From the Top of the Acropolis: How Greece’s Economy Imploded

acropolisMy interview with Prime Minister George Papandreou was preceded by one with his Deputy Minister of Foreign Affairs, Spyros Kouvelis. I was ushered into a pleasant yet not extravagant office, decorated tastefully with various artworks of Greek culture and personal artifacts. The Deputy Minister was joined by some of his staff. After introductions, Mr. Kouvelis opened with an assessment of his country’s situation, which of course he subtly pinned on the government of the previous Prime Minister, Costas Karamanlis, which had hid the full extent of Greece’s debt.

Deputy Minister Kouvelis told about attending what has become a legendary meeting of the then-newly elected Prime Minister George Papandreou and his team, in which each department head and Minister reported to the PM about the state of affairs inherited from the previous government. As they went around the room, the deficit grew larger and larger as each department had discovered that the situation in their respective area was much worse than had been reported.

Mr. Kouvelis talked about the look on all their faces as they realized the magnitude of what they had inherited. When the true size of Greece’s deficit was revealed to the world, the bonds markets went berserk. The interest rates on Greece’s sovereign debt spiked to unheard of proportions, threatening the solvency of the government, and the rest is history.

“It was clear that the previous government had not told the truth,” said Mr. Kouvelis in a calm, even-tempered manner. He did not belabor the point to score political points, but his overall message was sobering.

Indeed, the deficits were so big, he says, that Prime Minister Papandreou was forced to go to the European Union and tell them, “It’s not just Greece that is on the line…Europe and the euro zone are on the line, too,” because it raised the unprecedented possibility of a eurozone member having to default on its debt. Moreover, much of that debt is held by banks in other European countries, so even though Greece’s economy is only two percent of the overall E.U. economy, there was the chance of other dominoes falling, or as it has been called, “contagion.”

Spyros Kouvelis

Spyros Kouvelis

And indeed, Papandreou was correct about that. The European Commission already had been providing money to Greece for development for many years, for infrastructure-building and other growth-encouraging projects, and so it was already heavily invested in Greece’s welfare. Little did anyone realize then how much Greece’s fellow eurozone members would be called upon to “invest” in their Aegean partner. Greece’s plunge into near bankruptcy shattered the bonds of trust and agreement that had prevailed in the eurozone and by extension in the European Union.

Part of the rupture resulted from the fact that Greece’s crisis was not just economic in origin. As Professor Takis Pappas from the University of Macedonia has written, “The crisis has its origins in grave pathologies of [Greece’s] political system over the last three decades, so recovery will require much more than wise economic management. It will in fact require the remaking of Greece’s whole political and institutional system.” Specifically all of Greece’s major political parties had gotten into the habit of winning elections by giving away the candy store, providing subsidies and government jobs to their constituencies.

What resulted was an uncompetitive economy with a huge percentage of government employees, a diminished private and manufacturing sector, and ballooning government deficits compounded by huge numbers of people from all income levels who didn’t pay their taxes. That had become the Greek “development model,” much like a declining manufacturing sector combined with a financial industry on steroids and a housing bubble had become the U.S. development model. Finally in both countries their unsustainable ways came crashing down. Now, with their economy in ruins, could Greece figure out how to do things differently? That’s what I was interested in assessing from those whom I was interviewing — did they have a plan to fundamentally change Greece? Or were they looking to band aid over this latest crisis, as so many previous governments had done?

I asked a question to the Deputy Minister. “Given that economic experts are saying that Greece needs to increase its exports, and make its economy more competitive, what does Greece have now or what will it have in the future, that the world wants to buy?” (a similar question could be legitimately asked to the Obama administration).

In response he said that Greece was looking to focus development in the following areas:

  • high quality tours and culture (which makes sense, Greece’s peerless historical and cultural attractions had long been a big money maker for them);
  • renewable energy and green development (taking advantage of copious amounts of sun and wind); and
  • shipping (a longtime core Greek industry).

