Turning A Crisis Into A Greek Tragedy

Looking back at historic events, say the protracted tragedy of World War One, one is frequently puzzled by the inability of the actors involved to understand the futility of their actions. The temptation is to rationalize away such obtuseness as being the product of the backwardness of an earlier age. However, today one can can recognize similar epically-scaled ineptitude in the management of the ongoing Greek crisis.

The political management of the Greek financial crisis is akin to the generalship exhibited in World War One -- and, depending on the final outcome, the fluid situation in Athens could have similar catastrophic consequences for the political unity of Europe.

There are the three major players in the Greek financial crisis:

The Greek administration. The issue here is not just the ruling socialist party. The reality is the Greek political class, in general, has lost the skills necessary for governing. After decades where governing meant spending borrowed money, hiring huge numbers of public servants and giving voters generous early retirement packages, problem solving, budgeting, awareness of market forces etc. are not in the skill sets of any possible administration. Things are more complicated for the present government since it is being called on to implement a reform program  it doesn’t believe in -- actually, a program it campaigned against in the last elections. The current administration, after making some general cuts in government salaries and pensions, has made every excuse possible to avoid any meaningful reform. It is a government now pledged to make budget cuts but which has vigorously pursued more tax revenue from a weak and shrinking private sector. The socialist government will not touch the annual 603 million euro subsidy to employees of the public electric company, but it is ready to slap people making a thousand euros a month with a retroactive tax on past income. It’s no surprise that a strategy of making an inefficient system somewhat less expensive and then taxing the heck out of the rest doesn’t seem to inspire much confidence in the people or the financial markets.

The European Union. Trying to work with a Greek government during the worst financial crisis since the Great Depression could be described as many things -- but certainly not as a pleasant task. And, unfortunately, the European Union for the time being remains a big part of the problem rather than a vehicle which will provide a solution to Greece's potential descent into default. It doesn’t really know how to handle the Greek political class, it doesn’t know how to communicate with the Greek public and, worst of all, it's unable to avoid its own institutionalized bad habits. It treats all budgetary questions from a rather neutral point of view -- budget cuts are equal to tax increases and vice versa. The Greek government has to reach a certain debt-to-GDP ratio this year -- but how Greece will actually acheieve this to be a non-issue for the EU. Can you make budget cuts? Good. Can you make tax increases? Great. But budget cuts and tax increases are not equal: especially, in the case of Greece where -- despite the widely-held stereotypes about rampant tax evasion and avoidance -- the tax revenues are rather close to the European average. However, the government imposes huge tax, regulatory and corruption costs on an already squeezed private sector -- structural problems which will have to be addressed sooner rather than later. So instead of dealing with the issue of the Greek insolvency, the EU treats the whole issue as a liquidity problem in the hope that at a future date things will be more manageable. Adding debt to more debt, glossing over important policy questions and being hostile to the Greek conservative party (it is opposed to the tax increases) because it's not willing to sign up to the socialist government’s ruinous program is simply the wrong way to go.

The Greek public. Despite all the reports and video footage of continuous riots and demonstrations, the vast Greek silent majority remains dumfounded by the unfolding news. Its assumptions and expectations about life have been dramatically altered. Gradually, albeit slowly, it has come to the realization that the economic system it embraced for the last 30 years is not sustainable. The problem here is that if a program of reform is not put in place soon -- one which offers some realistic hope of both avoiding default and stimulating economic growth -- Greek society will regress to its old default positions of victimhood and isolationism. And such a withdrawal inwards will only further hamper efforts to resolve the country's deeply entrenched fiscal woes..

Up until now the Greek government and the EU have played the game according to the traditional rules. The problem is that the conditions have changed dramatically but, like the generals who presided over the carnage of 1914-1918, they are fighting the last war. The brief, heady belle époque of the euro is over. What Greece needs now is an orderly restructuring of its debts which will reduce them at least by half. Such restructuring needs to be be yoked to a drastic -- but gradual -- reduction of the humongous Greek public sector: that’s the tricky  but unavoidable part.

But without such urgent and overdue remedial action, the Greek government and the EU run the very real risk of transforming a crisis into an economic cataclysm -- one which will produce another "lost generation" of Europeans.