Sunday, November 23, 2014

Who is Responsible for the Greek Tragedy?

SEATTLE – Greece is following the road taken by several other crisis-ridden emerging economies over the past 30 years. Indeed, as I argued earlier this year, there are stunning similarities between this once-proud eurozone member and Argentina prior to its default in 2001. With an equally traumatic implosion – economic, financial, political, and social – now taking place, we should expect heated debate about who is to blame for the deepening misery that millions of Greeks now face.

There are four suspects – all of them involved in the spectacular boom that preceded what will unfortunately prove to be an even more remarkable bust.

Many will be quick to blame successive Greek governments led by what used to be the two dominant political parties, New Democracy on the right and PASOK on the left. Eager to borrow their country to prosperity, they racked up enormous debts while presiding over a dramatic loss of competitiveness and, thus, growth potential. Some even sought to be highly economical with the truth, failing to disclose the true extent of their budgetary slippages and indebtedness.

Having borrowed far too much after joining the eurozone in 2001, New Democracy and PASOK let their citizens down when adjustments and reforms were needed after the 2008 global financial crisis. An initial phase of denial was followed by commitments that could not be met (indeed, that some argued should not be met, owing to faulty program design). The resulting erosion in Greece’s international standing amplified the hardship that citizens were starting to feel.

Hold on, I hear you say. For every debt incurred there is a credit extended. You are right.

Greece’s private creditors were more than happy to pour money into the country, only to shirk their burden-sharing responsibilities when the artificial boom could no longer be sustained. The over-lending was so widespread that at one point it drove down the yield differential between Greek and German bonds to just six basis points – a ridiculously low level for two countries that differ so fundamentally in terms of economic management and financial conditions.

Overeager creditors willingly underwrote this absurd risk premium. Yet, when it became abundantly clear that Greece’s debt burden had been taken to insolvency levels, creditors delayed the moment of truth. They dragged their feet when it came to the critical agreement on orderly burden-sharing (that is, acceptance of a “haircut” on private-sector claims on Greece). And the longer they did that, the more money left Greece without any intention of returning.

But neither the Greek government nor its private creditors acted in a vacuum. Both took comfort from the political cover provided by the European unification effort – an historic initiative aimed at securing the continent’s well-being through closer economic and political integration on the basis of credible rules and effective institutions.

On both counts – rules and institutions – the eurozone fell short of what was required. Remember, the large core economies (France and Germany) were among the first members to breach the budgetary rules that were established when the euro was launched. And European institutions proved toothless when it came to enforcing compliance. All of this served to sustain the fantasy world that both Greece and its creditors happily inhabited for far too long.

Europe also failed to react properly when it became obvious that Greece was starting to teeter. European government counterparts failed to converge on a common assessment of the country’s problems, let alone cooperate on a proper response. While they grudgingly loosened their purse strings to support Greece, the underlying motives were too shortsighted, and the resulting approach was strategically flawed and abysmally coordinated.

Finally, there was the International Monetary Fund, the institution charged with safeguarding global financial stability and being a trusted adviser to individual countries. It appears that the IMF succumbed too easily to political pressures during both the boom and the bust. Political expediency seems to have trumped analytical robustness, undermining both the Fund’s direct beneficial role and its function as a policy and financial catalyst.

On the surface, each of the four suspects has an individual case for arguing that the finger of blame should be pointed elsewhere. They could even argue that, at worst, they were uninformed accomplices. But that is not really right.

None of the four can avoid the reality that Greece’s collapse would not have occurred had they not been complacent during the boom and, subsequently, fulfilled their responsibilities during the bust so poorly. They sucked each other into a sense of false prosperity, only to trip each other up during the inevitable downturn. Now, one hopes, all four will be held properly accountable by their stakeholders and undertake serious self-evaluation.

Most likely, they will end up getting off too easy, especially compared to the real victims of this historic tragedy – the most vulnerable segments of the Greek population, who will become much worse off, today and for many years to come, as jobs disappear, savings evaporate, and livelihoods are destroyed. And they may not be alone. Millions of others may experience collateral damage, as financial contagion risks spreading to other European countries and to the global economy as a whole.

In a fairer world, these vulnerable citizens would be entitled to claw back the salaries, official privileges, and bonuses that the four parties to blame enjoyed for too long. In the world as it is, they are a compelling lesson for the future.

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    1. CommentedPaulo Sérgio

      Why is the US sitting on the fence if the risk to its economy are so great both in Europe's protracted resolution for peripheral debt (uncertainty delays investment and hiring), and in the increasingly likely event of eurozone blow-out?

