'The Greek saga: competing explanations of the Greek crisis - A Marxist alternative', 1st World...
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1st World Keynes Conference
Attacking the Citadel: Making Economics Fit for Purpose
Izmir University of Economics, Izmir/Turkey
26-29 June 2013
The Greek saga: competing explanations of the Greek crisis - A Marxist
alternative*
Stavros D. Mavroudeas
Associate Professor
Dept. of Economics
University of Macedonia
e-mail:[email protected]
&
Dimitris Paitaridis
Dept. of Public Administration
Panteion University
e-mail:[email protected]
Preliminary Draft
Abstract
This paper reviews the alternative explanations offered to explain the
Greek crisis and checks there analytical and empirical validity. The first
part focuses on the mainstream explanations. It distinguishes three main
versions. The first, stemming mainly from the dominant EU circles,
considers the Greek crisis as a historical accident; a case of policy-driven
economic imprudence: it is a Greek disease which contaminates
through contagion mechanisms the rest of the EMU. Hence, it is not
*We are indebted to Costas Passas for constructive comments.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected] -
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geared to any structural contradictions of the European integration project.
The second version, having more Anglo-Saxon origins, recognizes certain
structural causes of this crisis; namely the Eurozone being a non-optimal
currency area. It argues that EMUs fundamental flaws cannot be rectified
and its collapse is on the table. The third version is a middle-of-the-roadblend: while the Greek crisis has national origins it abated existing flaws
of the EMU. However, these flaws can be rectified. All these versions are
criticized for failing to account for the economic crisis of 2007-8 and its
effects on the whole European Union edifice. The second part reviews
certain radical explanations offered and particularly those around the
financialization thesis. These explanations are criticized for mimicking
the mainstream approaches; particularly regarding the 2007-8 economic
crisis. They are also criticized for failing to explain satisfactorily the
Greek crisis in both analytical and empirical terms. The last part offers an
alternative Marxist explanation of the Greek crisis. This explanation
stresses two main aspects. First, it is argued that 2007-8 economic crisis is
a crisis a-la-Marx (i.e. stemming from the tendency of the profit rate to
fall) and not a primarily financial crisis and this represents the internal
cause of the Greek crisis. Second, it is shown that apart from the
internal cause there are also external causes. These come from the
relations of imperialist exploitation that exist within the EU and which
relegate a host of countries to the dismal position of the euro-periphery.
I. Introduction
Today the Greek economy is in the spotlights of international attention as one
(if not the major) epicenter of Eurozones crisis. It is considered one of the main (if
not the main) sovereign debt crisis threatening the foundations of the ambitious
european integration project as expressed by the European Union (EU) and
particularly its European Monetary Union (EMU). The Greek economy is considered
to suffer from the twin deficit disease, i.e. to have an exorbitant fiscal deficit that
ultimately led to an unsustainable foreign debt (expressed in a worsening current
account deficit). The fiscal deficit is attributed to the profligate nature of the public
sector. This was covered through external borrowing worsened the current account. In
addition to that, a worsening competitiveness is diagnosed and attributed mainly to
labor market rigidities and institutional unfriendliness to entrepreneurship. This
worsened further the current account.
The whole affair began in the end of 2009. Previously, Greece had for quite
lengthy periods high fiscal deficits and public debt but was able to finance them via
either internal or/and external borrowing without serious problems. Greecesaccession to the EMU placed fiscal deficit and public debt under the constraints of the
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Maastricht treaty. However, these were violated not only by Greece but by almost
every other EMU country since these constraints proved to be rather unsustainable.
The Greek crisis erupted when the newly-elected PASOK government revised
upwardly the estimates of the Greek fiscal deficit amid internal and external talks for
Greek statistics (i.e. manipulation of statistics by successive Greek governments)
1
.This ignited a crisis of confidence in international markets concerning Greece's ability
to meet its debt obligations which resulted in the widening ofbond yield spreads
(particularly the one related to the German bund) and the increase of the cost of risk
insurance on credit default swaps (again compared particularly to that of Germany).
