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eurozone

The POST-FINANCIAL CRISIS of GREECE and it’s economic prospects

Greece is just recovering from a severe economic recession, and it will take several years to consolidate economic growth and return to pre-crisis levels. But now that the worse seems over, various opportunities open up for Greece. The degree to which it will be able to manage this combination of challenges and occasion exploit will determine its course in the decades ahead.

The Financial-Economic History of Greece

Greece has a turbulent financial history marked but repeated bankrupts. Since its independence was recognized in 1830, it experienced five defaults, the last of which took place in 1932. Greece contracted its first debt from Great Britain even before becoming independent, as a mean to finance the armed insurrection against the Ottoman Empire. Unable to fully repay the interests for this loan, the Greek state had to declare its first bankruptcy while the War of Independence was still ongoing. Since then, it often contracted debts with foreign powers just to repay previous ones. A recurrent pattern can be identified in these crises. Greece received foreign loans, whose terms were not always advantageous; but it failed to repay debts and ended up declaring bankruptcy. The precondition for debt restructuring or cuts from foreign creditors was to apply austerity measures such as reducing government spending and imposing new taxes, which ultimately resulted in financial stabilization and readmission to international credit markets. Soon, investments and loans started flowing in again as foreign lenders were disposed and even eager to provide funds; but this always resulted in unsustainable levels of debt. Combined with domestic problems such as government overspending and corruption, this led to another debt crisis, thus restarting the cycle. A notable even occurred in 1898, when an International Committee was set up to monitor Greece’s public finances; thus anticipating the role of the EU institution in the most recent recession. The last default in 1932 also presents notable similarities with the recent situation, as that that crisis followed a major global-scale financial crunch; namely the 1929 Wall Street collapse.

After suffering huge human and economic losses during WWII and the Civil War that followed it, Greece managed to settle most of its external debt and experienced an exceptional economic growth; also thanks to US aid received via the Marshall Plan. It built infrastructures and promoted industrialization, the living conditions of its citizens greatly improved and its GDP growth rate was one of the highest in the world, second only to countries like West Germany or Japan. During this period, which goes roughly from the early 50s to the mid-70s and that reached its apex in the eight-year rule of Prime Minster Konstantinos Karamanlis of the New Democracy party between 1958 and 1963, the debt/GDP ratio fell to a record-low of 9.7% in 1959; and continued oscillating around 20-25% until the early 1980s. But since the Socialist Party (PASOK) took power it started rapidly growing, stabilizing at a high level of about 100% in the 90s and early 2000s. The return to power of New Democracy in 2004 did not change this course. This massive surge of public debt was largely due to uncontrolled and unproductive government spending combined with the effect of an economic slowdown plus structural inefficiency and lack of transparency, especially in the public sector. Yet, Greece achieved its objective of joining the Eurozone since its beginning in the 1999-2002 period; even though it did so by dissimulating the real entity of its debt; as otherwise the discrepancy from the financial stability criteria established by the 1992 Maastricht Treaty would have been too high for its admission. At that point, things started getting alarming, and Greece itself warned that the situation of its public finances was worse than it appeared; resulting in the country was put under observation by the EU Commission in 2005.

The Crisis

The 2008 US financial crunch had world-spanning effects; and in the EU it shook the very idea of European integration. The refusal of the US government to bailout Lehman Brothers resulted in the latter’s bankruptcy, which had chain effects on the world’s financial markets. States acted to prevent the collapse of major financial companies, as this would have had detrimental repercussions on national economies. But soon, this raised concerns over the ability of states to repay their own public debt; especially over those Eurozone states having the bigger debt/GDP ratio. Among them Greece stood out with its huge debt of more than 120% of GDP. This was the result of a combination of factors. The introduction of the Euro had caused wages to rise, thus deteriorating Greece’s competiveness. The trade balance went negative and the government deficit also reached 15% of the GDP in 2009. As the crisis struck the EU, loans from other countries begun to decline and their interest rates grew, meaning that Greece could no longer finance its deficit via cheap external debt. Moreover, while joining the Eurozone increased financial credibility and favoured trade thanks to lower transaction costs, it also deprived the country of its monetary sovereignty. Consequently, Greece could not counter the effects of the crisis by depreciating its currency; even though this would have been just a short-term solution.