    2. Commentedjracforr jracforr

      Excess capital seeking investment opportunities made possible the global financial crisis . Greece ,Spain ,USA it makes no difference what the particular circumstances were, it all happened because of EXCESS CAPITAL. The irony of it all is the pursuit of even greater profit by excess speculation was the proverbial straw that broke the camel's back. And yet the solution being put forward, is for more tax break and lower wages, which will only expand the pool of investment capital.

    3. CommentedFlip Bibi

      In summary, who is to blame? The Government, the EU, the creditors, IMF. Ok, but I think that the "list" is incomplete. I agree with Matthew Cowan, the Greek citizen played an enormous part in this melt down. But there is one group that has not been mentioned: the Greek Unions. The Unions were able to play the Greek government as Paganini played the violin. The Unions were able to get much more out of the government than it needed. Unregulated Unions, to me, are worse than the Mafia.
      What really made, and still makes, me angry is how the Greek citizens reacted to their situation. Fine, it's nice that they voiced their complaints, but after a while, they should of realized that they were just as guilty as their governmet. Instead of buttoning down and working together to help their country to survive, they decided to take to the streets to riot and blame others; and this caused the Greek image to become even more tarnished, causing even more global uncertainty towards Greece.
      I just hope that one of these days, Greece opens it's eyes and starts to think about the greater good towards it's citizens.

        CommentedFlip Bibi

        Oh yes I can blame the US citizen for embracing an idiotic idea that s/he can own a $400,000USD house when s/he earns $70,000USD a year. Common sense is the most uncommon thing these days. Morgage math is not that difficult to calculate when you know $ of house, $ yearly earned, %interest. The lack of economic education/sense, especially in the US, is vast. Nothing in this world is free, there is always a catch somewhere, and when industry tells me that I can buy a mansion when in reality I can only afford a hut, I blame the person for not being realistic, uneducated, and easily fooled. If a deal sounds too good to be true, then it is not true. Personally I can afford a bigger house than what I have, but I decided to play it safe and went smaller and I will be paying off the morgage very, very soon.
        The buyer and the seller are guilty. Government is guilty as well, because they could see what was going on but never did a thing to stop it. I'm sure that policy makers have a TV in their house and that they saw those predatory commercials, and yet they did not act to prevent a whole industry to make fools out of the whole population. And as far as voting goes, bah, either way you vote in this country, or any country, you will still get taken advantage of.

        Commenteddimitris emmanouil

        you can hardly blame the Us citizens that were given the abundant mortgages. the banks should have done a better job. Equally you cannot blame the greek citizens for receiving cheap capital. And ok lets assume that greek citizens are squanderers and thieves. Are irish and spaniards also? The big four, as very eloquently El-Erian is putting it, should take the blame and loose their money. Not the poor and the vulnerable. And they can vote also. Last night's elections in Greece was a near miss of bringing back WWII chaos and should be a warning that capital should't be too greedy!!

    4. CommentedMatthew Cowan

      Although I agree that many forces outside of Greece contributed to the current situation, I think Mr. El-Erian underplays the contribution that individual Greek citizens played in the current economic outcome.

      From what I understand, tax evasion is rampant in the country. Productivity growth and international competitiveness have also lagged, which is squarely on the heads of individuals and private companies to improve.

      Not only that, when creditors agreed to reduce required principal payments in exchange for austerity measures, the people went to the streets instead of thanking their creditors for their kindness and promising to work hard to repay the debts.

      Just like the housing crisis in the US, there are a lot of institutions and macro factors to blame, but ultimately the lions share of the responsibility and accountability belong to the individuals, not the other entities that contributed.

      As long as there is a lack of accountability by Greece and its citizens, no amount of external blaming and punishment will fix the problem.

    5. CommentedGordon Tolleson

      Mr. El-Erian,

      Thank you for posting your article. I am new to this site. As I look at the Euro situation with Greece, I too see the Northern European countries must carry as much fault as Greece. It is indeed sad to see the Greek politicians leading their populice down this road.

      One poster sums it up well this was and is all about greed and voting yourself some of the government pie providing you vote for a certain party of candidate. This is all about the Northern block countries making easy loans to the PIIGS for the benefit of their own economies. Now that these countries are basically insolvent, the same countries that benefitted from these transactions and easy credit do not want to assist said countries nor take a haircut for making loans that cannot be paid back.

      If the EU is to continue they need to have a single unified government setting the same standards across all borders and a way to balance out the contries that need support. I do not think this will happen as there are too many governments involved that will not give up soverignty to accomplish this.

      The USA is worse shape then alot of these countries the only difference is they cannot print or deflate their currency to overcome their problems. Of course that is a different discussion.

      Where are my manners! Hello to all of you and I look forward to some discussions. I am here to learn and discuss. I will do my best to remain neutral but there are times when we will disagreee and that is ok.