But perhaps most interestingly Mr. Kouvelis discoursed at length about the advantages of Greece’s “geographical position.” By that he meant that Greece’s location would allow it to play a key role as a gateway between the west and the east, between Europe and the Arab world. He talked about Greece being a regional hub for the Balkan countries and Turkey’s fast growing economy, and using that position to attract foreign direct investment.

It sounded plausible, even convincing. But one of the people with me, Alec Mally, was a former long-time American employee of the U.S. embassy in Greece. He expressed skepticism. “This is not the first time that the Greek government has proposed regional projects like this, and being a regional hub,” he said. “But in the past those plans didn’t work because of so much bureaucracy and corruption. How will it be different this time?”

That’s a key question. The large-scale patronage that I referred to earlier, besides causing a large and ineffective state, also has been responsible for a paralyzed bureaucracy. And the corruption had become so widespread that a Brookings Institute study showed that patronage, bribery and other corruption costs Greece 8 percent of its GDP per annum. Another study by Transparency International showed that in 2009 the Greeks had paid an average of about $1800 in bribes for such services as speeding up the obtaining of a driver’s license or building permits, getting admitted to public hospitals, or manipulating tax returns.

What about it, Mr. Deputy Minister? Can you reverse these trends?

The Deputy Minister made the case that the linchpin for changing Greece fundamentally was “getting people off the public payroll and on the private sector payroll.” This in turn would shrink the size of government and the slice of the budget so dependent on patronage, i.e. handing out jobs to bought-off constituencies.

Coming from a high-ranking member of the PASOK government, this was a statement worthy of attention. PASOK is the socialist party of Greece begun by the current prime minister’s father who was probably more responsible than any other figure in fashioning the patronage state. This was Nixon going to China, to have PASOK tackling this issue.

“Now we have a fast-track program,” said Deputy Minister Kouvelis, trying to sound convincing. “The current crisis has given us more momentum for making the changes that need to happen.” As proof, he reported that for the first time ever this Greek government took the first survey of government employees to find out how many they had. “Previous governments did not even know how many public employees were on the payroll.” They found that there are 760,000 public employees, or 18% of the overall workforce (compared to the United States where about 9% of the workforce of 155 million workers is public employees).

Deputy Minister Kouvelis also talked about how, as a way of further reducing costs, they are consolidating government in significant ways. For example, there used to be 1050 municipalities, with a lot of overlapping jobs and positions. Now there are 335 municipalities, and a lot of the overlapping jobs have been abolished. My Greek sources who attended this interview with me were nodding their heads in approval over the depth in his responses.

I asked him a question that I think doesn’t get enough attention (and that I wrote about in a previous blog post), namely the downsides of having so much of the economy based on an informal sector of family and social networks. That also lends itself to barter and covert exchanges of money, which easily heads in the direction of graft and corruption; that in turn makes it difficult for the government to count things, to know how much its revenues and expense are. “Do you have a plan for bringing that under control?”

He reframed this into a discourse about the “family welfare system,” which sounds warm and fuzzy and was starting to look like an evasion. But he recovered nicely, saying “The ‘gray economy’ is a problem, but grandmothers taking care of their grandchildren is good. How do we get rid of the downsides of the gray economy without getting rid of the social aspects that we believe are good? That’s what we are grappling with.”

In sum, he said that the E.U. partnership is getting better, as everyone has been making compromises to find solutions. At the moment, he is feeling hopeful about the current situation. “We are safe from a crash of the global economy. And we are ready to build a new future for Greece as part of a strong Europe.”

My Interview with Prime Minister Papandreou
The next day I interviewed Prime Minister Papandreou. Prime ministers are generally pretty busy people, especially when you are the prime minister of a country in the middle of a historic crisis in which much of the capitalist world seems to believe that your tiny nation could be a domino that brings down the rest of them.

