Saturday, July 18, 2015

The Tortured Relationship Between Greece and Europe

The past few weeks have been a veritable roller-coaster ride in Greece, and more turbulence lies ahead. Pundits can disagree about the reasons for Greece’s mess—the rough outlines of the debate are that it is a victim of heartless German austerity or that its corrupt governance and sclerotic economy are to blame. Whatever the main cause, there can be little doubt that the election of Syriza was a game changer in the debt crisis afflicting the country, because it was the first time that a populist anti-austerity party took power in the euro zone. It almost took power in 2012; pre-election polls suggested it could win, but its message of rejecting austerity was interpreted by many Greeks as a recipe that would have led to the ejection from the euro, and at the last minute many voters changed their minds and selected mainstream parties that continued the same policies of the previous years. The subsequent two years saw a worsening of Greece’s condition and hence during the election campaign late last year many were willing to gamble Greece’s euro membership by voting for Syriza, which won a resounding victory in January 20015. Since then, the fears of many Greeks in 2012 have been shown to be true: creditor countries will not compromise and the cost of rejecting their demands of austerity is a return to the drachma.

No More Austerity Please


And so we now have the sad spectacle of a radical left wing government that, on July 15th, voted for policies, such as lower social spending, higher taxes on the poor, and privatizations, that go against it raison d’etre. Even worse than this ideological volte-face is that it is continuing the policies of its predecessors which have been catastrophic for the country: under five years of austerity Greece's debt has ballooned, its unemployment has skyrocketed, and its economic output has plummeted. These confused policies are taking place because Greeks themselves are confused about the euro, displaying contradictory and fantastical preferences that are transmitted to the country’s leaders via the democratic process.

This was made clear by my recent stay in Greece. I arrived in the country on July 5th, the day of the referendum, which was perceived to be historic because the stakes seemed to be so high: both Angela Merkel and Francois Holland declared that a “No” would mean an exit from the euro, and this threat was taken seriously because, as the leaders of Europe, the preferences of Germany and France matter most for the politics of the EU. Polls before the vote showed that the No side was slightly ahead, and that the Yes side was catching up. But the No side won with a resounding majority. This happened largely because many Greeks ignored, or wanted to challenge, the threats emanating from France and Germany. Also important was the fact that Prime Minister Tsipras told his electorate that voting No would only strengthen his hand in negotiations, not lead to Grexit. He said this because he knew that the majority of Greeks fear being ejected from the currency. And herein lies the source of much of the country’s confusion: they want to remain in the currency union even while they recognize that it has been harmful and humiliating for their country.

This mix of sentiments was clearly expressed to me by a prominent professor of political economy at the University of Athens. Like most other elites in the country, he voted Yes in the referendum and is in favour of the euro, and he told me with a tone of conviction that the currency is in the best interests of Greece. But a little probing reveals a more complicated picture. He concedes that the austerity policies of the past five years have been a disaster and created a lot of social pain, and knows that the third bailout being negotiated will likely cause more of the same. He also recognizes that the euro is a deeply flawed system: a currency union without the requisite political union that is a sine qua non for its proper functioning. I asked him how he reconciles these flaws with his pro-euro attitudes. He first told me that geographically Greece lives in an unstable neighborhood, and without the euro “it would be left alone”. He also said that initially the euro coincided with a mini golden age in which standards of living rose for most. On the question of the lack of political union, he said that it might take 100 years, but it will happen.

Thus the euro for him has meanings that are not monetary, or not rooted in the concrete features of the currency. Rather, they are based on geopolitical fears, on memories of years of economic growth which coincided with the adoption of the currency, and on a faith—faith—that a political union will happen in the next 100 years.

His views are by no means unique to him; they are common among the country’s elite. The masses views on the euro are not dissimilar. Polls say that the majority want to remain in the euro, and talking to many locals during my stay in Greece gave me the impression that those numbers are accurate. But the numbers obscure as much as they reveal. Many support the euro because of an idealistic attachment to the EU, while others prefer keeping the currency for similar reasons held by the professor mentioned above, namely, that without the euro, Greece will be “alone” in an unstable geopolitical neighbourhood. This belief is held even though it is basically untrue: Greece’s membership in NATO, as well as its strategically important location as a geographical bridge between the East and West would make any conflict with Turkey or in the Balkans a matter of crucial importance for European countries regardless of whether Greece is in the euro. For others, the euro is a symbol of their European identity in the sense of being “Western” and “modern”, and exclusion from the currency union would, in their minds, undermine their sense of being “European.” But this raises the question: is this identity really worth the years of humiliation and economic depression that the country has experienced? Or more pointedly, who has decreed that the euro is essential for the possession of a European identity? The UK, Sweden, and Denmark are European despite not having the euro. The Swiss and Norway are not even in the EU, and yet both, by any reasonable standard, are “European”.

