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The Mediterranean Conundrum Crisis in the European Periphery

The crisis in the periphery of the eurozone in Greece, Portugal and Spain suggests that, besides the badly conceived architecture of the euro system and the imbalances produced by the underlying mechanisms, there are defi nite specifi c domestic factors at work. Over the last three decades, government policies in all the three countries have been regressive rather than progressive. The distinction between socialist and conservative parties broke down in the late 1980s, with the former embracing neo-liberalism.


The Mediterranean Conundrum

Crisis in the European Periphery

C J Polychroniou

The crisis in the periphery of the eurozone in Greece, Portugal and Spain suggests that, besides the badly conceived architecture of the euro system and the imbalances produced by the underlying mechanisms, there are defi nite specifi c domestic factors at work. Over the last three decades, government policies in all the three countries have been regressive rather than progressive. The distinction between socialist and conservative parties broke down in the late 1980s, with the former embracing neo-liberalism.

C J Polychroniou has taught in universities in Greece and the United States and is the author of several books and scores of academic and popular articles. He is research associate and policy fellow at the Levy Economics Institute, New York.

he crisis in the periphery of the eurozone represents the biggest challenge facing the European Union (EU) since its creation. It is a crisis that surfaced when the 2008 global fi nancial crisis exposed the fl awed design of the euro system by triggering Greece’s sovereign debt crisis, but may be more threatening than the financial crisis itself: it undermines the entire foundation of the European economic and monetary union, increases dangerously the gap between northern and southern European economies, opens a political opportunity for extremists, and poses serious threats to global recovery. Yet, Germany and EU leaders seem not to be fazed by these risks. Apparently convinced that profl igacy is at the root of the crisis, Germany and EU’s neo-liberal chorus have been rather content for the past two years at blaming the Greeks and the Mediterraneans in general for the mess in the European peri phery, which also explains the “kicking the can down the road” policy response they adopted.

The conservative impulse to impose harsh austerity measures on the eurozone’s debt-wracked economies (more of a form of punishment than an economic policy with well-measured outcomes) made things even worse. In fact, as things got worse, the quack doctors increased the dose of the same medication that made the patient ill in the fi rst place. The new German-inspired fi scal compact treaty is the latest indication of how perverted the current economic policymaking mindset is in euroland. No wonder then why contagion fears in the eurozone have resurfaced, with Spain on the brink of joining Greece and Portugal as a debtor zombie of the EU and the International Monetary Fund (IMF).

Still, the crisis in the periphery of the eurozone may indicate that more specifi c processes are at work than the badly conceived architecture of the euro system and the imbalances produced by the underlying mechanisms. Upon close inspection, the crisis in southern Europe (and, in all likelihood, for Ireland as well) evinces a strong relationship between political regimes, social policies and the national macroeconomic environment, but not in the way it is usually portrayed by Brussels bureaucrats and the media. Instead of overly generous regimes, we have governments that pursued aggressively the neo-liberal agenda, promoting the privatisation of state assets and lagging far behind the rest of Europe in human and social services, investment in education, unemployment benefi ts, state revenue collections, etc. In fact, in contrast to popular imagination, the overall government policies in countries like Greece, Portugal and Spain, which form the core of the crisis in southern Europe, have been regressive rather than progressive.

In all three cases, we have peripheral nations with similar historico-political experiences, facing similar problems of underdevelopment, and executing similar types of economic and social policies during the course of the last three decades. For all three countries, the distinction between socialist and conservative parties breaks down at some point around the late 1980s, and the socialist parties emerge as tacit cheerleaders of the neoliberal experiment pushing through the corresponding policies and, often enough, paying a price at the ballot box as angry voters turn against them. Meanwhile, clientelism, corruption and patronage defines the political culture through which state regimes in Greece, Portugal and Spain exercise power. The same practices are reflected in socialist and conservative parties alike. As such, there are defi nite specifi c domestic factors at work which led to the build-up of the crisis both within and outside the context of the financial crisis and the imbalances generated by the fl awed design of the euro.