This led, in April 2010, to the downgrading of Greek government debt to junk bond
status by the international credit rating agencies2 which signified that international
private capital markets practically ceased to fund Greeces sovereign debt. The Greek
government requested EU assistance which took the form of two assistance programs
(Economic Adjustment Programs) encapsulated in respective Memoranda of
Understanding (MOU) signed between the Greek government and the so-called troika
(i.e. EU, ECB and IMF since the latter, after much deliberation, took part in the
programs). The second program was required because of the obvious failure of the
first, despite its numerous revisions. However, the same fate seems to apply to the
second program as well.
The first Greek MOU -signed in March 2010- entailed a 110 billion bailout
loan for Greece given by the troika. It was tied to a Memorandum (MOU) dictating
widespread austerity and privatization measures to restore fiscal balance. The loan (80
bn. by the EU and 30 bn. by the IMF) would be advanced during a 3-year periodwith a 5% interest rate. It aimed at cutting the fiscal deficit from 13.6 % of the GDP
(2009) to below 3% by 2014. It envisaged a 4 or 5 year program during the first two
years of which there would be a cumulative contraction of the GDP by 6.6% which
1On 20 of October in 2009, PASOKs finance minister, G.Papakonstantinou, stated that the fiscaldeficits estimates (6.7% of the GDP) presented by the previous ND government were massaged and
that the accurate estimate is 12.8% of Costas Karamanlis (New Democracy) had been showing were
misstated. He announced that the Deficit is 12.8%. Then he further upgraded the rate to 13.6% on 22nd
April 2010. This caused a lively debate in Greece since PASOKs increase of the fiscal deficit was
disputed by both the Right and the Left as engineered and inflated. Three were the main argumentsagainst the increase of the estimates. First, that ELSTAT (the Greek Statistical Service under its new
PASOK-appointed director) used a new EUROSTAT methodology (which includes in fiscal deficits
those of the wider public sector) which was not used by the other EU members (since it was left to their
discretion its application). Second, that the 2009 Greek deficit (measured with the new more strict
methodology) was compared with the 2008 deficits of the other EU countries. Third, there was a
significant underestimation of the GDP (which inflated the deficit/GDP ratio). Quite tellingly, thesearguments have been advanced even by other PASOK-appointed members of ELSTATs governing
council) and the whole affair is currently under penal and parliamentary investigation of
G.Papakonstantinou and the A.Georgiou (ELSTATs head). 2
Fitch downgraded Greece to A- , in October 2009, and further degraded to BBB+ by the end of
December 2009. Standards & Poors and Moody also followed suit. However, it should be noted that
much can be said regarding the destabilizing role of the rating agencies. In particular, it has been
argued convincingly that ex ante they tend to underestimate fragilities and they tend to overestimateproblems ex post (when fragilities have caused them); for a review of the relevant literature and a study
of the problem see Grtner et al. (2011).
http://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Yield_spreadhttp://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Junk_bondhttp://en.wikipedia.org/wiki/Junk_bondhttp://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Yield_spreadhttp://en.wikipedia.org/wiki/Bond_%28finance%29 -
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would be recovered, to a great extent, during the next three years by a cumulative
5.3% growth.
Table 1. First GreekMOUs projections
2009 2010 2011 2012 2013 2014
Real GDP growth (Percent
change over the previous
period)
-2 -4.0 -2.6 1.1 2.1 2.1
General government balance
(percent of GDP)
n.a. -10.5 -14.2 -15.6 -15.9 -15.6
General government gross debt
(percent of GDP)
115.1 133.2 145.2 148.8 149.6 148.4
Source: EC (2010, pp.12 - 13)
Moreover, the whole program was strongly frontloaded (EC (2010), p.42)
aiming at a speedy return to private markets for long-term funding in early 2012.
Although the programs aims mentioned apart from fiscal consolidation the
improvement of competitiveness as well, most of its measures concerned the public
sector leaving the private sector mainly unaffected, at least directly (see EC (2010)
table 1, p.51). The first MOU underwent several reviews (five in total) and respective
recalibrations and changes both in required measures and aims. However, very soon it
was obvious that the program was not working and needed radical overhauling. The
main reason for its failure was the deeper than expected recession caused by the
program. The inherently pro-cyclical character of the IMF programs was augmented
by its frontload character (at the request of the EU), the lack of ameliorating
mechanisms (e.g. currency devaluation) and the deterioration of the world economy
(double dip). The contraction of the GDP (as shown in Table 2) was 21.5% for the
period 2009-12 and 8% (instead of the projected 6%) for the period 2009-10. This
derailed the fiscal balance and the gross debt ratios. Consequently, it became obvious
that (a) fiscal consolidation was not achievable at least within the scheduled time
horizon and (b) in order to avoid default the Greek economy required further financial
assistance.