This bizarre mix of sentiments reflects a trait that is common in Southern Europe that fundamentally reflects a sense—sometimes unspoken, but nonetheless present—of inferiority vis-à-vis Europe’s “virtuous” countries; for others, it is indicative of the belief that Greece cannot become successful without being part of an ostensibly more advanced social aggregation like the EU. In this scheme, belonging to Europe is essential for the country’s relative status and prestige, two elements that are highly valued for individuals as well as for nations. But this belief runs against a basic fact: euro membership has coincided with their country’s relative decline even as it has strengthened Germany, with the consequences before our eyes: the bailouts, and the austerity conditions attached to them, all have the stamp of German preferences. Meanwhile, as was seen in the sorry spectacle of the parliamentary vote on July 15, legislators accept these Teutonic preferences even while they themselves claim to oppose them. Why? Because the alternative, they say, is ejection from the euro, with all the psychological consequences that are implied above.

 I had the privilege of speaking with someone who goes against the grain of Greece’s establishment, even though he himself is part of their socioeconomic class. Like many other Greek elites, he was educated at universities in the English speaking world (McGill and the University of Chicago), and is a professor of finance and banking. Unlike most elites, he voted No in the referendum on July 5th. Importantly, he unambiguously favours Grexit, and this makes him an iconoclast, since favouring a return to the drachma is—unfortunately—associated with the extremist parties like the Golden Dawn. His views are coherent because they are devoid of the idealistic attachments, or the unrealistic geopolitical fears, that most others in the country express. For him, the euro is a matter of costs and benefits, and on this score, few would seriously challenge the assertion that it has been an unmitigated disaster for Greece. What made my interlocutor a breath of fresh air in Greece’s confused political climate is his belief that the transition from the euro to the drachma would not be the Armageddon that many predict would happen. Rather, with a bit of planning and good leadership, the change-over could happen in a matter of weeks, and any difficulties encountered in that period would be minor compared to the alternative of being shackled to the currency union. 

This raises the question: why don’t the majority of Greeks feel like him? My interlocutor’s responses were instructive. Many Greeks, he said, suffer from a minor form of Stockholm Syndrome, or Battered Wife Syndrome, both of which entail a pathological attachment to an entity that has harmed them. This is reinforced by the propaganda that they are exposed to on a daily basis. Most of the establishment is in favour of the euro, and their views dominate most of the major media outlets, on air and in print. Before the referendum, the media—which generally reflects the views of the country’s socioeconomic and cultural elites—was unanimous in their support of Yes and said that voting No would mean leaving the euro. It is remarkable that 60% of Greeks voted No despite this deluge of misinformation, but most made this choice because they believed that they were voting against austerity, not the euro. Had Greeks been presented with a different question, such as “Do you support Greece’s membership in the euro?” most would have likely voted yes for the reasons outlined above.

Thus for now, Greece will precariously remain a member of the euro if only because most Greeks want it. But this state of affairs cannot last. Other events—such as a new financial crisis, or a new government, or another referendum—will eventually transpire that make Greece’s euro membership hang in the balance. When one or several of these events occur, at a minimum the Greek government should have a “plan B” ready that would ease the transition to the drachma if the need arises. This would strengthen Greece’s hand considerably, because it would signal to its creditors that it will not stay in the euro at any cost, and it would send a message to Greeks that the government was prepared for any eventuality (both were lacking in the most recent tortured negotiations, where it was the Germans, and not Greeks, who had a plan for Grexit). It would also send a message to the Greek people that the government would do its outmost to protect whatever savings Greeks had in the banks, and would ensure that the country had a sufficient stock of goods, like fuel and medicines, during the transition.

