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The Political Economy of the Greek Crisis

LSE Hellenic Observatory, March 2013
by

Elias Papaioannou

on 7 March 2013

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Transcript of The Political Economy of the Greek Crisis

Elias Papaioannou
(London Business School, NBER & CEPR) The Political Economy of the Greek Crisis The Era of the Memoradum Politics Economics Social Business Cycle Developments Debt Sustainability
interest, maturity, government, growth
Fiscal deficit
alarming (even before 2009)
unsustainable (even without the crisis) The Problem Two broad approaches
to fiscal expansion Sources of Greek Debt & Deficit Populist Policies
Supply (political system) & Demand (electorate)
Weak State Capacity
inability (on top of unwillingness) of bureucracy-adminisration to collect taxes (fiscal capacity)
inability of bureucracy-adminisration to enforce contracts, protect private property, and enforce rule of law (legal capacity) Long-Medium Run Developments Steady loss of competitiveness
wages (especially in public sector)
prices-inflation (especially on non-tradables)
enormous current account (trade) deficit
Deterioration across every "soft" competitiveness & institutional quality index (in spite of growth)
corruption
legal-court quality-speed
product market competition
barriers to entry The Belle Époque Euphoria high real GDP growth (adj. high inflation)
focus on non-tradables (services, construction, telephony)
"dutch" disease syndrome in outward-oriented sectors
huge borrowing (mostly public sector)
sizable decline in both nominal and real interest rates The Policy Focus: Fiscal Developments one of the largest fiscal consolidations ever in history!!
in spite of fixed exchange rate
in spite of huge recession
significant debt reduction
considerable extension of maturity/duration
bank recapitalization (with no deposit losses) Fiscal Developments - The Problems fiscal adjustment burden unequal
hurt mostly the very under-privileged
private sector
policies were slow ("daily" economics approach)
uncertainty
European and global economic (and political) environment not very helpful
tax evasion (esp. by the wealthy and specific professions) Uncertainty European environment
Global economic developments
resolution of uncertainty regarding exit
repatriation of deposits
banking recapitalization
investment climate
tourism Recession (2013-2014) The Biggest Issue Distorted Beliefs Status quo Reform Inaction Save Greece inward-orientation of business
peternalistic state (and its numerous agents)
state tool for kleptocracy and populism (rather than for entrepreneurial activity and redistribution)
media (as deal makers rather than news providers) The debt is not ours Kick-out the troica The Likely Path The Good News Economists almost always get it wrong

Prediction is very difficult, especially if it's about the future (Niels Bohr) Economics after the adjustment positive but sluggish growth (below trend)
perhaps some initial spike (if bank restructuring is successful and repatriation of deposits)
capital accumulation rather than productivity gains
lack of V-shaped recovery (e.g., East Asia late 1990s)
exports still small;
hopefully general equilibrium effect (due to initial mis-allocation of labor and capital) will operate
reallocation from inward-oriented sectors to outward-industries
(almost) balanced budget
jobless recovery; unemployment remains unacceptably high Political Economy lack of serious reform; or very partial steps towards modernization
product markets
tax collection mechanism
health system
judiciary-courts
some moderate restructuring in the state
some privatization (but still monopolistic structure) Political Economy fragmentation
both across party lines and inside parties
lack of consensus on a reforming agenda (among government partners)
unity in things that government actors do not want (e.g. firings of public sector employes)
consensus on clientilistic politics (e.g., opengov; diaugeia; replacement of non-party appointees)
continuation of personalistic rule at every level of the administration (ministries, municipalities)
absence of checks (dysfunctional judiciary)
lack of administrative capacity to carry over basic state functions Economic stabilization with some growth
Stagnation; unlikely that unemployment will fall
Political fragmentation & polarization
Social disintegration Non-Governmental Party Politics Political extremisim
anarchism (not left)
nationalism (not right)
Agenda setting (Golden Dawn; extremist factions at the other side of the spectrum)
Spillover effects to "mainstream" parties and government function Political Representation mainstream parties => dying ("zombie" parties)
glue: political favors
extremist parties => popular among the youth
glue: hatred
other parties => hybrid and volatile base
disconnected: favors, hatred, conspiracy theories Beliefs & Social Capital The Fundamental Issue

Weak Society Education The World education; openness-competition (e.g., coursera, edx, code.org). research
era of "large" data
education, science, government
health innovation
bio-tech
personalized drugs
science
IT (innovation)
immigration (diversity)
opportunity
responsibility
individualism
civic society Greece education: crime, party politics, nepotism; patronage; non-accountability
do not collect any data or do not admit the data, when you have them
generics sold to state hospitals at any price (of course no int. auction)
corruption (MDs, state, pharma)
construction
IT (adoption)
shame
connections
not my fault mentality
familism, paternalism
distrust & lack of civicness Structural Policies pension and social security (some/considerable)
labor (a lot)
product markets (minimal)
capital markets & banking (close to nothing; lack of transparency)
justice system (some)
administration (a bit)
education (some) Structural Policies - Problems slow; partial
political cost
state capacity
legitimacy
"imposed by foreigners"
lack of a coherent Greek plan
tax evasion
partial equilibrium (rather than GE)
lack of communication
daily economics-politics
huge social unrest
unreasonably polemic from opposition Fiscal and Structural Policies Recession Fear Distrust New and Old Parties European partners Politicians fragmentation technocrats anti-globalization anti-immigrants anti-EU anti-unions anti-politicians anti-banks anti-parliament unemployment Neglected aspect: lack of state capacity anti-econometrics! LSE Hellenic Observatory Forum - GRExiting the Crisis Lack of Consensus
(not even on the numbers) Slogans www.Code.org. Education Some unnoticed realities........ Polemic demagogue anti-semitism high-income examples: Italy, Japan
middle-income examples: Latin America My Fear The Contrast We and the Others The Others and Us Beliefs and the State Beliefs about Immigrants Beliefs about "Others" based on distrust, prejudice, and lack of civicness My Hope Emergence of a Civic Society NGO's volunteerism donations engagement involvement independent media & Consensus Building Government Actors factors shaping its depth entrepreneurial activity
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