So I was not surprised when the PM’s press office told me in response to my initial request, “We will have to wait until just a day or so beforehand to decide, depending on his schedule and any late-breaking situations.” The day before I was informed that “unfortunately his day is turning out to be quite busy, back-to-back meetings. The best we can offer you is a telephone interview, at approximately 15:00 (3 pm).”

I immediately accepted, but it put me in a bit of a quandary: that afternoon was the only time I had left to climb to the top of the Acropolis, one of the most revered classical sites in all of Greece, and explore it before leaving Athens the following day. What a choice, the prime minister or the Acropolis? Then I thought, What the heck, I can take the PM’s call from the top of the Acropolis…assuming there is cell phone reception up there, since it’s located on a 500 foot tall mount in the center of Athens!

The Acropolis of Athens is the best known of its kind in the world. Although there are many other acropolises in Greece, this is the only one know as THE Acropolis. The Acropolis in its current form was constructed under the leadership of Pericles during the Golden Age of Athens.

It sits on a flat-topped bluff jutting above the city, with a surface area of about 3 hectares. Its archaeological remains are vast and iconic, and one of Greece and the world’s most famous tourist attractions. Indeed, the Acropolis was formally proclaimed as the pre-eminent monument on the European Cultural Heritage list of monuments in March 2007.

The climb to the top of the Acropolis proceeds along a winding, gently sloping trail. Along the slope are the remains of two different ancient theaters built into the sides of the hill. Here, some of Athens’ leading dramatists like Sophocles, Aeschylus and Aristophanes premiered their most recent plays. Climbing through the skeletal remains of ancient Greek architecture is sobering…a chance to reflect on the rise and fall of civilizations, on the plate tectonics of human affairs that grinds up the past and deposits it in the future, transformed into little more than dust and a few artifacts of a time long gone.

Propylaea

Propylaea

The entrance to the Acropolis is a monumental gateway called the Propylaea. It’s imposing and impressive, or rather the Greek government has done an impressive job of rebuilding it. Using one’s imagination, one can see how these structures were meant to convey grandeur and power, a la 500 B.C.

The highlight of the Acropolis is the most famous, most photographed, most recognized and most admired ruin in the world — the Parthenon, or Temple of Athena Parthenos (Athena the Virgin).

The Parthenon dominates the Athens skyline, and can be seen from practically every point in the city; I could see it from my hotel balcony in the Plaka district, day or night, since the Parthenon is brightly lit at night and radiates over the city like a second full moon. Myth, religion and war are all embodied at this site, and in its heyday it housed the city’s treasures and showcased a gold and ivory statue of Athena Parthenos. It is reknowned as an example of Classical Greek architecture, with its famous distinctive columns, eight on each of its shorter sides, and 17 columns on two longer sides.

The history of the Parthenon is the history of Greece itself: built between 447 and 438 BC, in the 5th century AD transformed into a Christian church, before becoming a mosque under Turkish rule in the 1460s. The building was attacked and almost destroyed in 1687 during a siege of the Acropolis by the Venetians to remove the Turks. A British nobleman named Thomas Bruce (otherwise known as Lord Elgin) caused more damage when he looted it in the 19th century, selling much of its contents to the British Museum. The Parthenon underwent restoration in the late 19th and 20th centuries and today is considered one of the most important symbols of ancient Greece, having been named a UNESCO World Heritage Site in 1987.

I was standing right in front of this magnificent building, admiring its history and architecture when, at 15:20 (3:20 pm), 20 minutes later than scheduled, I received a call and a distant voice said: “Please hold for the Prime Minister.”

This Is George Papandreou
A few moments later a second, softer voice was on the phone, saying “This is George Papandreou.” His understated voice didn’t have to say it, but it was immediately and implicitly clear to me, that this was the latest scion of one of the two families that had dominated Greek politics for decades. He had been educated – ‘groomed’ is the more accurate word – for this slot as a leader, attending the world’s best schools and living much of his life abroad, including in the United States, rubbing elbows with the young elites of the world. He had grown up in a rarefied world that few could enter or understand, and it is said that his English is better than his Greek. Certainly his voice on the other end of the phone spoke better English than many of my relatives.