But more important than government plans is the need for a shift in the mentality that allows Greeks to see the euro for what it is: a mechanism for fixed exchange rates that, like the gold standard, constrains monetary policy and ensures that units of value are the same for those countries that are part of the system. A corollary of this is the fact that the euro, as a mechanism of ensuring exchange-rate values, is not a necessary feature of European identity, which at any rate is an amorphous and subjective idea. Some might say that being excluded from the euro would mean being outside the EU, but this is questionable. Although there is no formal legal mechanism for leaving the euro while remaining a member of the EU, policy is ultimately determined by its most powerful members (the bailouts, it is worth recalling, also had no legal basis, and yet they happened because Europe’s leaders deemed them necessary). This means that if the will is present to keep Greece in the EU even though it reverts to the drachma, it will happen. And the evidence shows that the will is indeed there, as demonstrated by Wolfgang Schauble’s policy document released on July 12 that said Greece could have a “time out” from the euro while remaining a member of the EU.

To prepare themselves psychologically for Grexit, Greeks must also begin to have faith in themselves as a people with the talents to solve their problems. This means getting rid of the belief they are not capable without the help of outsiders and discarding the widely held notion that it will become a third-world country outside the euro. Yes, many members of Greece’s political class are corrupt, and yes, they will probably mismanage the transition back to the drachma. But is that much worse than the alternative of an interminable toxic cycle of crises, bailouts, austerity, and economic decline?

Saturday, July 11, 2015

Post-Referendum Diary of Athens

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When Greek Prime Minister Alexis Tsipras called a referendum on whether to accept austerity conditions being offered by the country’s creditors, both Francois Holland and Angela Merkel said that a victory of the No side would mean exclusion from the euro. Most pundits interpreted those words as a meaningful threat because France and Germany are Europe’s leaders, and their preferences usually determine the major policies of the EU. After the resounding victory of the No side on Sunday July 5th, Greece is still in the euro, although barely. Its banks are closed, its citizens can only withdrawal 60 euros a day from ATM's, and economic activity has taken a nose dive, with consumer spending down 70% and tourist bookings down 40% during the high season, when the industry is usually at its peak.

Running out of cash in Athens

 The hardship that the country has experienced, not only recently but in the last six years, is visible in many neighborhoods—shuttered windows, abandoned or crumbling buildings, graffiti-strewn walls, closed shops, and homeless people seem to be ubiquitous. But even people who on first appearance seem to be doing well, after a bit of probing, reveal themselves to be struggling. Typical is a man I befriended at the University of Athens, where he works precariously as an administrator. In the past two years, his pay has been cut 25%, and for five months he was placed on “availability”, which means being laid off while continuing to receive 25% of his paycheck. He is now expecting another 25% pay cut, on what has become a 900 euro a month salary, and he will have to live on that while sustaining an unemployed wife and nine year old child. Despite this hardship, he wants to Greece to stay in the euro.

Even though many credible sources said that a victory of the No side would mean being ejected from the currency, my friend voted No in the referendum. This reflects a strange and contradictory mix of sentiment that is widespread here: people recognize that the euro has brought hardship, but they are unwilling to give it up. The reason is the currency has extra-monetary meanings: exclusion from the euro would be perceived as being kicked out of Europe. This belief is often accepted uncritically; people are seemingly unable to imagine plausible alternatives, such as leaving the euro while staying in the EU, or even the possibility of prospering outside the euro.

Speaking to many locals one also gets the sense that Greeks are divided across many lines. One major division is between those who voted No and those who voted Yes on Sunday’s referendum. At the celebrations on Sunday July 5th, when thousands of people who voted No gathered at Syntagma square, I noticed that the crowd was composed mainly of youth, and the older folks present seemed to be mostly from the working class. Not coincidentally, these are the groups that have borne the brunt of the crisis. There were some radicals with Che Guevara T-Shirts, but they were a tiny minority. On Thursday July 9th, I attended a pro-euro rally composed mainly of those who voted Yes in the referendum. Walking around, observing, and talking to participants one could not help but notice the significant differences between them and the crowd that voted No. The Yes crowd was mainly older. They also showed signs of being socioeconomic and cultural elites. There were many botoxed women with designer outfits, and many clean-shaven men wearing dapper suits and shiny shoes. These are the classes—not coincidentally—that still have a lot to lose if Greece leaves the euro.

