The Economist as Novelist in the Greek ‘Crisis’

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The relationship between economics on the one hand and disciplines such as history, psychology, and sociology on the other is much disputed and seems to me a little like that of couples who live in a state of hostile dependence: they cannot live together but cannot live apart.

Are there rules of political economy such that if they are obeyed prosperity invariably and everywhere results? Or, of course, if disobeyed, impoverishment? Ought an economist to be more like a novelist in his understanding than a scientist?

I recently read an article by Barry Eichengreen, professor of economics and political science at Berkeley, about the Greek crisis, if a situation that has continued for years can properly be called a crisis. The article addresses the mistakes made by Greece. Amen to that: who wants to repeat mistakes?

But what exactly is or was the Greek mistake? We cannot trace it back to the Garden of Eden, though that is undoubtedly where things first began to go wrong in Greece, as everywhere else. Professor Eichengreen’s question is really this: the Greek situation having once arisen (never mind whether it ought to have arisen, it is part of the human condition always to be setting out from where we ought not to be), how should it have been dealt with?

Certainly not the way it actually was dealt with, on that many people are agreed. The IMF, one of the three institutions that recommended, dictated and oversaw the response, has issued a kind of mea culpa, acknowledging that its prescription was not right: though I doubt (and I apologize in advance if I am mistaken) that anyone will lose his or her job over the mere ruination of a country. Love is never having to say you’re sorry; being an international bureaucrat is never having to lose your job if you do say sorry.

Professor Eichengreen says that two thirds of the Greek debt, which is obviously unsustainable, should have been written off at the outset; the interest payments saved by the Greeks could have been used to recapitalize its banks and to reduce rather than increase taxes. This would have resulted in investment which would soon have got the Greek economy moving again.

The second thing that should have happened was an orderly internal devaluation (the Greeks, being members of the Eurozone, couldn’t arrange an external one) combined with structural reforms. By internal devaluation the professor means a reduction of salaries and pensions, all brought about consensually by agreement between the unions, the bosses and the politicians. The economic pain and discomfort would thus have been shared equitably, and this would have been propitious for the necessary structural reforms that Greece has so far been unable to carry out.

All this seems very sensible to me, except for two things. The first is that Greece is not an island; and the international conjuncture at the time the Greek crisis erupted is omitted from the professor’s recommendation in hindsight that two thirds of the Greek debt should at once have been restructured or in effect written off. This might have been possible if Greece had been the only country in crisis: but it wasn’t, and what was sauce for the Greek goose would, for political reasons, have had to be sauce for the Irish, Portuguese and other ganders. Writing off the Irish debt to the same extent as the Greek – a debt contracted in a very different manner from the Greek, but a debt nonetheless – would have entailed losses of more than $200,000,000,000 for the British, German and Belgian banks. The near-simultaneous default of several deeply indebted states would thus have been a nerve-wracking experiment. Politicians preferred – and who can really blame them? – to pretend for a few more years that the debts were performing and that the banks were solvent in the Micawber-like hope that something – strong growth, perhaps, or more likely inflation – would turn up in the meantime to make the debts manageable. 

As regards a socially agreed and constructive internal devaluation, allowing for the necessary structural reforms, this is where economics intersects with history, psychology and sociology. Such an internal devaluation has actually taken place in Ireland: friends of mine there, for example, have had their salaries cut by 25 per cent and, coming up to retirement, their pensions also much reduced. Reform has been so smooth that Ireland – under effective European tutelage in return for financial rescue – will soon be free of its suzerains.  Despite a tripling in the rate of unemployment, there has so far been little in the way of social conflict or even protest there.

Why could something similar not happen in Greece? Why is the never-ending crisis in Greece not merely financial, but social and political as well?

No doubt it is easier to cut the salaries and pensions of people who were among the best off in Europe, as they were in Ireland, and who to this day live better than most of their creditors. But there is more to it than that.

I hope I will offend none of my Greek friends when I say that their country is not one in which an Irish-type response to the crisis could happen. The Greeks are a talented people, but organizing a functioning modern state is not one of their talents. Mistrust between various parties is so great that none of them believes that there is such a thing as the national interest, or if there were such a thing that anyone could or would put it ahead of his own individual or sectional interests. Corruption is so general that it has destroyed faith in even the possibility of honesty. By contrast the Irish, though they hold their political class in almost as deep contempt as do the Greeks, believing them to be a pack of thieving or at least of self-interested scoundrels, retain a sense of national unity and purpose, no doubt a legacy of the long struggle for independence (and it helps that it is so small a country that no one is more than a couple of phone calls away from the highest powers in the land). An appeal to the national interest in Ireland in time of obvious crisis will not therefore be regarded cynically, as just another ruse of one tiny section of the population to deprive everyone else of what is rightfully his. A constructive attitude in one country is not automatically reproducible in another, and depends upon history and mass psychology.  

There are other differences between the two countries of course. Ireland’s economy was greatly more productive before the crisis than was Greece’s. In Greece the catastrophe was brought about almost entirely by the agency of a corrupt and despised government (albeit with the assistance of other European governments and Goldman Sachs), whereas in Ireland the happy participation of the whole population in the whole debacle – for the bubble was glorious while it lasted – could not be denied. And the Irish, being English-speaking, had a safety valve in the other English-speaking countries, which the Greeks did not have.

What it was possible to achieve in Ireland, then, may not have been possible in Greece for intangible but real reasons, and we should beware of economists bearing solutions that are not specific to a country’s situation and history. Moreover, there may be undesirable situations to which there are denouements but no solutions.