When the Dubai debt crisis broke out in November 2009, European markets

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experienced relatively very little turbulence. But Europe’s political leaders began, as if they saw the handwriting on the wall, to display sudden concern about the debt levels among some eurozone member states, which they were aware of all along but had opted to look the other way as long as growth was still on the right path. A month later, the “big fat Greek debt crisis” burst onto the world scene and the eurozone crisis was underway. However, the position among Europe’s policymakers at the time was that this was an isolated incident (whether a wishful thinking fallacy or merely a political posture because of the dark cloud hanging over the whole of Europe remains a guess) brought about largely as a result of a corrupt political culture which overspent and cooked statistics (largely true, but still an incomplete account). Even when Portugal and Ireland prompted concerns about their heavy indebtedness, Europe’s leaders believed that Greece was the main problem and that solving the Greek debt crisis would put an end to all contagion fears and thus get the eurozone out of the woods. Europe’s leaders continued to hold on to this preposterous belief as late as last month, and France’s “visionary” President Nicolas Sarkozy and Italy’s “wizard technocrat” Prime Minister Mario Monti, two leaders with totally diverse communication styles and temperaments, took on the stage after the Greek debt swap was put on track to announce that the eurozone crisis is over, or “nearly over”.

There is plenty of foolishness in the political world, but Europe’s leaders seem to be far ahead in the game. Before the dust had settled on the Greek bond swap, the eurozone crisis resurfaced,1 with the periphery drawing again the attention of the bond vigilantes. Now, it looks like it is Spain’s turn to join the European Financial Stability Facility (although the hope is that it can last till the European Stability Mechanism kicks into effect, which will be later in the year). Spain’s banks are going under, its economy is in deep recession, and borrowing costs for the 10-year bond have reached unsustainable levels again (trading at over 6%). Italy, the eurozone’s third largest economy, also faces grim prospects: its economy has weakened considerably (it shrunk by 0.2% and o.7% in the third and fourth quarter of 2011, respectively, and overall the forecast calls for a contraction of 1.2% for 2012) and borrowing costs have also moved up sharply (a mid-April 3-year bond auction paid an interest rate of 3.89%, up from 2.76% in a similar sale last month).

From Bad to Worse

Spain and Italy are on a steady path towards default. They cannot continue borrowing at unsustainable levels. In fact, as economists at Moody’s Analytics stated recently, “…borrowing costs above 5.7pc will significantly raise the chance of default”.2 Borrowing costs are also rising for the Republic of Cyprus, yet another recession-stricken peripheral. This is a nation whose economy, according to IMF forecasts, is expected to decline by 1.2% in 2012, the situation is already assessed as being “very serious” and there is a growing possibility that it may be forced to seek a bailout from the EU and the IMF. And then of course there are the old patients, Greece, Portugal and Ireland, already under bailout assistance and subjected to harsh austerity measures. Naturally, their economies are going from bad to worse, and onwards to disaster.

It takes no genius to realise that instead of being over, or “nearly over”, the eurozone crisis is entering a new and far more dangerous phase. In spite of the bond swap, Greece’s sovereign debt to gross domestic product (GDP) ratio remains unsustainable and will actually increase considerably in the years ahead. First, the bond swap is a temporary fi x and will not pull Greece out of its debt spiral, let alone end the crisis. The new bailout package actually increases the overall size of the country’s debt, which means that another restructuring down the road is simply inevitable. This is the price to be paid for the EU’s lack of political imagination in dealing with the Greek crisis. Second, the bond swap was a deal forced on private investors (aside from triggering credit default swaps, expect the markets to seek revenge in the near future), yet the new bonds have been

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issued under foreign law. This does not mean that the Parthenon is at risk of one day falling into the hands of foreign creditors, but it does mean that the Greek government has lost whatever strategic advantage it may have had in the ruthless game of sovereign debt restructuring. For one, all of Greece’s debt is now mostly owned by public institutions (with European taxpayers bearing much of the cost), so the next debt restructuring phase could entail political, not merely economic, consequences. Simply put, it could pave the way for Greece’s forced exit from the eurozone. Indeed, given the prevailing sentiments towards Greece across Europe, it is most unlikely that European taxpayers will accept kindly the idea of getting stuck with Greece’s bill while allowing it to remain in the Union. However, in the event of an exit from the eurozone, Greece will no longer be able to pass legislation to convert euro-dominated debt into new drachmas. Moreover, the new bailout package, just like the first one in 2010, comes with harsh austerity measures that are guaranteed to cause additional economic havoc. Two years ago, the Greek economy was in a recession, with GDP having declined by 7% over 2009-10. Today, the Greek economy is in free fall, with GDP declining by 7.5% in 2011 and unemployment at nearly 22%. The austerity measures constitute a “scorched earth” type of economic policy designed as much to punish a nation as it is to secure funds for paying off the banks.

