite these facts, the perception has now taken hold that due to poor national character, it is the Greek people that are to blame for the problems the country is now facing. Rather than based in truth, Mr Pogatsa believes that this has more to do with believing something because it would be convenient if it were true.

As he writes, “The Korean Cambridge economist Ha-Joon Chang reminds us that nowadays the Japanese are associated with values such as diligence, thrift, dynamism, adaptability, openness and creativity. This is because Japanese firms have achieved global success in recent decades, and the country has achieved first world status. According to Chang, however, after World War Two, visitors to Japan talked disparagingly about its inhabitants, in much the same terms that are used to describe the unfortunate Greeks today: lazy, corrupt, closed, stubborn and so on. The poor Japanese were by no means likely candidates for Asian Tiger accomplishment. Quite simply, when a society is successful, it is tempting to ascribe its achievement to its values.” And vice versa.

Interestingly Pogatsa points out that these negative stereotypes are just as often believed by Greeks about Greece, and he finds this typical of developing economies.

“This kind of thinking that, ‘we are exceptionally culturally behind other more developed countries,’ is a typical reading of the liberal elite of countries that are not in the center of the global economy,” he told TPPi.  “It’s trying to say that, ’I as member of the liberal elite am different from everyone else. I am not to be blamed for this situation because I am better than these people.’ ”
 
So why the Greek crisis?

Perhaps most contentiously, and contrary to the dominant view of Greece’s Troika of lenders, Mr Pogatsa maintains that Greece’s problems did not arise due to an excessively large public sector.

“That is a myth,” he says, “And it can easily be proven with data.”

Pogatsa shows that the expenditure of the Greek state in relation to GPD was actually lower, rather than higher than the Eurozone average before the crisis, and significantly lower than that of Germany’s. Furthermore, contrary to popular belief Greek public servants did not receive significantly greater levels of compensation than the European average. And social spending in Greece was much lower than the European average.


General Government expenditure as a percentage of GDP. Source: The Political Economy of the Greek Crisis


Social expenditure in Greece in contrast to Eurozon average. Source: The Political Economy of the Greek Crisis

The main source of debt in Greece pre-crisis were interest payments on debt already incurred rather than primary deficits:


Source: The Political Economy of the Greek Crisis

Despite this, the troika continues to insist that it was excessive state spending that was the cause of Greece’s fiscal woes. Therefore as a ‘cure’ it continues to demand more austerity and horizontal cuts to public services.

“You know what is really ironic is that you look at the IMF’s post-fact assessment of the first memorandum and they actually have those data in the text. There is a graph which shows that there isn’t a difference between the expenditure on public servants. There is a graph that shows that social expenditure is way lower. And next to the graph you actually have text which says the opposite of what the graph shows. You have an obviously false reading of what the graph says. They are insisting on the narrative that there was overspending by the state which is not backed up by any data.”

So how did Greece end up with such a huge mountain of debt? Pogatsa says that to answer this question one has to go back at least three decades to the 1970s – 1980s. He points out that Greek debt did not increase significantly with the launch of the euro in the 2000’s although Greece did miss the opportunity to attempt to get it back to sustainable levels through improved revenue collection which is significantly below European averages.

Greece's sovereign debt levels as a percentage of GDP did not increase substantially during the eurozone decade. Source: The Political Economy of the Greek Crisis

Rather, the 2008 sovereign debt crisis was a crisis that had been set in motion much earlier and had been only narrowly averted several times in the 1980s and 1990s.

“The crisis does not start in 2008. I think if you really want to look into depth as to what led to the crisis in Greece you need to go back to the 1980’s because the original sin of debt accumulation happened between ‘79 and ‘93. Because by ‘93 Greece was already in a sovereign debt crisis.” Then, Pogatsa says, it was the signing of the Maastricht Treaty laying the groundwork for the euro that reassured the markets and allowed Greece to keep borrowing, and its politicians to heave a sigh of relief. But in 2008 there was no such respite and Greece had to be bailed out with emergency loans to avoid default.

Pogatsa says that the reasons behind the ‘original sin’ of debt accumulation to over 100% of GDP are complex. State overspending, particularly in the form of huge shady payments that were initially kept off budget, until they weren’t (and still have not been adequately examined to date) certainly played a role, as did poor revenue collection and corruption. However the Greek economy was also undergoing a series of shocks as a result of joining the European Common Market and the wider processes of globalization and liberalization.

“If you compile a list of the reasons Greece runs into difficulties it is almost identical to the facets of globalization and neo-liberalization from the 70s onwards: free trade for instance, the tax competition, money moving offshore, etc. A lot of the dimensions of the Greek story since the late seventies is defined by international policies of globalization which made it impossible for Greece to become a fully first-world country.”
 
An end to austerity

Given this analysis of the causes behind the Greek debt crisis, Pogatsa believes that the current austerity path amounts to attaining short-term fiscal gains by crudely sacrificing social spending crucial for long-term economic growth, such as on education and health.

Meanwhile due to a nexus of interests, certain areas where the Greek state is losing huge amounts of potential revenue remain areas the lenders and the government refuse to discuss.

“Take the 3.5% of GDP military expenditure which the Germans are pushing down the throats of Greece – much of which was corruption and add to this 5% of GDP leaking out to offshore per year. And if you add to this untaxed shipping, then you can quickly come up with a list of things that add up to easily 10-12% of GDP which never even reaches the budget. To make the argument that you should be making cuts where people suffer in the end whereas you are not even addressing the issues which are obviously elephants I think is ridiculous. It is unacceptable.”

But Greece alone cannot address these ‘elephants’. Altering the rules on European offshore havens for example would require a European approach for which there would be major opposition from member states such as the UK and Austria. Low taxes on shipping means the Greek state cannot obtain more revenue from its flagship industry. Yet were it to unilaterally raise rates on ship-owners, they would move their companies elsewhere. Therefore an international approach is required.

Pogatsa argues that given that the issues that led to the Greek crisis are largely systemic and Europe wide, it is only that level that they can be addressed. The current ‘parametric’ policies of austerity are doomed to failure, he says, and are only causing pain, while a Greek exit from the eurozone would spell disaster by inevitably triggering contagion across the European South. “If the Germans seriously believe that you can lose the South and go on with European integration, go on with Germany being a strong economy then they are living in a dream.”

The Greek political system clearly shares a significant portion of the blame for the situation the country currently finds itself in. But the longer Europe treats Greece simply as an aberration, then the longer it ignores the structural deficiencies at the heart of the of the European project.