Table 2. Actual GDP growth rates
2009 2010 2011 2012
Real GDP growth (Percent
change over the previous
period)
-3.1 -4.9 -7.1 -6.4
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Source: EUROSTAT
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pco
de=tec00115
Thus, in February 2012, a second Economic Adjustment Program was initiated
and a respective MOU signed between the same covenanters. This second bailout
package worth130 billion was accompanied by another harsh austerity program and
a voluntary debt restructuring agreement with the private holders of Greek
government bonds (banks, insurers and investment funds) called Private Sector
Initiative (PSI). The PSI organized a 53.5% nominal write-off voluntary and a bond
swap with short-term EFSF notes and new Greek bonds with lower interest rates and
longer maturity (their initial maturity was prolonged to 11-30 years). This is the
biggest debt restructuring ever done, affecting 206 bn of Greek government bonds
and leading to a 107 bn write-off. This made again looking feasible the target of
120% outlined in the first MOU. However, the net debt reduction was only 16 bn since the write-off was supplemented with the new loan. A new feature of the second
MOU was its emphasis not only on fiscal consolidation (as in the first versions of the
first MOU) but also on wider changes in the Greek economy in order to improve
competitiveness. Thus, the private sector was also affected by a series of measures.
This had only shyly been done by the first MOU. With the second MOU not only
fiscal consolidation but also increased competitiveness became the standards of the
adjustment program. On the other hand, building upon the measures dictated by the
first MOU and its reviews, the new austerity package deepened even further the
recession of the Greek economy leading to a dismal -6.4% for 2012 amid growingsocial and political unrest. The new pro-MOU government difficultly elected in June
2012 asked for a 2-year prolongation of the adjustment program (which would require
an additional third bailout worth of 32.6 bn.) which was denied by the troika. Thus,
the new government legislated a new 18.8 bn. austerity program including a vicious
labor market deregulation. In return, the EU lowered interest rates, prolonged debt
maturities and provided 10 bn. for a debt-buy-back program.
However, doubts continue to linger about the feasibility of the adjustment
programs. Growth rates continue to trail dismally behind their projections and this
derails both the public debt to GDP and the fiscal deficit to GDP ratios. Additionally,
public revenues from taxes and privatisations also continue to disappoint. Tax revenue
is hit hard not only from tax evasion but also by the recession. Privatisations do not
appear promising in a deteriorating national and international economic outlook.
Therefore, the aim of a 120% public debt to GDP by 2020 and a speedy return to
finance through private markets seems unachievable.
This paper reviews the various competing explanations of the Greek crisis. It
categorizes them in two main categories (mainstream and radical) and then proposes
an alternative Marxist explanation.
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115 -
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The mainstream explanations, which derive from either neo-classical or neo-
Keynesian economics, are divided in three perspectives:
(a)The first one considers the Greek crisis as a Greek disease (i.e. caused by specialpolicy errors and structural deficiencies). Therefore, it emphasizes mainly policy
errors and recognizes structural deficiencies only as a consequence of these
nationally-specific policy errors. This perspective is usually conferred by
European pundits coming from the dominant EU circles.
(b)The second perspective, usually stemming from Anglo-Saxon commentators,argues that whatever national disease was aggravated by EMUs structural
deficiencies. That is, EMU is characterized as a non-Optimal Currency Area
(OCA) which is prone to asymmetric shocks that exacerbate national diseases.
Thus, this second perspective emphasizes the European structural dimension. It
argues that EMUs fundamental flaws cannot be rectified and its collapse is on the
table.(c)The third version is a middle-of-the-road blend: policy-driven (national
disease) cum EMUs rectifiable structural flaws. It is argued that while the
Greek crisis has national origins it abated existing flaws of the EMU. However,
these flaws can be rectified.
