Tag Archives: Greece

Why Greece Needs a Pinochet: A Modest Proposal

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.


Syriza shows the failure of ‘cartel politics’

As expected, the radical left party Syriza was the big winner of the Greek elections, coming only two seats short of an absolute majority in parliament. But it’s unclear if new Prime Minister Alexis Tsipras will be able to effectively pursue his anti-austerity agenda and renegotiate the terms of the Greek bailout with creditors — and he will surely need to make a number of concessions to its coalition partners, the Independent Greeks, a right-wing anti-immigration party.

What does this victory mean for Greece and for the debt-ridden countries of southern Europe?

Read it over at CNN.com.

Read our article on austerity politics and clientelism in Greece and Portugal in the Journal of European Public Policy.

Reforming Southern Europe: How to Square the Triangle of Employment, Fiscal Austerity and Inequality?

Mass unemployment is probably one of the most worrying features of the Eurozone crisis. As youth unemployment is hitting record levels (one in four people under 25 in Europe and more than one in two in Spain are officially out of work), many observers are warning against the rise of a “lost generation”, especially in Southern Europe. The European central Bank and international financial situations may have developed an obsession for deficit and debt reduction, but mass unemployment can be considered a much more worrying problem in the long term for both workers and governments. For workers, skills deteriorate when they are out of work, and as technology goes forward, their likelihood of finding a job tend to decrease with the duration of unemployment. For governments, each period of mass unemployment tends to increase the incompressible threshold of structural unemployment. When the number of unemployed increases en masse, it is very difficult to come back to the initial level even in the case of an upturn, as many workers driven out of work for too long are never able to come back into employment again. The problem is even more serious when unemployment concerns primarily young people at the beginning of their career, who cannot even start climbing the ladder in the first place.

In this context, what can governments do, and how do different types of reform impact on public deficits and inequality? In the late 1990s, political economists have argued that service economies, where economic and productivity growth tend to be much lower than in the past, entail a “trilemma” between high employment, low inequality and budgetary restraint. Following this idea, governments in service economies have to choose two out of these three objectives, as all three of them cannot be reconciled.

For many Continental European countries with so-called “Bismarckian” welfare states such as France, Germany, Italy or Spain, the common wisdom is that employment has often been sacrificed to reduce inequality and – often unsuccessfully – contain taxation at the same time. Redistribution is funded through payroll contributions levied on wages rather than by general taxes, which tends to price out low-skilled workers. The amount of contributions employers have to pay even on low salaries can make them too expensive, and earnings-related benefits and minimum wages possibly prevent the entry of low-skilled workers. In Mediterranean countries like Spain, Italy, Greece or Portugal, the problem also often emphasised is the rigidity of labour laws which tend to protect the “insiders” – people who have entered the labour market in the period of growth in the 1960s to 1990s, making it harder for new entrants to get in. The result of this is that young people are much more affected by unemployment in spite of the fact that they are typically much more qualified than their parents. On top of this, poor childcare inherited from a strong *male breadwinner” bias combined with the loosening of family structures typically hampers female employment in Southern Europe: in 2012, only 54% of Spanish women and 50.5% of Italian women between 20 and 64 were in employment (64% and 71 for men respectively). The corresponding figure for Denmark was 72.2 (females) and 78.8 (males). Even considering lower employment rates in general, the gender gap in employment is typically greater in the South.

The first strategy governments can pursue to increase employment while keeping a lid on public expenditure is the Anglo-Saxon way, namely mass deregulation to price in workers again at the bottom of the labour market. It is also the one that is being pushed by European institutions, Germany and the current Spanish government. By cutting down payroll contributions and benefits, what is sought is the expansion of the labour market downwards, through low wage-jobs. It is understandable that Germany is pushing for this kind of solution because it is the strategy that it has pursued itself since the early 2000s, with the rise of mini-jobs, the Hartz reforms and a deliberate strategy of wage compression by German trade unions. The obvious direct consequences of this strategy are the higher income inequalities typical of Anglo-Saxon economies. Income inequalities in Germany also seem to have increased considerably in recent years in spite of the “jobs miracle”. It is unclear, however, whether deregulation is really able to increase employment across a wider set of countries. Moreover, the internal devaluation strategy pursued by Germany to boost exports and run a positive trade balance can only work if other countries run a trade deficit: we cannot all be Germans at the same time.

The second strategy is the Scandinavian way. It consists in the massive expansion of the public sector to provide a wide variety of social services funded by high levels of taxes. Countries like Denmark, Norway or Sweden tend to have higher employment levels at least in part because the state provides or subsidises a large variety of quality social services such as childcare, which not only employ a large workforce, but also tend to facilitate female employment. Affordable childcare allows both members of households to be employed, while its absence often forces a member of South European households – typically the woman – to choose to stay at home. Moreover, theses countries invest massively in active labour market policies. Obviously, the price to pay for this strategy is very high levels of taxation to fund the state, or alternatively, an increase in borrowing. In the context of fiscal austerity that pervades almost all European countries, this is politically very difficult, or even impossible. Countries like France, however, still have large programs of publicly subsidised employment for young people. In 2013, a quarter of jobs held by people below 25 were partly subsidised by the state.

