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Monday, February 13, 2012

Greece: Crushed by Common Currency

I am writing this on the morning after the legislation on the austerity pack for Greece has been passed (at a remarkable margin of 199/74/27) by the Greek parliament. The international press is preoccupied with the "looting," arson and general mayhem that followed the vote; some even make an attempt to decipher the details of the deal struck, after months and months of posturing, negotiation and arm-twisting, between the IMF, "Brussels" (i.e., the EU Commission), the European Central Bank, as well as the German and French governments, on the one hand, and the subsequent Greek governments (I am saying this in plural as one government has already been ousted on this issue).

As for the "tragedy" reading of the drama, I am somewhat skeptical. Here is a visual explanation why.



This graph compares two sets of data. The red line is an estimate of the world mean per capita GDP for the period of 1999 to 2008; the blue one is the same for Greece. (Both come from estimates of economic performance provided by economic historian Angus Maddison here.)

Two things are clear from this. One, Greece is not among the poor countries of the world. It's per capita GPD has been, throughout the period of the existence of the Euro, at least twice the magnitude of the world average.

Second, Euro-membership was hardly an economic disaster for Greece; quite to the contrary. Its per capita GDP grew at a speed faster than the growth of the world average, such that, beginning at just a notch below 200% of the world mean, by 2008, it was around 215%. This is not an economic horror story at all. The problem lies elsewhere.

The heart of the problem is that, even with a per capita GDP that is more than twice the world mean, Greece was still among the relatively less wealthy members of the Eurozone. It is also among the smallest in economic weight in the Eurozone. A globally quite privileged society, that is among the relatively poorer and less significant than many of its main trading partners with which it is locked into a currency union--well, this is a textbook prescription for a serious process of unequal exchange and its main corollary, external dependency.

This situation is extremely similar to the predicament of economically less well-to-do regions within states. There is one crucial difference, however. The institutional and ideological practices of modern European states (on both sides of the erstwhile Iron Curtain, btw) have been, to a large extent, all about providing stable, predictable and sustainable mechanisms for transmitting tools to less wealthy regions for economic growth, in the form of a multiplicity of subsidies of all kinds. To a large extent, that is what modern European statehood is all about: These states are basically mechanisms of enforcing a particular kind of a complex social contract, in which the means of faster economic growth are provided to less wealthy regions in exchange for "national unity," i.e., a willingness to participate in a size- and, by implication, global-weight-making process called modern European statehood.

It is this element of matter-of-fact redistribution that is sorely missing from the project of the EU. In the absence of a pan-Europan supra-state, neither the institutional structures, nor the ideological wherewithal are present that would provide for effective subsidies for regions that perform less intensely than others in an economic sense. Meanwhile, the currency union allows member states, including the relatively less wealthy ones, to adjust their social policy provisions to mimic those of the wealthier states. It is difficult to blame them for this: the mechanism (the currency union) is there, the incentives are enormous, the enforcement has been tenuous. As a result, you have the mind-boggling paradox of a tremendous over-borrowing crisis on part of the government, in spite of commendable economic growth. The funds generated by private capital in the booming tourism and shipping sectors of the Greek economy do not get re-routed to finance the social safety net, infrastructural expenditures, and various other social provisions that the society has expected the state to provide. Domestic capital refuses to finance the Greek state, and within-EU, non-Greek capital also refuses to finance the Greek state.

Voila, the predicament of Greece.

And one final note. I was doing fieldwork on the "eastern enlargement" process in the EU headquarters in the late 1990s--i.e., at the time when the Euro, including Euro-member-state status for Greece, was being established.

There were not one, but two occasions when I was told by pretty high-ranking officials of the European Union, working at the time on "eastern enlargment," that one of the widespread concerns in Brussels about the possible inclusion of a set of east European erstwhile-state-socialist economies was that, and I quote pretty close to literally, "nobody wants more Greeces" in the EU. When I asked what they meant by that, I was told, in no uncertain terms, that there was widespread knowledge that the Greek government takes whatever it gets by way of funding, fails to implement required reforms and provides false data about the economy. That happened before the Eurozone membership of Greece.

I have, thus, a hard time accepting the argument that "everyone in Brussels was surprised" about the lack of honesty on part of the Greek government. No. Greece's admission into the Eurozone was the result of a much more complex process of complacency that occurred on, pretty much, all levels of the EU, not just the Greek state.

Whether that should be an issue or not, is an open question. It need not be: If there were economic growth in Europe, none of this would matter, at least not this much, I suspect. The trouble is that, now that austerity has hit Greece, there will definitely be less economic growth--something that would be desperately needed in a region composed of increasingly frustrated, waning powers.

Good luck with that.

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cover page of the book

cover page of the book
image used for the cover design by Anannya Dasgupta