A panel of distinguished German experts led by Lars Feld have recently written an interesting column about the Greek debt crisis. It largely echoed a recent piece by Jürgen Stark, former (German) European Central Bank Board member. The gist of these two pieces is basically a) that the problems that Greece faces are essentially self-made b) That austerity works and is the only solution to solve Greece’s economic problems c) that the newly elected Syriza government should continue on the path of drastic austerity of its predecessors in spite of the unrealistic promises it has made to its voters. Germany, of course, is acting responsibly whereas Southern countries have lived beyond their means:
“The political elites of the eurozone periphery are responsible for having lost access to the financial markets in 2010. Years of mismanagement and failure to observe the rule of law have led to increasing budget deficits and mounting debts (…) The truth is that, in contrast to many eurozone countries, Germany has reliably pursued a prudent economic policy. While others were living beyond their means, Germany avoided excess”
Of course, this view has been criticized by dangerous leftists such as Paul Krugman and Simon Wren-Lewis, who argue that the pain inflicted by austerity reforms could have been avoided if it had been carried out less violently, more slowly, or possibly if Greece had left the Eurozone, through external – rather than internal – devaluation. Now, since the Syriza government has committed to stay in the Eurozone, internal devaluation is the only available option, and prices and wages should go down. The state should be rolled back, the public sector downsized, pensions should be cut, wages should decrease, the labour market should be deregulated.
The problem with the reforms favoured by our German friends and the Troika is that they are very difficult to implement in a democratic regime where voters can kick out governments out of power. Indeed, such measures tend to be very unpopular, and governments trying to implement them are bound to face significant electoral losses up to a point where they can no longer rule. This is precisely what happened in most countries of the European periphery, where incumbents at the beginning of the crisis have been systematically voted out of power (e.g Fianna fail in Ireland, the Socialists in Portugal and Spain, Silvio Berlsuconi in Italy, and more recently PASOK and New Democracy in Greece). In Italy, Spain and Greece, anti-austerity or anti-system parties have become leading political forces ahead of established “centrist” parties. The latter have tried to band together in political cartels to implement unpopular austerity reforms, but this strategy has faced severe limits. Indeed, their electoral base has shrunk to a point where they may no longer hold a majority, as happened in Greece. Hence, the main stumbling block impeding Greece from implementing further austerity is a democracy where dissatisfied voters hit by unemployment and falling living standards can vote governments out of power. Karl Polanyi rightly showed that market liberalisations always create a countermovement of protection from society, and citizens badly hit by austerity will turn to political forces that promise to stop the pain, triggering a “countermovement”. This is why extreme austerity such as that implemented in Greece seems difficult to reconcile with democracy.
There is of course a fairly simple solution to this, and that is the establishment of a military junta such as that of Augusto Pinochet in Chile, which has been praised by the likes of Friedrich Hayek and Milton Friedman for the extensiveness of his economic reforms along market lines. Technocratic governments in Greece and Italy were already an attempt to suspend democracy and implement austerity partly in isolation from electoral politics. However, they proved short-lived an fragile. A real military regime would have nothing to fear from unhappy voters bearing the consequences of austerity reforms, and the occasional protest could be easily dealt with through military repression. Pay cuts, which are difficult to achieve in a system with powerful unions, could easily be enforced with military intervention in factories. Portugal’s Salazar, for instance, has a fairly good record in wage restraint during the 1950s and 1960s under state control over unions, and demands observed elsewhere to expand social programs could be swiftly squashed by the political police. It no coincidence that Chile was able to achieve such a level of economic liberalization whereas other countries were wasting time with the consensus-building imposed by democratic institutions.
Greece displays a number of favourable conditions for the establishment of such a political regime. First, it has one of the biggest armies in Europe compared to its population, and up to the crisis, had the largest military expenditures as a share of GDP in the European Union. Second, it also has a past of military dictatorship (1967-1974), and the large support received by Golden Dawn in the last elections shows that a sizable share of its population would be confortable with a fascist regime. This creates good conditions for radical methods. These are clearly the only way to overcome opposition to the radical economic reforms that the Troika and Germany wants implemented in Greece.