Greece's Financial Crisis: The Politics of Resolution and Reform

The current financial crisis in Greece has challenged the cohesiveness of the EU and has raised questions about the viability of the eurozone. Achilles Skordas remarked that Greece's massive debt build-up and skyrocketing budget deficit are symptomatic of deeper structural problems in the state. Endemic corruption, dysfunctional regulations and erratic policies, along with the "collectivist mentality" that is predominant in Greek society, have all contributed to paralyzing the economy. Skordas believes that the crisis should be an impetus for sweeping reforms in Greek fiscal, trade and social policy sectors.

The extent of the crisis became apparent when Greece's deficit and debt were found to be severely above the reference value set by the eurozone's Stability and Growth Pact, adopted by member countries in 1997. In the absence of of effective economic governance mechanisms, the pact calls on each country to ensure that its national deficits do not to exceed 3 percent of GDP, and for debt in relation to GDP not to exceed 60 percent. Before the crisis, Greece was able to use financial derivatives to mask actual debt levels. As the derivative market began to collapse, Greece's debt ballooned to 13 percent of GDP, with a debt to GDP ratio at 125 percent.

In order to rein in the accumulation of sovereign debt and limit the effects of Greek policies on the eurozone, Prime Minister George Papandreou announced the adoption of an austerity package which introduced dramatic government spending cuts and tax increases. Although the Prime Minister has the political will to reform the dysfunctional system, Skordas noted that public resistance could thwart the implementation of any substantial structural reform, making the country susceptible to default, which would have tragic consequences for the eurozone.

Years of nepotism, clientelism and corruption, Skordas noted, have inflated the size of the public sector in Greece. In addition to contributing to the state's huge debt, the public sector blurs the government's accountability and decreases transparency. The 2009 Corruption Perception Index Transparency International ranked Greece 71 of 180 states. Furthermore, persistent irregularities in the reports by the Greek Statistical Services have made it an unreliable source for information on government spending, which undermines the state's ability to ensure the implementation of EU norms. In order to fight systemic corruption, Skordas recommended that much of the work currently done by the public sector be contracted to the private sphere. In order to improve transparency, he asserted that new legislation on freedom of information be adopted.

Structural reforms should also include the transition from an unsustainable pension system to what Skordas called a "market-friendly system." The recent demonstrations in Athens indicate mass public resistance to pension reform. But at the current rate of contributions, Skordas warned that the pension system will bankrupt quickly if retirement age remains constant.

In order to increase competitiveness, Skordas advised streamlining Greece's inefficient government bureaucracy, liberalizing restrictive labor and tax regulations, and reforming education. Taking these steps would make Greece an attractive target for foreign investment, he asserted.

Finally, Skordas mentioned that while cutting defense spending would be justified in light of the crisis, it would inevitably spark larger debates about Greece's strength in promoting a national foreign policy. Although Greece has largely normalized relations with its neighbors—particularly Turkey, Greek foreign policy remains static on the Macedonian name issue. Skordas believes that the economic crisis will force Greece to revisit some of its foreign policy priorities, and ultimately help to overcome the stalemate.

In order to avoid a systemic default, the Greek government must practice fiscal restraint. Although they may fuel civil unrest, structural reforms necessary to overcome the current crisis should be seen as a tremendous opportunity to revamp Greece's political and social institutions. If the reform agenda fails, however, Greece will be further marginalized by its eurozone partners.

By Herma Gjinko and Andri Peros
Christian Ostermann, Director, European Studies