    6. CommentedKaren FOGG

      Decent balanced article, but there are surely more specifics to the Greek situation - its still underdeveloped economy (probably unable to draw much advantage from a possible eurozone exit and devaluation), its feudal political system (with public monopolies and bureaucracies providing the bed rock of political support for the main political parties), its traditional sensitivities over Turkey and defence (exploited to the full by arms traders, with Germany and France in the lead, apparently refusing defence cuts as part of the bail-out package) etc.

    7. CommentedShiang Peow Foo

      Will this Greek tragedy be a compelling reasons for future lession? I think not. What have we learned from Asian Crisis? Tequila Crisis?

    8. Commentedgill agee

      I am always surprised that no one observes that the Euro is a conspiracy of the rich against the poor.

      After all, cui bono. Using Greece as the example, the beneficiaries of the Euro are the wealthy--government bureaucrats, professionals, business owners and those with high salaries and inherited wealth. How? The Euro makes luxury goods from wealthy Europe easily available to the poorer periphery.

      In the normal course of events, the build up in debt would have caused steady devaluation. The devaluation would have made the continued increase in debt extremely expensive. More importantly, the decreasing value of the "drachma" would make Bordeaux wines and BMW's more expensive. As a result, the wealthy would have a strong motivation to "fix" the economic morass.

      Instead, the Euro allowed the rich to fiddle while Athens burned. And austerity imposes the pain on the middle and lower classes while allowing those whose wealth is preserved to continue purchasing luxury goods at subsidized rates.

      Rich Greeks win, poor Greeks lose.

    9. Commentedsteve mackay

      I don't buy the "creditors are partially to blame" argument. If a bank offers me a credit card, I am not obliged to accept, or to max it out on excessive consumption if I do accept it.

      Greek politicians (and the electorate that put them there) were reckless, and now the bill has come due. Deficits matter, it turns out

        CommentedAntoni Jaume

        «I don't buy the "creditors are partially to blame" argument. If a bank offers me a credit card, I am not obliged to accept, or to max it out on excessive consumption if I do accept it. »

        Credit card have a limit. If you exceed it they stop working. The problem here is rather like the concession of a mortgage, you may not be aware of a lot of questions that banks use to decide when to concede a credit, when the bank concedes one, it is implicit that sometime it will not be repaid. Supposedly that's why bankers are paid, because they 'know' who is able to repay.

        CommentedAldo Dias

        Steve Mackay, that is because the information system involved in your decision to purchase or not that credit card, while still often flawed, does not compare to the complexities of the various information systems and institutional checks and balances that must operate in a society if democracy is to be healthy and effecient. Special interest groups, both political and financial, internal and external, distort perceptions, limit politicians' capacity for open discussion and people's ability to choose wisely. In this sense, yes, creditors are very much (also) responsible.

    10. CommentedZsolt Hermann

      I am sorry but we are still only scratching the surface.
      We are all responsible for the Greek tragedy, which most probably is just the prelude to what comes after, the unraveling of the global, developed world as we know it.
      It is our lifestyle, our whole attitude towards each other and reality in general that is the root cause, whatever the article talks about, and every solution our leaders are trying right now are only about the superficial symptoms.
      Our inherent selfish, greedy nature drove us into this illusion, that a constant quantitative growth, expansive, exploitative economic system, and a governing system purely serving this economic structure is forever sustainable.
      We have been behaving like children in a toy shop seemingly without any supervision, or responsibilities, grabbing, exploiting more and more without any control.
      But we forgot that we exist in a closed, and finite natural system around us with very specific laws, always thriving towards balance, and overall harmony, and we forgot that we are not above this system but we are part of it.
      Why do we think that there are natural laws like gravity, or other well know physical laws that we have to keep, but others, like thriving for homeostasis, integral interconnections, that even our biological life depends on, do not concern us when we extrapolate it to human society or our relationship to our environment?
      And now we have run into a wall, our present system is not only exhausted but has become self destructive, totally turning against us.
      The global crisis is just a start, we are in a system failure and it is 100% impossible to continue life as we live it today.
      This is proven through multiple scientific, economical or political studies, the information is all around us, but we do not want to look, because if we looked we understood we have to change.
      And so far humans only changed when the state we were in became intolerable, thus the suffering pushed us forward.
      Today we have a chance to change consciously since, we have the information to tell people about our new global, integral, and totally interdependent system, and with our experience and ingenuity we could easily build a new, mutually responsible and sustainable system.
      But first finally we need to acknowledge that we drive into a dead end street and we have to find a new direction instead of playing games with cosmetic adjustments.

    11. Commenteddonna jorgo

      i have to say your article is intristing but to much tragic..responsibility for Greek tragedy is bad politice EUROPE UNION follow from the begining ..and too responsibility is elit greek politice for generation GV.from 3 family (dinasty) ..corruption non disipline CAPITALISME thank you..god bless poor people.