The new round of austerity measures

– which include a sharp reduction in the minimum wage, deep cuts in private sector wages and pensions, and even a cruel 20% reduction in unemployment benefits – may well trigger the collapse of civil society on the whole. Violent crime is already out of control, and vigilante groups are beginning to organise themselves in various parts of the country. In this brutal economic and social environment, state revenues will experience abrupt declines. Indeed, indicative of the severe impact that the austerity measures are having on the national economy, Greece has missed its defi cit targets for the last two years, and defi cit projections for 2012 have already been

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revised upward. Its revenues for the first month of the year were lower than expected by more than one billion euros.

The most optimistic projections suggest that Greece will return to a budget surplus by 2015. However, even then, the predicted primary surplus of 20 billion euros will not cover more than 30% of the cost of carrying its debt.

In sum, Greece is not only bankrupt but also remains trapped in a dark, endless tunnel. No wonder its citizens, unlike its governing officials, were in no mood to celebrate the debt swap and the new “rescue” plan and have turned their backs away from the two major political parties – Pasok (socialist in name only) and New Democracy (a conservative political party but with a strong right-wing populist backing). They know that these are, at best, pyrrhic victories.

But why is it that the crisis erupted in the periphery of the eurozone? Is it purely because of the flawed design of the euro and the export-driven policies of Germany? Could the type of macroeconomic environment produced by the kind of political regimes that ruled in the region have played a part as well? I think so. Here, we have three state regimes with similar historico-political experiences which pursued consistently regressive policies that lead to growing poverty and sharp inequalities and failed to lay the foundations for sustainable growth. The governments reduced social services and cut down sharply the budget on education while looting of the state coffers by the domestic economic elites had become the dominant form of southern European entrepreneurial capitalism.

Indeed, the experiences of Greece, Portugal and Spain reveal a different trajectory than the one taken by northern EU member-states. In the light of the above, a strong case can be made that the specific interplay of domestic political and economic processes in the three southern Mediterranean nations which are currently at the centre of the eurozone crisis deserve serious attention when analysing the crisis facing the Mediterranean club (which includes Italy). On the other hand, the austerity measures these troubled economies have been forced to implement as part of Germany’s hard-core insistence on fiscal discipline ensure a deepening recession and further problems ahead. Their economies need to be put on a growth track while doing away with the regressive policies and practices that their state regimes had adopted in the last three decades or so. But in order for that to happen, the EU must abandon its undemocratic policies and neo-liberal policies. Under the current EU politico-economic confi guration, the peripheral countries of the eurozone will continue their economic and social downslide – unless they opt to leave the eurozone (though Germany may be the first to do so if political developments move in a direction not to its liking and begins to feel the cost is to0 great). So the future of the eurozone depends on addressing simultaneously structural, systemic, and institutional factors both at the national and regional level – a nearly impossible task even for the most enthused supporters of the EU.

Socialist Betrayal

Political explanations are not usually taken into account in discussions about the economy, but they should. It is also the case that economics rarely enter into the analyses of political developments, and that is very unfortunate. The problems facing southern European countries today are economic in nature but cannot be understood outside a larger historical and political trajectory, which is another way of saying that the southern Mediterranean crisis also has political roots.

One of the key reasons for the sharp but often misconstrued deviation between southern and northern Europe in the age of the euro has to do with political regimes, the economic setting, and political cultures. Greece, Spain and Portugal lie well outside the European social democratic trajectory and the policies they have pursued since their emergence as parliamentary democracies in the mid-1970s (all three countries have a long tradition of authoritarian rule and were ruled for many years by various types of fascist regimes) have been quite regressive by European standards. Even the application of the harsh austerity measures imposed today in Greece, Portugal, and Spain form part of the continuation of the regressive policies that have been integral to the nature of those state regimes. As they were drawn quite late into the orbit of capitalist accumulation and democratic legitimation, they never developed a liberal democratic state and the pathologies of populism (the propagation of easy solutions for difficult problems), stasis (resisting change so organised interests can maintain their hold on various ill-based privileges) and of the “amoral familism” syndrome shaped the political culture. In addition, there was a strong relationship between political clientelism and the development of media systems, underground economic activities fl ourished and were accepted as a normal structure of the formal economy, and highly ineffective and corrupt public bureaucracies created fiefdoms of power.