George Papandreou

George Papandreou

I started my end of the conversation by greeting him and explaining that I was, at that very moment, at the top of the Acropolis, perched in front of the Parthenon. “Somehow it seems very appropriate that I should greet you from here,” I said. He got a chuckle out of that, he appreciated the coincidence, and he was friendly and easy to banter with. But we soon got down to business.

“Your government is under enormous pressure, Mr. Prime Minister, do you think you can retain the support of the Greek people? Will you be able to hold on?” I asked him.

He responded by heaping great praise on his fellow Greeks. “I am amazed at the support we are seeing in such difficult circumstances. Keep in mind that right now we are living through the worst of it, people are experiencing the cutbacks but none of the benefits that won’t come until later. And of course people are protesting, that’s understandable. But even some of the protestors are telling me, ‘Keep going, keep going, we know that Greece needs to change.’ So everyone is in this incredibly difficult position, afraid to go forward but knowing we have to. I am really proud of my fellow Greeks, and so far I feel they are supporting my team and what we are trying to do.”

Opinion polls as well as a recent local election confirm that the prime minister’s party, PASOK, is enjoying support as well as a sizable 14-point lead over its main opponent; Papandreou himself retains fairly high ratings. But that flowed naturally into a rather obvious question: What exactly are you doing to rectify the situation? This part of the conversation repeated some of the same ground I went over with his Deputy Minister, Spyros Kouvelis. He stated some of the same themes about rooting out corruption. He spoke about how, shortly after coming to power in October 2009, he was obliged to admit that the Greek public sector suffered from “systemic corruption,” and identified cracking down on it as necessary for reducing the country’s public debt.

But he also talked about his visions for Greece’s future, reiterating some of the same themes as Deputy Minister Kouvelis, i.e. Greece as a regional hub, boosting their green economy and green tech. “For example,” he said, “The prime minister of Turkey is coming this weekend to participate in a regional conference on global warming and green economy. We are trying to position Greece as major players in this region for those issues.”

He also said that Greece’s position as a regional hub is perfectly located to attract foreign direct investment. “Chinese investors are here in Athens next weekend, and they are extremely interested in investing in our shipping and other industries where we are well-positioned to expand in the private sector if we can find sufficient investment capital.”

Suddenly, much to my chagrin, our phone connection went dead. Cell phone reception at the top of the Acropolis was spotty, and I had been pacing to and fro among the ruins and tourists, so perhaps that contributed to losing reception. But fortunately he called right back and we resumed our conversation.

I asked him a question about the Greek military. “Greece spends the highest percent of GDP on its military of all European nations, about 3.6% (the U.S. spends at least 4%, but other European countries spend less than half that amount as a percent of GDP). Given the crisis, given the budget deficit, doesn’t it make sense to reduce that spending?”

He was cagey on that one. Precisely because of its location as a crossroads between east and west, Greece has been involved in numerous military conflicts over the centuries; in the last century Greece was invaded by the Nazis and the Ottomans/Turks, with the military itself becoming a powerful special interest during periods of dictatorship within Greece. So reducing military spending taps into a lot of historical baggage. And ongoing fear of Turkey’s army has led Greece to become the European Union’s biggest military spender as a share of GDP.

But last May, during a visit to Athens Turkish premier Recep Tayyip Erdogan said the neighbors and strategic rivals should work to cut military spending. And naturally matching cuts from Turkey would help Greece make the reduction in military expenditures. It seems like this is on the track to becoming a reality at some point, but PM Papandreou was not about to make any major announcements or commitments to me over the phone. He discoursed a long version of “We are looking into that.”