At the height of the crisis, Greece found itself in a serious standoff with foreign investors over the terms of debt restructuring and cancellation. The so-called Troika, formed by the European Commission, the European Central Bank and the International Monetary Fund, demanded Greece to adopt harsh austerity measures to reorganize its finances as a precondition for a bailout; similarly to what had happened in previous cases. In this, Germany played a major role, because its banks owned the largest share of the Greek public debt. As such, Angela Merkel’s government acted primarily to protect the interests of Germany and its financial actors, who would have suffered significant losses in case of a Greek default with negative consequences for the German economy. Yet, given the relative small size of the Greek economy, a default would not have been fatal for the Eurozone; but Germany’s very decision made the situation worse. Berlin has always been very unwilling to implement expansionary economic policies to boost growth in the EU and assist countries facing economic troubles like Greece. For this reason, initially it insisted for a bail-in, which would have meant making private creditors withstand the costs of restructuring the Greek debt. However, Germany’s stance greatly undermined the market’s trust by creating fears among investors, thus further worsening the situation for Greece and the EU.

In the end, Greece had no choice but to implement the austerity measures demanded by the Troika; and in exchange it obtained three bailout programmes which included a cancellation of 100 billion euros of debts in 2011. Nevertheless, Greece plunged in a deep economic recession. Its GDP shrunk, and so did salaries. Unemployment grew to reach about 27% of the workforce in 2013, and it still remains above 20%. Living conditions worsened for large swathes of the population. Today, the government budget has returned in surplus, but due to the contraction of the economy the debt/GDP ratio has actually increased to a current level almost 189%.

But even more importantly, the crisis caused tremendous social harm, disrupting the lives of millions and sparking violent protests alimented by anti-EU and anti-German sentiments. This also arose the controversy over German reparations for WWII. Like other states, Greece was plundered by the Germans during their occupation, and it received some material compensation after the conflict in the form of equipment and commodities. But since the US wanted Germany to rapidly recover in an anti-Soviet logic, Greece and other countries were convinced to soon renounce to the remaining reparations. In addition, a 400 million marks loan that the Germans forced Greece to concede during the occupation was not included in the reparations; but today Berlin refuses to discuss the issue. Converting this amount to today’s dollars is very complex, but considering that in 1941 one dollar was worth 2.5 Reichsmark and accounting the changes in purchasing power of the USD, a rough estimate suggests that in 2017 the loan would have been worth 16.6 billion dollars. This is a huge sum, but still small compared to Greece’s 388 billion USD of debt.

What Prospects for Greece?

The acute phase of the crisis is over; yet, Greece will have to deal with its consequences for many years ahead. Its recovery is still shaky, unemployment is a problem and its debt/GDP ratio remains very high. In this context, the result of the 2019 elections and in general the future political orientation of the country is uncertain; as new economic turmoil may have negative effects on political stability and vice versa.

Still, there are also opportunities that Greece can exploit. Lower wages translate into a competitive advantage, and in the post-crisis scene there is plenty of opportunities for investment. More importantly, Greece’s large merchant fleet combined with its location give it the potential to become a Mediterranean trade hub. Being close to the Suez Canal, Greece can be seen as a gateway to Europe for Asian countries. China, in particular, has shown great interest in Greece as part of its “One Belt, One Road” initiative; and COSCO, its state-owned shipping company, acquired the majority of shares in the Piraeus Port Authority. Since then, both the container volume and revenues have greatly increased. Russia has also interests in Greece, because it is a pipeline crossroad: its Trans-Anatolian Pipeline (TANAP) is scheduled to connect on Greek soil with the Trans-Adriatic Pipeline (TAP) to reach Western Europe. Exploration for hydrocarbons in the Eastern Mediterranean is also opening opportunities for Greece, but is also accompanied by greater tensions with Turkey. Finally, as Washington’s relations with Ankara deteriorate, the former is building closer ties with Athens, who can take benefit from this.

Greece remain in complicated situation, but with a careful management it can fully recover. It must pay attention to its public finances, favour domestic saving, avoid contracting external debt, diversify its partners and attract foreign direct investments capable of sparking a positive economic spill-over. To what extend Greece will succeed in doing so will determine its future well-being and its role in international affairs.

Will the EU Collapse and lead to a Civil War?

The last decade has been a difficult one for the European Union. In the wake of the 2009 debt crisis, much debate has arisen around its nature, its powers, its governance and its policies.

The situation got only worse when the migrant inflow boomed in 2015, triggering a EU-level crisis.

In this strained socio-economic context, diverging views on the EU as a polity have emerged at the political level both inside the single member states and inside the organization’s institutions.

