The agony of Greece

Riot police during the demonstrations in Athens (picture Ggia)

The word agony comes from the Greek agōnia, meaning struggle, and struggle there certainly is.  Can the Greek government implement the changes deemed necessary by the other EU governments in order for them to continue lending money to keep the Greek state afloat?  Can the Greek economy start growing again, fast enough to enable Greek debts to be paid off?  And can the Greek people bear the pain of the political and economic reforms for long enough to see the eventual benefits?

As far as the government is concerned, there was a majority in parliament on Sunday evening for the latest set of cuts.  But the reforms that are needed go way beyond a simply austerity package.  Graham Bishop observes that:

the Greek political system seems to be based on a “clientelism” arrangement that offers employment in the public sector or publicly controlled companies. So it is well understood that meeting the demands for a reduction in the number of civil servants and privatisation is really code for requiring a major change in the political system.

The other EU member states want to see both government and opposition support the reform package – they want it from New Democracy leader Antonis Samaras in writing! – to reduce the risk of things being overturned in the forthcoming general election (likely to be held in April).  What does this say about the democratic choices available to the Greek people in that election?

What it says is that the Greeks have the choice between asking for EU support and rejecting it.  Asking for that support comes with conditions, which the rest of the EU is laying out clearly.  Rejecting that support, which the Greeks are freely and democratically entitled to do, is probably incompatible with continuing EU membership.  (I write probably because we are entering novel legal territory here.)

The economic pain is harder to bear.  Greek GDP is falling at an annualised rate of about 7 per cent, whereas the scenario in which debts are paid off sees it growing.  What are the causes of such a sharp fall?  There is the austerity package, which, as in other European countries, sucks demand out of the economy.  This can be justified to the extent that the demand cannot genuinely be paid for by economic production.  But there is also the uncertainty, Keynes’ famous animal spirits.

If no-one is sure whether Greece is going to be in or out of the euro or in or out of the EU altogether, it is hardly surprising that investors are taking flight and the economy is in retreat.  Confidence is an intangible thing – it can be talked up and down, as well as moved by numbers – but it is lacking in Greece and the economic decline weakens confidence still further.

This is the trap into which Greece has fallen.  It is not an exchange rate trap, it is a confidence trap.  Greece will not recover without confidence, but confidence will not come without recovery.

It is politics, both in Greece and in the rest of Europe, that will break this vicious circle.  Are politicians up to the task?

About the Author