Employment ratio 20-64 by gender

Employment ratio 20-64 by gender

If deregulation creates inequality and is not guaranteed to work, while public sector expansion is very expensive, what is left? In a forthcoming book chapter with Jelle Visser, we argue that there may be a third “liberal-corporatist” way based on the experience of countries such as Switzerland and the Netherlands, where employment participation is high, inequality is low to moderate, and the public sector is nowhere near the size of Scandinavian countries. This model relies on the widespread use of part-time employment and strong systems of occupational skills lifting wages in the bottom of the labour market. The Netherlands and Switzerland have the highest incidence of part-time employment in the OECD, and Switzerland has one of the lowest income inequality levels in the OECD in spite of the fact that it redistributes as little as the United States. In a context where public sector expansion and extensive subsidised childcare as found in Scandinavian countries are politically difficult to put in place, the increase of part-time employment has been a private response allowing women in particular to reconcile childcare with labour market participation. Interestingly, the places where the Dutch and Swiss social models perform particularly well are those in which Southern European countries are lacking, notably for female, elderly, and youth employment. The latter is largely due to strong systems of vocational training which ensure a better transition from school to work, so that the alternative is not only between dropping out of school with low skills or going to university, a system which also tends to foster income inequalities. In all these respects, they can represent a politically viable way to escape the trilemma outlined above at a lower cost in terms of public finances and inequality.


Incidence of part-time employment, 2011

Of course, any supply-side reform agenda is constrained by the availability of demand, which is a massive problem in Southern Europe. Governments are cutting spending at a time when households are reducing their consumption. Supply-side reforms are of little incidence if nobody at home or abroad is buying anything. In Switzerland and the Netherlands as well, high employment has been underpinned by some form of demand-stimulating factor whose sustainability is uncertain. In the Netherlands, tax exemptions on mortgages have encouraged ever-inflating house prices and the highest levels of mortgage debt in Europe. At the moment, the country has fallen in recession, and the government has cut spending at a time when households are seeking to reduce their debt level. In short, while the Dutch government was a harsh advocate of austerity in Southern Europe, it finds itself entrapped in the same kind of “balance-sheet recession” that Spain is facing. In Switzerland, domestic demand has been maintained by very high levels of immigration since the mid-2000s, compensating for declining exports due to the appreciation of the Swiss franc (as a consequence of the depreciation of the euro), and anaemic demand in the Eurozone. The sustainability of this strategy can be questioned as well, as population growth cannot be pursued indefinitely.

This article was first published under a different title on the LSE’s EUROPP blog, and will be published in Spanish by Agenda Publica.

The Political Consequences of Austerity in Southern Europe


Lisbon, July 2013

So I have written a blog post (both in Spanish on El Diario’s Agenda Publica and in English on the LSE’s Europp blog) that seeks to explain why the Portuguese party system has stayed relatively stable in the face of austerity policies while the Greek party system has exploded. The main arguments were

1)   that the more extensive nature of party patronage in Greece has made mainstream parties more vulnerable to austerity policies . Since they relied quite heavily on the distribution of rents (public sector jobs, pensions and social benefits targeted at specific groups) as a way to reward voters, they collapsed when these tools were ruled out by Troika-imposed austerity. Portuguese parties, by contrast, could not really rely on these strategies in the run-up to the crisis because of low growth and deteriorating public finances. No growth, no leeway to distribute rents, better resilience.

2)   that responsibility was easier to attribute in the Greek case, where PASOK ruled alone in the run-up and in the direct aftermath of the bailout, whereas the Portuguese PS and PSD formed an informal coalition which diluted responsibility. I wrote that in the political context of Southern Europe, where everything you do is bound to be unpopular, the only solution left for parties if they want to survive may be to form a political cartel to defuse blame.

A few points of background: I came up with the first part of the argument while working on a paper with two Greek colleagues. Obviously, it is quite difficult to test empirically but I thought it would be worth throwing it out there. The second was inspired by existing arguments about the politics of blame avoidance in welfare state reform (for instance here). Since, I only wrote about two countries, it is obviously difficult to say which mechanism is the most important. Moreover, one can think of a number of other reasons that can explain variations in outcomes, such as historical traditions, different cultures of protest, etc. I am personally skeptical towards cultural explanations because anything can be explained by culture, but it’s probably a matter of taste. As a political economist, I tend to favour explanations that involve some form of material/economic interest.

The post has generated a number of reactions. Some said it was just utter nonsense and that I didn’t know what I was talking about. I suspect that the argument may have come across as saying that democratic politics is alive and well in Portugal as compared to Greece where democracy is on the brink of collapse. This is really not what I meant. Recent polls indicate that 88% of Portuguese citizens do not trust the government (see this as well, which points to similar developments elsewhere in Southern Europe). The question is to know when this distrust and anger translates into the collapse of existing parties (as in Greece or Italy) and when it translates into abstention and apathy (as in Portugal and perhaps Spain). This latter occurrence is of course damageable for democracy, but as far as party competition is concerned, it does not change much.