Recently, two events have revived once more the debate. The first is the re-election of Viktor Orbán, a prominent conservative and Eurosceptic politician, as Prime Minister of Hungary.

The second is the statement by France’s President Emmanuel Macron that the EU is facing a “civil war” on its fundamental values resulting from different opinions between its Western and Central-Eastern members.

This affirmation seems exaggerated, at least at a first glance. But in such a turbulent political context, it raises a legitimate question: is the EU on the edge of a civil war?

The Conditions of a Civil War

To answer this question, the first thing to do is determining in which conditions a civil war does start. Essentially, this happens when two or more socio-political groups belonging to the same political entity disagree on the existing and/or future institutional order; and, being unable or unwilling to peacefully find a compromise through the existing institutional mechanisms, opt for armed conflict to impose their view and determine who will (re)shape the existing order by the use of coercion. Usually, a civil war opposes one group fighting to preserve the standing institutional framework (along with the prerogatives it enjoys thanks to it) and another group who wants to dismantle it (and set up a new order more favourable to its interests).

That said, history is full of examples of civil wars; from those which paved the way to the end of the Roman Republic centuries ago to the ongoing conflicts in Syria and Yemen. But one is particularly significant due to its similarities with the situation the EU is facing today: the American Civil War.

The American Civil War

The US Civil War, also known as War of Secession, was an armed conflict that split the United States between 1861 and 1865.

The contenders where two: one was the Union (the North), formed by states that remained loyal to the government of the United States;

and the other was the Confederacy (the South), made up of states which seceded from the US and form a separate political entity known as the Confederate States of America (CSA).

Usually, this war is portrayed as a fight over the issue of slavery, with the Union supporting its abolishment and the Confederacy favourable to its preservation.

But even though slavery was indeed a central issue in sparking the conflict, the situation was far more complex than a clear-cut black-vs-white clash between conservative and progressist ideals. As a matter of fact, there were also major political, juridical-institutional and economic factors linked to the debate over slavery and human rights.

To understand this, it is necessary to perform a rapid historical overview on the prelude to the conflict. After being recognized as a sovereign polity by the Paris Treaty that officially ended the War of Independence in 1783, the United States began developing and expanding to the West. Rapidly, new states were founded and admitted to the Union.

But the economic outlook of the member states started diverging: those located in the North embraced industrialization, whereas the states in the South remained essentially agricultural.

There, rich landlords owned vast plantations, and exploited a large workforce of black slaves to work them. With time, this North-South gap became more and more marked, and it ultimately assumed a political dimension as well.

As a matter of fact, the Northern states needed cheap manpower to sustain their rapid industrialization. The mass of black slaves living in the South was the ideal solution, but it was impossible to hire them since they were a private property of the Southern landowners.

Consequently, the North states started calling for slavery to be abolished, provoking the firm opposition of the Southerners who needed slaves to cultivate the plantations that were the base of their local economy.

Besides, the two sides also diverged over trade policies: the North wanted protectionist measures to shelter its developing industry, while the South supported free trade as a mean to continue exporting its agricultural products abroad.

This led to an intense constitutional debate over slavery, and ultimately over the power of the federal government to introduce and enforce legislation on the matter all over the US territory.

Again, the opinion diverged between the North and the South: essentially, the former claimed the central government had this authority, whereas the latter considered this as a violation of the constitutional limitations on the powers of the federal institutions.

So, the debate took a dimension that went beyond the issue of slavery and focused on the nature of the US as a polity. The Union favored a strong central government having large powers,while the Confederates defended the rights and prerogatives of the single member states. The combination of all these factors finally led them to secede from the US in 1861 and form an alternative polity, the Confederate States of America (CSA).

The name itself is significant, as it reveals the different way these states interpreted the Constitution and conceived America as a political entity: they wanted a Confederation, so a polity granting more powers to the member states; in contrast to a Federation where the central authorities have larger constitutional competences.

Striking Similarities

Now, there are striking similarities between the situation of the US before the Civil War and that of the EU today.

The latter has also expanded during the previous decades by admitting new member states, with the most important “enlargement wave” taking place in 2004 with Central and Eastern European countries; and the most recent new member being Croatia, which joined the organization in 2013.

Again, similarly to America at the eve of the Civil War, the EU is also facing an intense debate over human rights that has greater economic, political and “constitutional” implications (there is not a proper EU Constitution, but the general sense of the term is still applicable to the Treaties at the base of the EU). In this context, two camps are identifiable, the complexity of reality notwithstanding.