All these versions are criticized for either attributing the problem to policy
errors or having a weak structural explanation. The first perspective, faithful to the
typical neoclassical approach to economic crises, considers the Greek case a national
specificity created by bad policies. The second perspective recognizes a rather weakstructural cause. It concerns mainly the sphere of circulation (i.e. how the common
currency is related to diverse national economies) and has not much to do with the
sphere of production per se. Concomitantly, Greek and the Eurozone crises have to do
mainly with the architecture of the European monetary system. The third perspective
also attributes the structural problems to the sphere of circulation (with the additional
argument that, contrary to the second perspective, these problems can be surpassed)
and neglects the sphere of production. Thus, all three mainstream perspectives fail to
appreciate the fundamental structural dimensions of the problem at hand.
According to them the Greek crisis, the Eurozone sovereign debt crisis and moreover
the 2007-8 global crisis have nothing to do with the sphere of production. The 2007-8
global crisis is considered solely a financial one, having nothing to do with real
accumulation. A more robust account should refer to the deeper structural problems
that arise from the sphere of production.
The category of the radical explanations is examined by focusing mainly on
the more popularfinancialization thesis; i.e. the argument that modern capitalism is
radically different from classical capitalism since money capital has not only broken
loose from productive capital but it is actually dominating the latter. The other radical
stream, underconsumptionism (which is usually blended with the financializationthesis) is neither particularly popular nor applicable regarding the Greek crisis. The
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financialization perspective emphasizes the structural component but only regarding
the sphere of circulation which is, implicitly or explicitly, assumed to dominate the
sphere of production. Two versions of the financialization argument are discerned
regarding the Greek crisis:
(a) The first version places financialization in the context of the North Southdivide. It attributes the imbalances that caused the Greek crisis predominantly to
this divide as it is articulated in the EMU.
(b) The second downplays the significance of the North - South divide as anerroneous dependency argument. Instead, it attributes the Greek crisis to mainly
national elements and less to EUs or EMUs structure.
Both perspectives are being criticized for analytical and empirical deficiencies.
More generally, they are too criticized for having a weak structural emphasis by not
considering the problems in the sphere of production.
Finally, a Marxist explanation of the Greek crisis is proposed. This
perspective offers a strong structural explanation by attributing the fundamental
causes of the Greek crisis to problems grounded in the sphere of production. More
specifically, it emphasises two structural components. First, it is argued that 2007-8
economic crisis is a crisis a-la-Marx (i.e. stemming from the tendency of the profit
rate to fall - TRPF) and not a primarily financial crisis and this represents the
internal cause of the Greek crisis. Second, it is shown that apart from the internal
causethere are also external causes. These come from the relations of imperialist
exploitation (i.e. unequal exchange) that exist within the EU and which divide it
between North (euro-core) and South (euro-periphery) economies. Greece obviously
belongs to the second group.
The paper is structured as follows. The next part surveys the mainstream
explanations. The third part analyses the radical explanations. The fourth part presents
the Marxist explanation. Finally the last part concludes.
II. Mainstream explanations
As mainstream explanations of the Greek crisis are categorised those inspired
from the neoclassical and/or neo-Keynesian perspectives 3 . Unsurprisingly, these
3The term mainstream economics is used in its broadest meaning. It signifies the dominant traditionof economics. This was initially expressed by the neoclassical economics and the post-Keynesian
neoclassical synthesis (which merged neoclassical methods and Keynesian approach macroeconomics).
After the neo-liberal onslaught of the end of the 20th
century (as expressed by monetarism initially and
the rational expectations theory subsequently) mainstream economics became even moreconservative.The majority of the Keynesian theory followed suit by adopting significant parts of the neoconservativeagenda. This realignment was expressed in the New Keynesians or New Consensus Macroeconomics.
http://en.wikipedia.org/wiki/Neoclassical_economicshttp://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Neoclassical_economics -
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explanations are offered not only from established academic voices but also from
institutional centers of the politico-economic establishments both in Europe and
elsewhere. As it has already been argued in the introduction, these mainstream
explanations of the Greek crisis fall into three distinct perspectives.