Southern Europe also reveals far greater economic inequalities than the northern European societies and decades of socialist rule failed to supply even the necessary retraining programmes and vocational education systems that are so prevalent and well-funded in northern Europe – in spite of the persistently high rates of unemployment these countries have been facing. The problem of unemployment was seen through the prism of the electoral process and taking care of the party faithful was always a top priority. National economic strategies had little room in the cosmos of southern European politics; instead, personality cults thrived, as with the cases of Andreas Papandreou in Greece, Mario Soares in Portugal and Felipe González in Spain. As for the welfare systems in southern Europe, governments extended meagre funding to them, but this was part of a larger policymaking approach. Public social expenditures were routinely much lower than the EU average, evading taxes was a national pastime, and state revenue collections for the three pariahs of social democracy always lagged well behind state revenue trends in northern Europe, reflecting the organic nature of political ties between state, the rich and big business interests.3

Greece, Portugal and Spain were ruled by socialist parties throughout the

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1980s, most of the 1990s and well into the 2000s (in Portugal the socialist party comes to power as early as the mid-1970s). In Greece, the Panhellenic Socialist Movement (Pasok), which was founded in 1974 with Andreas Papandreou as its leader, was in power from 1981 to 1989. It was out of power between 1990 and 1993 because of its turn to right-wing economics and the eruption of various scandals, involving Papandreou himself; however, having built a strong electorate base because of its leader’s populist rhetoric and charismatic personality (Andreas Papandreou was Greece’s Juan Perón), Pasok made a comeback in 1993 and (with Costas Simitis as its leader from 1996 to 2004) ruled uninterruptedly till 2004 when, beset again by huge scandals and having fi nally alienated a large segment of its voting base because of its unmistakable neo-liberal aura (Pasok was essentially converted from a regressive populist and kleptocratic political organisation into a neoliberal party which practised systemic political corruption but preached the virtues of untamed markets), it lost to the conservative party of New Democracy which rose to power with a mandate to restructure the state and clean up corruption.

Tragic Situation

The conservatives won the 2004 as well as the 2007 parliamentary elections. While in power, they pretty much continued with the policies of their predecessors and made extensive use of the corruption nexus. Major scandals surfaced towards the second term (including illegal public land swaps with the abbot of a 1,000-year old orthodox monastery). With the economy already in a recession, the socialists were voted back into offi ce in 2009, with George Papandreou (Andreas’ eldest son) running on a typical populist platform, telling voters “there is money around” and promising to turn Greece into the Denmark of the South! A few months later, the future Denmark of the South was on its way to becoming, instead, a banana republic: in May 2010 Papandreou turned Greece over to the IMF and set in place the most radical structural adjustment programme in postwar European history as part of a


bailout deal with the EU and the IMF.

To be sure, populism, graft and corruption have been an integral part of Greece’s modern political culture, thanks to the existence of a paternalistic state where “kickbacks” constitute routine practice for the provision of public services. But under the long and ignominious reign of the socialists, the looting of public wealth became an art form and covering up corruption a science. Pasok continues to this day to be synonymous with clientelism, corruption and patronage even though the conservative party of New Democracy had been equally bedevilled by the same problems when it was in power from 2004-09. Now, thanks to the tragic situation the country has found itself in as a result of the sovereign debt crisis, Greek voters have turned massively away from the two major parties and accuse them directly for the catastrophe that befell on the nation.

In discussions of the Greek crisis, much has been made of the growth rates the economy registered between 1997 and 2007. It is true that during this period Greece averaged 4% GDP growth; however, this rather impressive economic performance rested upon the twin pillars of heavy state borrowing and EU transfers. Thus, government debt doubled between 2001 and 2009 while EU transfers for the period 2000-06 amounted to approximately 20 billion euros, which has been estimated to be equal to about 3.3% of annual GDP.

For the last decade leading up to the explosion of the debt crisis, Greece built up consistently a public debt ratio above 100% of GDP. But there is relatively little to be shown in terms of investments and sustainable growth patterns. One key variable for explaining the correlation between debt accumulation and the lack of public investments lies with the huge discrepancy between expenditure and revenues. Data reveals that the Greek government collects on the average 7.9% of GDP annually from direct taxes when the average EU government collects 13.7%.5

Turning now to Spain, the picture that emerges for the Spanish Socialist Party (PSOE) bears some striking similarities

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with that of Pasok in Greece. PSOE arrives in power, with Felipe González at its helm, in 1982 and rules until 1996. As in the case of Greece, the socialists monopolised political power over extended periods of time. However, during its 14-year rule, the PSOE became better known for its neoliberal agenda – which included massive privatisation of state companies, deregulation of labour, liberalisation of the telecommunications industry and the energy sector, business-friendly tax policies, a massive reduction of the government’s role in human and health services, and sharp budget cuts towards education – than for its pursuit of progressive politics. González’s neo-liberal programme in Spain compared favourably well to that of Margaret Thatcher’s in Britain. The government debt declined substantially during the 1990s, but the economy experienced a series of recessions and unemployment remained stubbornly at 20% as regressive policies became the hallmark of the González regime. As one long-time expert of southern Mediterranean politics and society argued, the socialists in Spain replaced the authoritarian right as the functionaries of big business and became the new Right.6

