Government and Institutions

Why Greece cannot prosper in the eurozone

About eight years ago, I attended an economics conference in Berlin, where one of the speakers criticised the structure of Germany’s public finances as overcentralised, inconsistent and full of distortions. Responsibilities were too often unnecessarily split across various levels of government, he argued, and decisionmaking powers were too often disconnected from fiscal responsibilities. He proposed a major tidying up. If policy area X was the responsibility of the states, then the federal level should stop messing around with X and leave it only to the states, and the states should pay for X out of their own tax revenue. Have fewer cooks, and have each cook pay for their own ingredients. He repeatedly referred to the example of Switzerland, which came a lot closer to the fiscal architecture he described, and given that he spoke with what was unmistakeably a Swiss accent, he would have known a thing or two about it.

I, for one, found the speech perfectly persuasive. But the person next to me was less impressed:

-“Who does this guy think he is?”, he hissed. “Coming here, telling us how we ought to run our affairs? If everything is so wonderful in Switzerland, then why doesn’t he stay on his alp, munch his Emmentaler, and lecture the cows.”

-“But what he said was completely logical!”, I objected. “Why does it matter where he’s from? He’s right.”

-“There is no ‘right’ and ‘wrong’ here. The Swiss do things their way, we do them our way.”

-“They do it better by every available measure. There is right and wrong. Two plus two is four, and it would still be four if I said it in Schweizerdeutsch.”

People who overheard our conversation later told me that they found my seatmate’s reaction irrational, parochial and inappropriate. Nobody else at the conference had a problem with the fact that a Swiss speaker used Switzerland as a successful example to be emulated. My seatmate was, in this respect, wildly unrepresentative of the conference audience.

But here’s the thing: That conference audience, in turn, was wildly unrepresentative of the general population. At the conference, my seatmate’s response may have been deemed misplaced, but outside of the conference centre, most people would have found it perfectly understandable. Those familiar with Jonathan Haidt’s moral foundation theory would recognise it as a manifestation of the loyalty/betrayal foundation, or more generally, as an example of in-group/out-group sentiments.

And that is essentially the reason why attempts by Eurozone creditors to pressure Greece into a reform programme are doomed to fail. No, please bear with me – I swear that this is not the week’s umpteenth article about bossy Germans bullying poor Greeks. My point is a different one. As Steve Davies explained here, the Greek crisis is not about debt per se (although debt doesn’t help), but about the fact that the Greek economy is simply not productive enough to sustain wages and transfer incomes anywhere near the pre-crash ones. This cannot be solved by a few parametric adjustments.

The basic problem is that the Greek economy is an economy built on patronage and clientilism. In too many sectors, economic activity in Greece is not about creating wealth, but about extracting wealth through political means. Could Greece turn itself around, and become a productive, prosperous economy? Of course it could. At some point, all economies were based on patronage. Such an economy is far more in tune with human nature than an economy based on free exchange under the rule of law. We are a clannish species. Building networks of patronage comes naturally to us, capitalism does not. That’s why almost nobody likes capitalism, even if we grudgingly accept it because the alternatives are so dire.

On this basis, a move to a rules-based economy based on strong institutions could happen in Greece as well – but not as long as it is perceived as an imposition from outsiders. It will happen if and when it is perceived as a necessity. The country needs to find its own way towards economic reform. Everyone else has to back off.

Backing off is, of course, not possible as long as Greece is part of a quasi-transfer union. You can either have national sovereignty, or you can have a transfer union, but you cannot have national sovereignty within a transfer union. The current tenor in the British media (and a fortiori on social media) is that the creditors should just write off Greece’s debt, throw lots of money at the country, and ask for nothing in return. That, we are told, is ‘democracy’: Syriza was elected on that platform, and the Greferendum has further backed up their mandate, so not giving Syriza all the money they want, and on their terms, would mean trampling over the democratic rights of the Greek people.

Except that Syriza is not the only democratically elected governing party in the Eurozone, and just like Syriza voters demand unconditional transfers from other countries, voters in those other countries demand conditionality. As is their right, and their governments have a duty to act upon it.

Some have suggested that Grexit, partial default and devaluation would be at best a medium-term solution, not a substitute for structural reform. They are right. But they seem to assume that the likelihood of successful structural reforms is independent of the question of Eurozone membership. It is not. The Grexit/default/devaluation option would mean that Greece would be on its own. Nobody would have the power to interfere with the country’s internal affairs, and for the political class, there would be nobody left to blame. It would detoxify the political atmosphere, which is not a sufficient condition for reform, but very much a necessary one.

Dr Kristian Niemietz is the IEA’s Head of Health and Welfare.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).