II.1 A primarily Greek disease
The first version has now become a bit arcane. It was expressed vociferously
during the beginning of the Greek crisis and before the eruption of the Eurozone
crisis. In its initial version it centered mainly upon the public sector as this basically
came under attack with the first MOU. Subsequently, after the first MOUs reviews
and as the private sector came also under attack, it was expanded to the whole Greek
economy. In a nutshell, it identified the Greek disease with two major deficienciesof the Greek economy: (a) large and persistent fiscal deficits financed through
borrowing (which created large external debts) and (b) a falling competitivess. It
argued that these deficiencies were caused by particular Greek national characteristics
(special policy errors and structural deficiencies), i.e. it is a Greek disease.
Therefore, it emphasizes mainly policy errors and recognizes structural deficiencies
only as a consequence of these nationally-specific policy errors. Again unsurprisingly,
this version was expressed predominantly by the EU, the ECB, commentators and
think-tanks of the euro-core countries but also by the Greek governments that signed
and support the troika MOUs. Of course it was echoed and popularized by Greek and
international media in order to justify and legitimize the first MOU.
The gist of this version is that Greece is a special type of economy (and
country) which is prone to fiscal profligacy. It is argued that it is characterized by
large and persistent fiscal deficits and a falling competitiveness, characteristic of the
lazy European South as opposed to the prudent European North. More specifically,
the mainstream mantra maintains that the Greek economy is characterized by low
productivity, high wages and a big public sector. High wages are the product of the
big public sector which is clientelist (thus voters are bought through provision of
employment and wages). In addition, the public sector has low productivity and afalling ability to collect taxes (due to clientelism fomenting tax evasion).
Consequently, fiscal deficits are accumulated. These are financed through loans
resulting in a widening external debt (expressed in a deteriorating current account).
Cheap borrowing was possible because since the entrance to EMU Greece benefited
from low interest rates. In addition, Greece exploited EUs benevolence by forfeiting
statistical data and thus violated the provisions of the Maastricht Treaty (that founded
the euro). With the advent of the 2007-8 crisis international financial markets started
scrutinizing fiscal deficits and external debts. Consequently, the unsustainability of
the Greek debt was discovered and the Greek crisis erupted. Thus, the deep fiscal cutsof the first MOU were justified. This was a political choice since the Greek and EU
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establishment aimed to pass piecemeal the MOU strategy. Therefore, it focused
initially on the public sector and public employees by staging a truly defamation
campaign aiming at creating a rift between public and private sector employees. The
slant of the lazy and corrupt public employees is the trademark of this first version.
However, as soon as the first MOU program started failing austerity had to be
expanded to the private sector. In order to justify this expansion the problem of
competitiveness was surfaced. It was argued that not only the public but also the
private sector is characterized by low productivity, high wages and rigid labor market
regulation culminating in a falling competitiveness. Consequently, the current account
worsened not only because of public borrowing but also because of diminishing
exports and increasing imports. High wages fueled consumption which was directed
towards imports, since domestically produced goods were uncompetitive. The
trademark of this new propagandistic campaign was that Greek workers collectively
(private and public sector) are overpaid and inefficiently working.
Typical examples of this perspective are offered by papers from the governing
EU and ECB bodies and from the Bank of Greece. For example, in the beginning of
the first Greek MOU (EC (2010), p.6) the origins of the Greek crisis are defined as:
(a)Persistent fiscal and external imbalances that led to a significant increase ingovernment and external debt
(b)Rigid product and labor marketsThese Greek vulnerabilities were exposed by the 2008-9 global crisis.
Subsequently - and while not at the origin of the problem - the banking sector was
affected by the economic and confidence crisis (p.7). The same verdict is professed,
in more damning terms, in the introduction to the second Greek MOU (EC (2012),
p.9). The origins of the Greek crisis are again attributed to:
(a)Unsustainable fiscal policies, partly hidden by unreliable statistics andtemporarily high revenues;
(b) Rigid labor and product markets;(c) Loss of competitiveness and rising external debt;
It is again reiterated that while not at the origin, the banking sector was
affected by the economic and confidence crisis. In a similar vein, Gibson, Hall &
Tavlas (2012, p.500-1) - the first and the third belonging to the Economic Studies
Directorate of the Bank of Greece - find the origins of the Greek crisis in the large
fiscal deficits and the falling competitiveness of the Greek economy:
Although entry into the euro area contributed to a period of prolonged and
robust growth, and low (by Greeces historical standards) inflation, two deep-
seated problems remained unaddressed; the country continued to run large
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fiscal imbalances and the countrys competitiveness already a problem upon
euro area entrycontinued to deteriorate.