Just like in Greece, it took the Spanish voters a rather long time to digest the right-wing turn of the socialists and kick them out of office. And just like in Greece, the socialists in Spain became immersed in huge corruption scandals, which finally led to their downfall in 1996.7 The socialists lost the 1996 elections to the conservatives (Pe0ple’s Party) and were trounced in the 2000 elections, pulling less than 35% of the vote. PSOE returned to power in 2004, largely due to the impact of the 11-M terrorist attacks, and won again the 2008 general elections. Under José Luis Rodríguez Zapatero, the party pursued a postmodern political agenda (gays rights, greater participation of women in government), and implemented a reactionary set of social policies (civil service pay cuts, unemployment benefit cuts, raising the retirement age, etc). Like everywhere else, he failed to deal with the crisis that had fully engulfed Spain by 2010, and angry voters punished the socialist party in May 2011 with a historic defeat in local and regional

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elections and the conservative People’s Party went on to score a decisive victory in the November 2011 national elections.

Of course, one could argue that the pattern is the same today all across Europe. The social democratic parties fl irt with progressive economic programmes when they are in opposition but embrace the agenda of neo-liberalism once they are in power. They privatise state assets, reduce social benefits, and cut taxes for the rich and the corporations. Part of the reason for this can be attributed to the overwhelming power of the fi nancial sector and the corporate world in an age of declining trade unions and ideological confusion; part of it can also be attributed to the “soft” commitment of social democratic parties to progressive economic change, especially since the collapse of really existing socialism, which led legitimacy to social democracy’s claim as representing the best of two ideological extremes (i e, state communism and freemarket capitalism). The difference, however, is that social democracy never took root in southern Europe (the social democratic agenda, in turn, was accepted by virtually all conservative parties in northern Europe as late as the 1970s) and that for countries with authoritarian legacies and strong reactionary forces, as in Greece, Portugal and Spain, the socialist parties were far more prone to using ideology for opportunistic reasons and far quicker in pushing forward the neo-liberal agenda when things got rough.

Shift to the Right

In Portugal, the socialists entered the modern southern European political stage a bit earlier by winning the 1975 elections for the constituent assembly (with Mario Soares, yet another charismatic and authoritarian leader as the head of the socialist party) after the Carnation Revolution in 1974 had brought down the Estado Novo (“New State”) corporatist authoritarian regime that had been installed in 1933. After a brief period of severe political unsettlement due to fears of a communist takeover by some radicalised elements within Portugal’s armed forces, the Portuguese Socialist Party (PSP) won the 1976 elections for the national assembly with slightly more than 35% of the vote, but went on to lose the 1979 elections as it failed to manage the deteriorating condition of the economy, which included runaway inflation, high unemployment, declining wages and widespread poverty, and the coalition government collapse. The truth of the matter is that the PSP faced a situation in the immediate years after the return to parliamentary democracy where reactionary forces continued to have fi rm control of the economy while a number of other political parties, both to its left and to its right, had considerable support among the nation’s population. The 1973-74 oil crisis and the transformations that took place in the years after the collapse of the authoritarian regime that had ruled for 50 years had severe impacts on the country’s trade and balance of payments. But by the time it was ousted from office, the socialist party of Portugal had already shown that its strategy for a way out of the economic crisis rested with neo-liberal inspired policies. In 1977-78, the government pushed forth a one-year IMF economic programme in exchange for a line of credit. Not surprisingly, in the national elections held in December of 1979, the country’s voters turned to the right and the socialist party saw its electoral percentage drop by nearly 10% over what it had received in the 1975 elections. The deteriorating state of the economy continued, as did the austerity measures, and popular discontent with the right-wing government brought Soares and the socialist party back in power by winning the 1983 elections (and forming a coalition with the Social Democratic Party).

Once in power, Soares pushed forth with even harsher austerity measures, seeking another IMF fi nancially supported economic programme, thereby showing the future of southern European socialism! Under Soares, Portugal became the fi rst member country on the Organisation for Economic Co-operation and Development to accept the Washington Consensus Doctrine and be subjected to the IMF’s shock treatment of Milton Friedman and the Chicago School. Soares embraced wholeheartedly austerity in order to receive (at current exchange rates) close to $800 million in international credit.8

In 1983, Portugal’s foreign debt was in excess of $14.2 billion, which, at nearly 60% of the GDP, represented at the time one of the biggest debt-GDP ratios in the world.