But their attitudes cannot be reduced to concerns about economic losses; for them, the symbolic value of the euro is equally, or even more, important. One well-to-do woman I spoke to said that outside the euro, “Greece would become Pakistan”. For her, the euro is a symbol of European and Western identity, and the incarnation of "modernity", while exclusion would mean being part of the third world. I asked her why she felt that way even though in the past six years Greece’s euro membership has coincided with a high degree of economic decline. She replied that had the country been outside the euro, it would have been even worse. She also told me that Europe itself would not survive Grexit because "Greece is the origin of European civilization" (many others voiced this to me, highlighting that the belief is widely held). As the demonstration gathered momentum, the crowd chanted  “Greece, Europe, Democracy”. The association between those three elements is not surprising, since many here feel that Europe is the guarantor of Greece's fragile democracy.

Here in Athens I also sense that there is a strange mix of anxiety and resignation. People fear what will happen if the country leaves the currency union and hope that it does not even while there is a belief that sooner or later, it could transpire. These tensions and anxieties are being expressed everywhere. The euro, and Greece’s place in Europe, dominate conversation on TV, on the street, in bars and cafes, and many people have strong feelings about the subject. The debate is largely divided on the basis of class lines: those with something to lose are arguing vociferously that Greece must remain in the euro, while those who have borne the brunt of the crisis are upset at the austerity measures that have caused them so much grief. This latter group is willing to gamble Greece’s euro membership by demanding an end to austerity and a reduction of Greece’s mountainous debt even if the price of such inflexible demands is Grexit.

It looks like this latter group will be very disappointed in the coming days, because Tsipras has presented a proposal to creditors that would include 12 billion euros worth of austerity over the next few years in exchange for a third bailout, and evidently this is much more than the 8 billion euros in tax rises and spending cuts that the creditors were offering before the referendum was called. If a deal is made on the basis of this proposal, it will make a mockery of Sunday’s referendum, which supposedly was a signal that the majority of Greeks were no longer willing to accept more austerity. It would also mean much more of the same policy of the last 6 years that has brought the country to its knees: bailing out a bankrupt state with austerity conditions that worsen the economy and that only makes the state even more bankrupt which then creates the need for another bailout, all while Greece's economic decline continues. Even worse is the humiliation and loss of dignity that comes from the basic fact that elections don’t really matter, since whoever is elected will ultimately cave in to the demands of creditors in exchange for more bailout money. This is something that seems to have escaped the crowd that was chanting “Greece, Europe, Democracy” at the pro-euro demonstration on Thursday.

Monday, July 6, 2015

Greece's Triumph--Well, sort of

I am writing this from my hotel room in Athens. I just returned from Syntagma Square, where there is a party taking place as thousands of people celebrate the victory of the OXI (or "No", pronounced "oi-hee") side of the referendum. It was a resounding, thunderous rebuke to the policies of the last 6 years that have created or worsened Greece's economic despair. But more on that theme later. Now, I will recount my experiences of the last few days.

I was originally booked to arrive in Rome on July 19th, and I had planned on coming to Athens shortly after that date. Tsipras's announcement of a referendum on July 5th changed that itinerary. I knew it would be an event of historical importance, and that I could not miss it, not only because of my sympathy and affection for Greece, but also because I have devoted most of my professional life to studying the euro. I wrote my doctoral thesis on the interplay between national politics and the euro, and this year I signed a contract to publish a version of it with Routledge. For these and other reasons, I paid the not-so-economical fee to change the date of my flight, flew to Rome on Saturday July the 4th, and then Athens on Sunday July the 5th. To give a sense of the importance of the referendum, the pilot on my Aegean flight to Athens announced the results of the first exit polls which showed that OXI was in the lead. In all my decades of regularly flying across North America and Europe, and more recently around the Middle East, I have never heard a pilot announce, with barely disguised glee in his voice, the results of a referendum.

When I arrived in Athens, it was 8:40 pm, and although the final results were not yet in, already at that time there was a sense that there was little chance that the Yes side would win, and I knew that the party would be starting at Syntagma square. And so rather than going right to my hotel to drop of my luggage and shower after a long day of travel from Toronto to Rome, and then to Athens, and despite feeling tired, hungry, sweaty and with luggage in tow, I went to Syntagma. As the train approached the station, more and more Greeks entered the metro with Greek flags; I knew that they were going to the party too. When we reached Syntagma station, the trains emptied, and immediately one could hear the chanting and singing from the crowds outside. As the phalanx of people walked up the stairs towards the exit, there was a burst of spontaneous chanting of "OXI, OXI, OXI". It was electrifying, and when I exited the station and entered the square, I became part of a huge crowd of Greeks, many with Greek flags and huge grins on their faces, celebrating the momentous event that just transpired.

