Greece Jumps from Scylla to Charybdis
Every Greek child reads Homer in school. So Greek children are familiar with the legend of Scylla and Charybdis, from Homer’s Odyssey. The sailor Odysseus, returning home after the Trojan War, is faced with a desperate choice in the straits separating Italy and Sicily. To one side is the monster Scylla, who will tear his ship and eat his crew. On the other is the whirlpool Charybdis, which will suck his entire ship down to the depths. He chooses to sail past Scylla, and loses only a few of his crew. Greece, in its recent parliamentary election, faced a similar choice. But unlike Odysseus, Greek voters chose Charybdis.
The whirlpool was represented by Syriza, a radical leftist party that sprang out of nowhere to fill the void created by the collapse of PASOK, the long-established Greek Socialist party. It was the last PASOK government, headed by George Papandreou (from a family that produced three Socialist prime ministers), that steered Greece into these straits in the first place.
Papandreou was presented with the boon of cheap money following Greece’s entry into the eurozone in January of 2001. At the time, the European Central Bank (ECB) pursued policies aimed at shoring up Germany’s then-flagging economy by borrowing heavily to finance public spending. The result was the debt crisis that began in 2010.
Greek voters came to regard PASOK as the party of nepotism and corruption, and shifted their support to the Coalition of the Radical Left, known as Syriza for its Greek acronym. Syriza positioned itself as anti-corruption, anti-bank, and (at least implicitly) anti-euro, and for increased levels of public spending and welfare.
Syriza narrowly lost to the center-right New Democracy party in the 2012 election, but was able to capitalize on increasing public discontent with that party’s policies afterward. A majority of Greeks perceived New Democracy to be governing at the behest of the “troika” — the European Commission, the ECB, and the International Monetary Fund — that set conditions for the Greek bailout.
The troika’s conditions were characterized as an austerity program intended to lower the country’s debt burden. It consisted of a combination of increased taxes and lower public spending by means of privatization, staff layoffs, and welfare cuts. But it did not include major structural reforms, so the Greek economy has yet to recover, with unemployment at 25 percent overall and 60 percent among young people.
Syriza’s platform rejected austerity. Instead, it offered a return to prosperity by lowering taxes on the working class and increasing spending to stimulate demand, while providing “free” electricity. How would it pay for this? By more heavily taxing “the rich” — of course! — and by diverting money from bond repayments to public spending following a negotiated debt restructuring. It also expects the ECB to steer its new quantitative easing program toward buying Greek debt.
This set of policies, described euphemistically as “mild Keynesianism” by its prime author, is precisely what got Greece into trouble under PASOK — spending financed by the rest of Europe. But this time the rest of Europe is unlikely to stand for paying Greece’s bills. German finance minister Wolfgang Schaeuble has already signaled that he expects Greece’s new government to abide by its international agreements.
All this sets Greece on a straight course for another whirlpool: default and a possible “Grexit” from the euro. The new prime minister, Alexis Tsipras, has said he wants to avoid both eventualities, but it is hard to see how he can achieve this without forcing the troika and Germany into a humiliating U-turn.
There is a strong argument that Grexit would actually be good for Greece, which should probably never have entered the eurozone in the first place, but the Greek people remain strongly in favor of the European project. They would likely blame Grexit on Germany, leading to even greater political tensions. The fact that Syriza’s coalition partner, the right-wing populist Independent Greek party, is militantly pro-Russian would just exacerbate this further.
Not all the blame for this terrible situation should fall on Greek voters. While the austerity program of New Democracy and the troika looks impressively Thatcherite at first sight, it includes very high taxes and misses out on one vital element: institutional and regulatory reform. Greece’s financial and labor markets are still hopelessly bureaucratic. New Democracy’s attempts at reform were half-hearted at best.
As long as Greece remains beset by a bureaucracy that promotes corruption as the best way around it, its economy will remain in the doldrums, regardless of how austere or profligate any one government may be.
Greece does not have to choose between Scylla and Charybdis. As the accompanying cartoon from 1790s England suggests, it is possible to steer between the rocks of anti-establishment populism (in Greece’s case, Syriza) and the whirlpool of an arbitrary executive (the troika). It can do so if its sets a straight course for the safe harbor of liberty.