Like it or not, Armageddon may be the solution

The alarm bells are ringing for the Greek economy. They seem to be ringing more loudly outside Greece than domestically, however. Foreign observers fear economic meltdown: a debt crisis so severe that the Greek state can no longer pay its way; it defaults, and is forced to beg for a bailout by international institutions. Respected economists talk of the country having three or four months to avoid Armageddon. Yet Greece is seen by them as living in a parallel world, slow to recognize or deal with reality. A year after the riots that exploded across the cities of Greece and signaled to the world painful problems of social exclusion, the riots are commemorated and a major financial crisis looms. Thus, it is legitimate to pose the question: Is Greece capable of rescuing itself? The biggest successes of Greece in recent times have come via an enforced external discipline. The Maastricht Treaty set criteria that Greece had to meet before it could enter the eurozone (though subsequently many foreigners believe that it cheated by submitting false data). Even the huge success of the Olympic Games in 2004 came with external constraints – not least the dates. By contrast, in areas where the EU sets much softer constraints – such as the Lisbon 2000 program of economic and social reform – Greece is a laggard. Other EU states – such as Ireland, Hungary, and the Baltic states – have needed economic help, of course, during the recent crisis. But each has drawn back from Armageddon. Ireland, for example, introduced its second budget of 2009 this week proposing radical cuts in public services (saving 4 billion euros) and actual reductions of between 5 and 15 percent in public sector salaries. The Irish finance minister’s words were resonant: We must send «a signal to the rest of the world that we are able to put our own house in order,» he said. Greece faces a fundamental strategic choice: Choose to take action or have it imposed from outside when bankruptcy comes and you have little power to determine the terms of the loans you need. This is the threat to national sovereignty that the prime minister spoke of yesterday. Closing the «credibility gap» – to use Papandreou’s phrase – means aligning domestic opinion with the demands of international institutions and financial markets that serious measures will be taken. Like it or not, these will be the arbiters of whether the domestic measures are sufficient. The prospect of Armageddon establishes a constraint of both time and of options. The call for a national dialogue – to include each of the parties and the social partners – is a sensible move to try and create such a consensus. Seen from abroad, the blame for the current crisis seems shared. Greece has lived with high levels of debt since the 1980s, under successive governments. The scope for stimulating the economy and taking desirable social measures this year has been curtailed by this legacy. Moreover, when governments in the past have endeavored to reform the social model – by tackling the pension crisis – they have been obliged to settle for small incremental changes. Both unions and large firms have defended their privileges and governments have been too weak and pliant to create a radical break. The very notion of a «social dialogue» has been repeatedly scuppered by lack of faith and the inability to upgrade the common interest. The governability of Greece was in serious doubt well before the financial crisis or even the riots of last year. Now, strategic choices cannot be delayed. Greece faces three scenarios. If serious measures are not taken, the International Monetary Fund (or the European Central Bank) may step in to impose very tough cuts. Alternatively, Greece will squeeze through with measures just strong enough to avoid Armageddon but not good enough to significantly improve its long-term economic and social position. The third scenario is that the current crisis shocks the political establishment into both emergency measures and a broad agreement on an economic and social model for the future. Either the first or the third option may be the best outcome in the long term. The most likely is Option 2, however. But this is the opportunity for Greece to emulate the Irish. Two decades ago, when Ireland faced debt levels the same as Greece does today (though with a smaller government deficit) a program for national recovery was agreed. It is commonly accepted that this social pact was the basis for the economic miracle the Irish enjoyed thereafter. In the past, Greece has not had the political conditions sufficient to support such a pact. Today, facing its biggest crisis in a generation, perhaps attitudes may shift. The chickens, as the Americans say, have come home to roost. Greeks believe in heroic leadership. Social scientists look at the structural conditions. Let’s hope the Greek instinct is right. (1) Kevin Featherstone is a professor at the London School of Economics and director of the LSE’s Hellenic Observatory.