It should be noted that in its 2010 version this explanation emphasized fiscal
and external imbalances with the emphasis on the former. The problem of
competitiveness is mentioned but in a somehow subdued manner. Moving to the
second MOU competitiveness is brought forward and emphasized4.
Finally, the same arguments are reiterated, in rather pedantic terms, by the
neoconservative Greek economists grouped in the greekeconomistsforreform.com
(e.g. Azariadis (2010), Dellas (2011), Ioannides (2012), Meghir, Vayanos & Vettas
(2010). Their arguments have nothing exceptional apart from some minor differences
between them (for example some prioritize the fall in competitiveness over the fiscal
deficits, e.g. Ioannides (2012)).
The Greek disease explanation suffered a hit when othercountries-members
(Ireland in the end of 2010, Portugal in the beginning of 2011) of the EMU faced
problems and entered also in bail-out programs through MOUs with the troika. What
was previously characterized as a special Greek disease was now discovered to be a
far wider problem. The initial reaction was to attribute the expansion of the problem
to contagion from Greece5. This, which is indeed a rather weak argument6, was
supplemented by collectively branding these countries (in fact all the PIGS
Portugal, Ireland, Greece and Spain) as EMUs outcasts: economies prone to fiscal
and banking profligacy: instead of a Greek a South disease was discovered. Thus,
beginning with non-other but the ECB (ECB (2012)), several economists (e.g. Kosters
(2009), Panetta (2011), Weidmann (2012)) identified fiscal profligacy as the root of
EMUs sovereign debt crisis.However, as the EUs crisis expanded beyond the PIGS
and started touching Italy and even euro-core countries (e.g. Belgium, Netherlands
and France) the popularity of the South disease explanation started receding.
In analytical terms, the Greek (or South) disease explanation hinges upon the
Twin Deficits Hypothesis which contends that there is a strong link between the
current account balance and the government budget balance. A twin deficit occurs
when an economy has a current account deficit plus a fiscal deficit with the causalityrunning from the latter to the former (see Appendix I). In the Greek case this
4The first MOU set as a short-term objective the fiscal consolidation and as a medium-term objective
the improvement of competitiveness and altering the economys structure towards a more investment-
and export-led growth model. However, in practical terms only the short-term objective was pursued.This was done by the PASOK government but in full knowledge of the troika (despite later bickering).5
A typical example is offered by Arghyrou & Kontonikas (2010) in a vehemently pro-MOU article:
the majority of EMU countries have experienced contagion from Greece, most prominently Portugal,
Ireland and Spain.6
It is a weak argument because, apart from expectations (and the mythical properties attributed to them
by mainstream economics), the only way that Greece could contaminate other EU members was
through its private creditors (banks and financial organizations). This channel, however important itmay have been it has, after the PSI, been checked as the great majority of Greek debt is in the hands of
official lenders (practically the troika).
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argument is expressed as follows. An increasing fiscal deficit is caused by the
profligate and clientelist state (mainly because of exorbitant wage increases but also
because of widespread tax evasion). In order to finance this fiscal deficit the country
borrows heavily. This has increased public debt. Since, after the accession to the
EMU, external borrowing was cheap and indeed favored by the EMUs rules
7
then thepublic debt became external debt; thus deteriorating the already existing current
account deficit. At this point a supplementary argument is brought forward: the
current account worsened not only because of the fiscal deficit but also because of the
falling competitiveness of the whole economy. Therefore, it is argues that the Twin
Deficits Hypothesis is verified.
The applicability of the Twin Deficits Hypothesis for Greece is far from
unambiguous (see Appendix 1). Studies that tested it have produced mixed results.
Most interestingly, a recent study (Katrakilidis & Trachanas (2011)) has argued that
while the Twin Deficits Hypothesis is confirmed for the pre-accession to the EMUperiod (1960-80) it is rejected for the post-accession period (1981-2007). For the
latter period the opposite is confirmed: trade (and thus current account) deficit has
caused increasing budget deficit.