The years between 1983 and 1985 represented the high point for southern European socialism. Socialist parties were in power in Greece, Portugal and Spain and the authoritarian legacy of the past seemed to belong to a very distant age. However, the rise of southern European socialist parties did not open up paths towards deeper democracy or towards the enlargement of the progressive economic agenda. As some analysts correctly observed, “for southern Europe as a whole, the years 1983-85 represented a period of maximum socialist conformity around a personalist leadership”.9 Putting aside the rhetoric of their leaders and the “progressive” manifestos they circulated, southern European socialists were highly anti-democratic and run by authoritarian leaders, with Papandreou in Greece being probably the most authoritarian of all. Indicative of how anti-democratic the southern socialist parties were, the party leaders prepared the list of candidates for parliament members, but in Greece it was Papandreou himself who was in charge of the list (Gillespie and Gallacher 1989). By the end of 1985, all three socialist governments in the region had turned to neo-liberal economics as a means of addressing pressing economic and social issues.

The fortunes of the PSP went up and down throughout the rest of the 1980s and 1990s, as under Portugal’s multiparty system coalitions were necessary for

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governments to be formed though they often broke down because of tactical differences among the partners. But it is almost impossible to tell apart the difference between the socialist party and the social democratic party, both of which seem to be contesting each other as to which one pushes further and faster neo-liberal policies when they fi nd themselves in offi ce.10

The socialist party makes a strong comeback in 2005, winning the elections for the first time with an absolute majority. It won again in 2009 but failed to attain the absolute majority it had in 2005. In 2011, the government failed to get support for its austerity measures and Prime Minister Socrates had to resign. In the elections that followed, the socialist party suffered an all-historic defeat, paying once again the price for being a wolf in a sheep’s skin.11

Wrapping it up, the development of southern European socialism had little in common with the social democratic culture and tradition of northern Europe. It needs to be bluntly acknowledged that it is under socialist rule that Greece, Portugal and Spain witnessed the rise of neo-authoritarian leaders, the emergence of a paternalistic political culture, and the systemic shift to neo-liberal economic policies.12 As for the social policies, a unique characteristic of the shape of southern European welfare states remains down to this very day the “clientelisticparticularistic” element.13 And contrary indeed to what one might expect from so-called socialist parties, the implementation of government intervention for addressing effectively problems of unemployment and poverty – in contrast to what was happening in the rest of Europe – was rather limited in size and scope. Thus, as Vicente Navarro writes:

…in Spain, as late as 2009, the level of poverty (60% of median income) declined only 4 points after implementation of state interventions (public social transfers): from 24% before to 20% after transfers. The EU-15 average decreased from 25% to 16%. Sweden’s poverty rate fell from 27% to 13%. The decline in poverty rate resulting from public social transfers in Spain is the lowest in the EU-15. Another indicator of the limited redistributional impact of state interventions is that the Gini coefficients in all four countries are higher than the EU-15 average (29.2). Spain’s Gini coefficient is 31.3, the same as Ireland’s; Greece’s is 34.3; and Portugal’s is the highest at 36.8 (2011).

As already indicated, declining state revenues was also another strong characteristic of state regimes in southern Europe. This was not an accident, or due to administrative incompetence on the part of southern European state regimes. It was the way the regimes served the interests of the domestic elite – i e, through massive tax cuts and looking at the other way on tax obligations, which in countries like Greece reached astonishing levels. It is worth quoting again Vicente Navarro about the impact that the declining state revenues had on public debt:

The decline of revenues to the states (the consequence of tax cuts) forced the states to borrow from the banks, where the rich deposited the money saved due to reduced taxes. The indebtedness of the states and the need to borrow were clearly related to the reduction of taxes. When the economy came to a stop as the bubble burst, the structural public deficit became apparent. Public defi cits as percentage of GNP, increased substantially in all four countries from 2007 to 2009 as a consequence. Spain went from a surplus of 1.9% of GNP in 2005 to a public defi cit of 11.1% in 2009. Greece went from a defi cit of 6.4% in 2007 to 15.4% in 2009, with Ireland moving from 0% to 14% in the same period. In all of them, rapid growth of the public deficit was based on the extremely regressive nature of state revenues. With most taxes based on labor income and consumption, when employment declined, unemployment grew, and consumption declined, the public deficit escalated dramatically (ibid).