He asked me how things looked in the United States, and I told him it varied from place to place, but that some parts of the country had been hit really hard. In California, where I live, the state government had to issue IOUs in 2009 to pay its bills and prevent default. California has been slashing social programs and government jobs, and is being swamped by foreclosed homes. A recent study found that 25 percent of Californians have no health insurance, and California has a higher unemployment rate than Greece.

While both Greece and California are in major belt-tightening mode, at least in Greece all families and individuals still have access to healthcare and a long menu of other supports that Europe is known for. But in California, even before the crisis millions had no healthcare, and now more have lost their jobs and their health insurance, with little in the way of a support net which further reduces consumer spending and weakens the economy.

The Greek economy is only about 2% of Europe’s economy compared to California’s economy, which is about 14% of the United States, truly “too big to fail.” Yet when California requested assistance from the Obama administration, the White House rejected it, causing California to issue IOUs. I pointed out the irony: in the U.S., which has the laws and precendent for the federal government to act as a financial backstop and bail out states that get into financial trouble, the federal govt refused to use that power; but in the European Union, which has no history, tradition or even laws to allow some member states to bail out another, they had figured out how to do just that.

He appreciate the irony, and concluded with a rather remarkable statement, a “glass half full” kind of statement that may not be fully shared by his fellow European leaders.

“Greece has given Europe the opportunity to fix a defect in the euro zone, that is the fact that we did not have a fiscal union. Now steps have been taken to begin that process. And there is more solidarity from nation to nation, and that is a good thing. That has been Greece’s gift to Europe.” That sounded familiar and a moment later I learned why: PM Papandreou told me he had quoted from one of my articles saying the same thing, in a speech he gave to an audience at the Foreign Policy Association in New York City (here’s a link to his speech).

steven hill

I concluded by telling him that I have been impressed with the steps his government had taken not only to deal with an extremely difficult situation handed to him by his predecessor, but also to reinvent Greece from the inside out. We both agreed there was a long way to go. At that point our connection went bad again, but the conversation had come to a natural conclusion, and he didn’t call back.

Steven Hill
New America Foundation

Republished with permission from the Washington Monthly.

Comments

  1. Avenger says

    A fed Bear is a dead bear.
    http://me.woot.net/vancouver/deadbear.jpg
    Feeding the Serbian bear with $20 billion grant aid from the West, and with $20 billion in weapons from Russia East, ended in 10 years war with 500000 innocent civilian dead, through execution, torture, raping, kidnapping and forcefully displacing millions of Croatian, Bosnian, and Kosovars. Shame on EU, shame on Russia.
    The actions of Serbian beast ended in dismembering of Yugoslavia, and creation of many independent states, sworn enemies to Serbia. If you go to Croatia they say don’t forget VUKOVAR, don’t forget Srebenica in Bosnia, Vojvodina in Hungary, “Western Outlands” in Bulgaria, and about Kosova there never will be peace without justice. So, Serbia will end a dead Bear if not protected from outsiders forever.
    Feeding Greece with grant aids, the West is creating another beast. Greece has created a virtual reality, with a very strong military, (330 Leopard tanks, F 16 jet fighters, a very powerful Navy, included up to date submarines, and more.)
    http://www.fprado.com/armorsite/leo2.htm
    http://www.hellas.org/military/navy/
    THAT GREEKS CANNOT AFFORD.
    The Greek people never learned to pay their taxes …. because no one is ever punished.
    To make things more interesting Greece has FREE HEALTH CARE, LUCRATIVE PENSIONS, and HIGH PAID JOBS, which they cannot afford either.
    So the WEST is feeding another Bear that soon or later will end in a DEAD BEAR.

  2. says

    The “grave error” in the government of Greece is that, like the Roman Republic and Greek republics of old, the “citizens” having their bread and circuses produced by the “taxpayers” or slaves was too much to sustain. Greece has more government than it can afford, given its Gross National Product.

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