Differences

As I argued in another article, one is formed by the original (or at least more ancient) members of the EU, concentrated in Western Europe; while the other includes the more recent ones, located in the Central-Eastern part of the continent and whose core is made of the four countries forming the Visegrád Group (Poland, Hungary, the Czech Republic and Slovakia; known also as V4).

The starting point to understand the divergence between these two “factions” is the migration crisis. As a matter of fact, the former group is demanding the Central-Eastern partners to accept a larger share of migrants. But the Visegrád states oppose these requests. As in the 1850s America, the issue is not merely humanitarian, since there are economic and political reasons behind the respective positions.

Countries like Italy, Greece and others (including France and Germany to some degree) worry that the migrant flow will put their socio-economic order under stress and that it may hamper the sluggish recovery from the recent debt crisis.

In contrast, the V4 and other states oppose such policies of migrant redistribution because they may slow down their ongoing economic development. But the divergence is also a matter of past experiences. Western countries have a long tradition of immigration from abroad (often as a consequences of their colonial past) and their societies are more used to the presence of foreigners; thus explaining their softer stance on immigration. This is not the case of Central-Eastern European states, that therefore prefer stricter measures in regard to immigration.

Finally, similarly to America before the civil war, the current debate in the EU also has a prominent institutional dimension. This can be explained from a historical perspective. Countries from the Western part of the continent took their current form as a result of a centralization process, which makes them more willing to accept devolving parts of their sovereignty to a supranational entity like the EU. That is why (in spite of mounting Eurosceptic forces) they remain favorable to further European integration; especially in the case of France, that appears willing to become the driver of deeper integration through devolving more powers to supranational institutions and by crating a true fiscal union (even though this met resistance from Germany).

On the contrary, the Visegrád states and those aligned with them oppose strengthening the powers of the EU institutions and want to preserve their fundamental sovereign rights. The reason lies in their past: these countries arose after the collapse of larger multinational polities affected by severe institutional deficiencies, and also had a long history of foreign domination and meddling which ended only in 1991 with the fall of the Soviet Union. As a result, they see the EU as another cumbersome supranational entity that will put them in a subordinate position and are therefore unwilling to devolve more powers to it.

Can they Compromise?

This underlying contrast over the powers of European institutions is the most important aspect in the current debate, because it will have direct repercussion over the future of the EU. Now, the problem is that, while opinions are discordant among the member states; the complex institutional mechanisms of the EU do not facilitate the search for a compromise

Introducing deep changes (both in the sense of increased integration and of more protection of the states’ sovereignty) requires a revision of the Treaties that form the bloc’s “constitution”; but this demands in turn a long and multi-stage procedure where reaching a consensus is hard and where a single “wrong” step can block the entire process (think of the French and Dutch referenda that sunk the proposed Constitutional Treaty in 2005).

Considering that the divergences are growing, finding a common agreement over the EU, its powers and its values may be impossible; and this could lead to an institutional stalemate.

Is a Civil War Inevitable?

And what then? Will the EU plunge into civil war as the US did in the past? Not necessarily. Modern-day European states and their societies are strongly averse to war, which is already a huge safeguard against extreme solutions.

And if it is true that European powers have been fighting themselves for centuries, it is also true that the EU was established after the trauma of WWII also as a mean to put a definitive end to that continuous bloodshed.

Moreover, in spite of its slowness and difficulties, the EU proved capable to adapt and preserve itself during the past. In more cynic terms, since the EU is not a state, even if one or more of its members decided to unilaterally “secede”, it would not have its own military means to enforce its rule and re-bring them in as the Union eventually did with the Confederates in 1865. Finally, this scenario is unlikely for the simple fact that the Treaty on the European Union (Art. 50) contains provisions allowing a member state to withdraw; as the United Kingdom decided to do after the 2016 vote on Brexit

But it is exactly a mass Brexit-like scenario what can raise concerns over the long-term tenure of the EU.

A full-scale civil war seems unlikely (unless the international situation becomes so severely deteriorated in economic and political terms to bring states to the point of using war to secure their interests); but if the existing divergences continue to mount and no solution is reached, then it is still possible that some member states (most likely the V4 ones) will decide to leave the EU.

The consequences are difficult to predict, ranging from an easier path to greater integration between the remaining like-minded members to a dissolution of the organization. In any case, the EU would be weakened at the international level, possibly leaving room for alternative blocs. All this would bring uncertainty in political and economic terms, and (especially if the EU were dismantled), it would certainly be a turning point in European History, as the Civil War was in America’s.

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