The socialist parties in Greece, Portugal and Spain ruled for many years before and during entry into the eurozone. They had the opportunity to stir their nations in a progressive route to economic and social development, according to the popular mandates they were repeatedly receiving at the ballot box. Instead, they betrayed the historical opportunities available, demoralised the popular sentiment for progressive social change and ended up building social orders immersed in corruption and economies with weak foundations by pursuing neoliberal driven policies. In Greece, the socialists managed even to destroy the

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agricultural sector, one of the traditionally strong sectors of the economy. Once inside the eurozone, where they had to compete with highly efficient and strong state supported industries, nations like Greece, Portugal and Spain could keep up the mirage of capitalist growth through bubble economies and heavy borrowing. The imbalances with northern European nations began to grow, and once could see that these nations were slowly but gradually turning into satellites of the metropolis in the European economy. And when the global fi nancial crisis reached Europe’s shores, the weakest economies in the eurozone were the first to go down. Years of pseudo socialist legacy had prepared the ground for this outcome.

The austerity measures imposed by the German master and the EU neo-liberals on the southern European periphery are devastating these economies, setting the standard of living decades back, in a concerted effort to increase their “competitiveness” in a race to the bottom. Greece at 21%, Portugal at 15%, and Spain at 24.5% already post the three highest unemployment rates in the EU and national wages are rapidly sinking to the levels of eastern European countries. This is how big capital in Europe plans to increase the rate of surplus value in an ever increasingly competitive global capitalist economy. The challenges facing the forces of the Left are immense. Decades of socialist opportunism deprived the Left from building large electorate bases, but the tide may be turning. History never ends and yesterday’s defeats can become tomorrow’s victories.


Approximately two years ago, the Pasok government under George Papandreou surrendered Greece to the IMF and the neo-liberals. From then on, the nation became a guinea pig for a Europe ruled by austerity and a minimalist state – the ideal of all who are against social legislation and seek the creation of a political regime which will transfer control of the economy from public to private hands and intensify the reproduction process of the exploitation of labour by capital in an ever-increasingly globalised socio-economic universe. Greece was

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forced onto the Procrustean bed by the use of fear and outright terror because its government was fundamentally committed to the neo-liberal vision of reforms as it was incapable of articulating a meaningful alternative to the real crisis that confronted the country, a crisis that is at one and the same time economic and political, and with roots at both the domestic and international levels.

On 6 May, after two years of brutal austerity which has shrunk economic activity to unprecedented peacetime levels, Greece held a general election. In what may still turn out to be the most critical elections since the re-establishment of parliamentary democracy in 1974, Greek voters punished the two mainstream parties (Pasok and New Democracy), holding them directly responsible for the country’s dire economic ills. This may be the start of a new chapter not only for Greek progressive politics but for the future of Europe.

Greece’s political landscape has been totally recast. For the first time since the 1960s, the Left finds itself again at centre stage, but daunting challenges lie ahead. To begin with, forming a coalition government is a nearly impossible task given the current political confi guration, and it is uncertain whether the leader of Syriza’s left-wing bloc would not prefer a second election, hoping for a bigger chunk of the national vote. His demand that the leaders of the two mainstream parties abandon the terms they had originally agreed with the EU and the IMF as part of an agreement for the formation of a coalition government is a shrewd move as it carries both ideological and strategic implications. It is also certain that his posture will anger Germany and the EU neo-liberal technocrats which could increase substantially the odds of Greece’s exit from the eurozone. And the Communist Party of Greece (a truly reactionary force) will sabotage Syriza’s (Coalition of the Radical Left in Greece) efforts in putting the country on a progressive development course in every conceivable way.

But change is in the air. In France, too. Even creditors are suggesting that austerity needs to be toned down. And some of German Chancellor Angela Merkel’s own economists in Germany are also doubting now whether it is realistic to stay the course. Indeed, it seems that the Greek spring has the potential to produce great changes in Europe. The politics of hope has returned.


1 The eurozone crisis is not back: it never left. It merely went into a very brief hibernation, as the world watched Europe’s leaders trying out various fixes for the wrong crisis. No matter how much cheap money the European Central Bank (ECB) provides or how high the European Commission (EC) “firewall” rises, Europe’s economic sickness will not be cured without

(a) massive government intervention to get the regional economy rolling again, and (b) without correcting the flaws in the design of the eurozone. The current economic policies, and the new German-inspired fiscal compact treaty, will convert Europe in due time into an economic wasteland, will force some countries to exit the euro (a better alternative than remaining captives to permanent stagnation), and could even split the euro into Teutonic and Latin Unions or even lead to its complete demise. Politician always think they have situations under control, but as history has shown so many times in the past, uncertainty and crises can result in unexpected and less than desired outcomes.