Pedro Magalhães from the Insitute of Social Sciences in Lisbon has posted a well-thought reply that takes a critical take on some of the arguments. I am sincerely honoured that somebody took the time to take on these ideas. The points raised by Magalhães have to do with the generalizability of the argument, and the idea of the political cartel as the only viable option for parties to survive. These are very valid points and I thought I’d say a few things about them.

Magalhães rightly points that the two countries where the party system seems to have been substantially transformed are precisely those where technocratic governments were formed, namely Italy and Greece. In these countries, technocratic governments or grand coalitions have generated a backlash, with the electoral surge of Beppe Grillo’s Movimento Cinque Stelle in Italy and Syriza or Golden Dawn in Greece. I think that this evolution has a lot in common with the rise of the populist radical right in so-called “consensus” democracies such as Austria, Switzerland, Denmark or the Netherlands. In these countries, coalition governments have de facto constituted a political cartel that isolated policymaking from electoral pressure for years. Writing about Switzerland and Austria in 2000, Richard Rose wrote that “a grand coalition is vulnerable to becoming a monopoly unresponsive to new issues. Sooner or later, some citizens will abandon established loyalties and vote for the rascal they do not know in preference to those that they know too well”. In many ways, this could apply very well to what has happened in Greece and Italy, and goes along Magalhães’s argument. When you seek to insulate policymaking from electoral politics, you are bound to face severe anti-system protest and electoral setbacks.

Now, when I wrote that forming a political cartel was probably the only viable option for parties to survive, I was probably wrong. In fact, after giving it some thought, I think that there are two strategies mainstream parties (those with an aspiration to govern) can pursue in the context of the crisis, and each of them has severe electoral drawbacks. Basically, there is the “plague” option and the “cholera” option.

  1. They can collude and form a cartel to implement austerity and commit not to blame each other (Kent weaver calls it « circling the wagons »), which sooner or later may cause an electoral backlash and the strengthening of anti-system parties as discussed above. This is the Greek and Italian case.
  2. Opposition parties can oppose austerity and blame the government for licking the boots of the Troika (“jump on the bandwagon”). The problem of this strategy is that agenda control in Southern Europe is extremely reduced in the current set of supranational/economic constraints. If you blame the government for austerity but want to stay in the eurozone, you will probably have to carry out the very same type of policies that you oppose when you come back to office. One way or another, you will have to betray your voters and face the electoral consequences. You can make voters believe that normal political competition can take place and that alternative agendas exist, but there is in fact only one policy option and it is largely dictated from outside.

There are still a number of questions that I still can’t figure out. For instance, why has Syriza become the first party on the left in Greece, while the Portuguese Bloco de Esquerda or the Communist party do not seem to have benefitted from the crisis? As I said elsewhere, I suspect that there is a pervasive tendency of Portuguese citizens to choose exit rather than voice, notably through emigration and/or abstention, while this tendency is not present in Greece. I would be quite curious to discover ways to investigate this link empirically.

How Austerity Killed Greek Parties, While Portuguese Parties Survived


This shows the electoral score of the two mainstream parties in Greece and Portugal in 2009 (before the outbreak of the crisis) and in 2011 (in Portugal) and 2012 (in Greece), after the outbreak of the crisis. For Greece, this shows the results of the May elections; new elections were held in June as no governmnet could be formed. What is striking is how mainstream Portuguese parties have been resilient compared to Greek parties, and especially PASOK, which completely collapsed. The cumulative vote share of the PS and the PSD remained stable, while it lost 42% in Greece. As we know, support for fringe parties has soared in Greece (Syriza, Golden Dawn) while radical left  parties in Portugal (Bloco de Esquerda and the Communist Party) have remained at astonishingly low levels.

I see two explanations for this. First, as I argued here, Portuguese citizens seem to prefer “exit” (abstention, emigration) over “voice”. Second, the base of support for Greek parties drew heavily on a spoils system (public sector jobs, pensions, cartelistic rights) and they didn’t differ much ideologically. By reducing public spending and removing these cartelistic rights, austerity directly undermines their base of support. Since PASOK and ND could no longer offer rents to voters because the money was gone, voters abandoned them. In Portugal, austerity had started before the crisis, as the 2000s were a lost decade in terms of growth (no real estate bubble). Hence, parties could not rely on the kind of spoils system that PASOK and ND drew on. There is some data on party patronage that shows these differences.

How big is the Greek public sector, really?


Employment in General Government as a Percentage of the Labour Force (2000 and 2008)

In the media you always read about the Greek “bloated and corrupt” public sector full of useless slags.  Now I have been unable to find actual data that can back up this claim. OECD data (picture above) indicate on the contrary that the Greek public sector is actually much smaller than elsewhere.

1) Are the numbers wrong? 2) Latest reported year is 2008. Have PASOK engaged in a recruitment orgy when they came to power? 3) Do comfortable stereotypes replace actual facts? 4) Other ideas?