After bathing in this intoxicating atmosphere for about an hour, I decided I would go to my hotel, check in, drop off my luggage, and then return to the square. But to my surprise, I could not find a cab! I noticed that other tourists also could not find one, and that I was jostling with them to get any cab that would pass by. I found a guy, and he said to me, "no service", and I thought, "is this a sign that economic activity is collapsing?" After walking for about 30 minutes, passing by deserted and decaying streets and buses full of soldiers who were there to quash any signs of civil conflict, I found a cabbie who did not seem to speak a word of English, but luckily he spoke some Italian. When I told him that I was Italian, he immediately put his hand on his heart to signal his affection, which I found comforting and also not surprising, since I have traveled to Athens before and am well aware of the close historical, cultural, and personal ties between Greeks and Italians. He took me to my hotel, and the concierge informed me that he would like me to pay cash (I am booked at the hotel for a week). This was a visible sign of the financial crisis--with a collapsing banking system, credit cards become harder to use. I tried to negotiate--the euros in cash I had were needed to last the 10 days I would be in Greece, and using them to pay for my hotel would be problematic. We reached a compromise--I paid half in cash, and half with the credit card, and he proceeded to check me in.

After that I walked the 2 kilometer distance from my hotel to to Syntagma, and the huge crowds were still there. After eating delicious suvlaki that I purchased for only 1.50 euros, I participated in the celebrations, and the general sense of happiness and joy was contagious. I bought a flag, which I enthusiastically waved while periodically chanting OXI OXI OXI with the crowd. There were many from other European countries, especially Spain, Portugal, and Italy, and I even saw a man of Asian decent (perhaps Chinese), with a huge flag of Syriza (the current government), wearing a shirt with OXI written all over it, and enthusiastically participating. It is amazing, I thought, that even people of non-European origin are here participating in the celebration and expressing their solidarity with the Greek people. It was exciting and fun and I wanted to stay there all night, but although I am still a sprightly 37, I began to feel tired at about 1:30 AM. I subsequently went to my hotel to get some rest.

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The triumph of yesterday's referendum is already beginning to fade (I am writing this section the next day), in part because Greece's deep seated problems cannot be solved by a vote, although of course the outcome of yesterday's poll will certainly strengthen Tsipras's hand in the coming negotiations. Today I walked around Athens and spoke to many locals, and the reality here is quite depressing. The first thing one notices is the long lineups at ATM machines. Those waiting often have an expression of worry and frustration on their faces, perhaps because they know that at any moment, the ATM might run out of cash, and their waiting will have been in vain and they will have to look for another one; what a total waste of time! Another notable feature of the landscape here in Athens is that most of the shops are out of business. When I came to Athens in 2012, even then it seemed like a huge number of shops--are least a quarter--were not running. Now, that ratio seems to have been reversed: it looks like the majority are closed and only a quarter are open for business, and even these are mostly empty. This is a visible sign of an economic catastrophe that usually happens during a major conflict or war. All those closed and empty shops are the visible side of real flesh and blood people who cannot afford goods that many take for granted; they are the concrete manifestations of a generation of youth with few job prospects and who have little hope of ever having a normal life which includes a job and a family.

One therefore understands the rage that people feel, but there are no simple solutions that will magically create a level of economic activity that will be sufficient to reverse this degree of economic devastation. Even if Tsipras gets a better deal from its creditors, Greece will still have huge debts that will make it difficult to implement an expansionary fiscal policy. It will need huge investments in employment-generating productive activity, but it will be difficult to convince investors that Greece, in its current condition, represents a profitable bet. And then there is the euro, that currency that most sensible people now regret. Can Greece escape its economic predicament in a currency union where the rules are determined by the most powerful countries? This might--and I want to emphasize might--be possible if Europe had a real political and fiscal union that allowed the transfer of resources from rich to poor countries. In that scenario, Greece's recession would be offset by transfers that would preserve its standard of living, which is exactly what happens in normal currency unions like Canada and the US. But the odds of that happening in Europe are next to nill, and so what we will probably see is continuing crises punctuated by brief periods of stability.

Stay tuned for more commentary in the coming days.