2 Cited in Szu Ping Chan, “Spanish and Italian Borrowing Costs Already at Unsustainable Levels, Warns Moody’s Analytics”, The Telegraph, 19 April. See at fi nance/fi nancialcrisis/ 9213919/Spanish-andItalian-borrowing-costs-already-at-unsustainable-levels-warns-Moodys-Analytics.html

3 All this is not necessarily to suggest that there is a southern European model, especially since there are some important distinctions between north and south in nations like Spain and Italy. But there are common features of underdevelopment and clear similarities in political and social structures which cannot be ignored, as they do point the way in which political regimes and political culture help to shape the macroeconomic environment. This point, which inspired part of the analysis pursued in this brief, is well made by Vicente Navarro in his article “The Cases of Spain, Greece, Ireland and Portugal: Crisis and Class Struggle in the Eurozone”, Counterpunch (19-21 August 2011). See http://

4 The austerity measures introduced involved sharp pay cuts, sharp increases in added value taxes, pension reductions, slashes in social programmes, increases in the legal maximum number of people companies could lay off each month, extreme pension reforms, privatisation of state assets and tax breaks for the rich and the banks. The Papandreou government accepted without a fight the EU/IMF terms and conditions for the first rescue package (worth 110 billion euros) in spite of the usurious nature of the agreement (it carried a 5% interest, while Germany borrows at very low rates) and went out of its way to convince the Greek public that it had to show patience and exhibit “patriotic duty”, and made promises that the crisis would be over by mid-2011. What happened of course is what every economist had been predicting and warning about from the start: the economy took a sharp turn for the worse (GDP shrank by 4.5% in 2010 and by another 6% in 2011), unemployment reached catastrophic levels (it presently exceeds 20%), and the debt increased. If this was not enough, the Papandreou government did not take a

Economic & Political Weekly

may 26, 2012 vol xlviI no 21

single action to combat corruption or to go after the rich and the big businesses which owe some 42 billion euros in back due taxes. Nor did it show any willingness to collaborate with the Swiss government in order to go after the estimated 600 billion euros that Greek tax fugitives have stashed away in Swiss bank accounts. And neither did his government reduce state expenditures or even undermine the power of vested interests. When all said and done, even the military junta that ruled the country with an iron fist from 1967 to 1973 would not have dared to implement the open class warfare against the average citizens as Pasok did under the Papandreou government. Part of this footnote comes from my article “The Greek and the European Crisis in Context”, New Politics, Vol XIII, No 4 (Winter 2012): 53-54.

5 See Costas Meghir, Dimitri Vayanos and Nikos Vetta, “The Economic Crisis in Greece: A Time of Reform and Opportunity” (5 August 2010, p 11). The article is available at

6 See James F Petras, “Spanish Socialism: On the Road to Marbella”, Crime, Law and Social Change, Vol 14, No 3 (1990): 189-215.

7 Corruption in Greece and Spain applies to all major political parties and certainly continues down to this day. In 2009, over 700 public offi cials in Spain were facing criminal investigation for corruption, with most cases being linked to the explosion of the housing market. In Greece, on the other hand, public officials rarely, if ever, face trial for corruption.

8 International Monetary Fund. Portugal Fast Facts at countryfacts/prt/index.htm

9 See Richard Gillespie and Tom Gallacher “Democracy and Authority in the Socialist Parties of Southern Europe” in Tom Gallacher and Alan M Williams (ed.), Southern European Socialism: Parties, Election and the Challenge of Government (Manchester, UK: Manchester University Press), 1989, p 164.

10 Portugal has a number of parties which call themselves social democratic, but names are deceiving. Aside from the socialist party, there is the Social Democratic Party, which belongs to the ideological camp of the European right. This is the party of the president of the European Union José Manuel Durão Barroso, in which he served as its leader from 1999 to 2004. Then there is the Democratic and Social Centre Party, a Catholic, conservative-based party.

11 See Joana Gorjão Henriques, “Portugal’s Left Suffers an Identity Crisis”, The Guardian (7 February 2012) at commentisfree/2012/feb/07/portugal-leftidentity-crisis-socialist-party

12 See James Kurth and James F Petras, Mediterranean Paradoxes: Political and Social Structures in Southern Europe (Oxford, UK: Berg), 1993.

13 See José M Magone, The Politics of Southern Europe: Integration into the European Union (Westport, CT: Praeger Publishers), 2003.

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