II.2 EMU is not (and cannot, at least easily, become) an OCA
The second perspective argues that, whatever national Greek disease exists,
it is aggravated by EMUs structural deficiencies. That is, EMU is characterized as a
non-Optimal Currency Area (OCA) which is prone to asymmetric shocks that
exacerbate national diseases. Thus, this second perspective emphasizes the
European structural dimension. It argues that EMUs fundamental flaws cannot be
rectified (i.e. EU cannot become something similar to the US) and its collapse is on
the table. This view centers only passingly on the Greek case per se. It takes it, as well
as those of the other PIGS, as a springboard to spearhead its main criticism: EMU is
inherently faulty. This perspective is expressed mainly by Anglo-Saxon commentators
either neoliberal (e.g. Feldstein (2010a)) or neo-Keynesian (e.g. Krugman (2012a)).
Characteristically, Feldstein (2010a) argues that:
The European economic and monetary union is doubly flawed. First, it
forces diverse countries to live with a single interest rate and exchange
7For example, the Greek state could not resort to direct - and more or less obligatory - internal
borrowing as it used to do before entering the EMU. It has to borrow through open market transactions;that is find a group of underwriting banks (usually five big banks from Germany, France, US, Greece
and some other EU country) to act as intermediators. This group of underwriters found creditors
usually in international markets. The problem with this process is that internal borrowing can be far
more easily manipulated in case of sovereign debt problems whereas external borrowing (especiallywhen governed by English law) is far less malleable.
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rate that cannot be appropriate for all members. Second, combining a
single currency with independent national budget policies encourages
fiscal profligacy. The Greek situation is a manifestation of these flaws.
And elsewhere, Feldstein (2010b) maintains that:
The crisis in Greece and the debt problems in Spain and Portugal have
exposed the euros inherent flaws.
Feldsteins position is reiterated by the Thatcherite Institute for Economic
Affairs (IEA). In a 216-page study, edited by Ph.Booth (Booth (2013)) it gives a
characteristically damning account of the EMU from a neo-liberal perspective. The
central conclusion is that the EMU is inherently flawedby not being an OCAand
that it should be either broken up in an orderly way or radically reorganized along
even more neoliberal lines.
The same line is towed by The Economist (2010):
The Greek crisis only confirms the folly of binding a group of
disparate countries together in a currency zone with no mechanism,
such as a central fiscal authority, to address its internal imbalances. The
north-south divide in the euro area looks more marked than ever. The
north, exemplified by Germany, relies on exports to power its growth,
saves hard and runs trade surpluses. The southern economies, such as
Greece, have leant too heavily on consumer spending, have weak public
finances and rely on foreign capital to supplement their low savings.
But also, from the neo-Keynesian side of the fence, Krugman echoes the same
argument. In a series of works he forcefully supports the OCA theory (e.g. Krugman
(2012b)) and he argues that the existing crisis is nothing but the consequence of the
Eurozones difficulties dealing with asymmetric shocks (Krugman 2012a).
To be more accurate, these predominantly Anglo-Saxon accounts do not
absolve Greece from being responsible for the problem. On the contrary, they usually- particularly the neoliberal accounts - press forcefully the Greek profligacy argument.
But, as said before, the crux of their argument is against the EMU. This emphasis has
a twofold explanation.
The first explanation is geopolitical or has to do, in Marxist terminology, with
the intra-imperialist contradictions. The euro is one of the main instruments through
which European capitals (and the EU as their expression) strive for world supremacy
against the US. As such it attracted US antipathy from its very beginning. Even in
academic accounts this reason cannot be fully disguised. Again Feldstein (1997),
commenting about the upcoming EMU, expressed it in almost explicit terms: the
adverse economic effects of a single currency on unemployment and inflation would
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outweigh any gains from facilitating trade and capital flows and that, while
conceived of as a way of reducing the risk of another intra-European war, it was
more likely to have the opposite effect and lead to increased conflicts within
Europe and between Europe and the United States.
The second explanation is academic and has to do with the theory of Optimal
Currency Area (OCA - McKinnon (1963), Mundell (1961)). According to this theory
in order for a currency union (that unites several diverse in character and structure
economies) to be such an area it has to fulfill several crucial requirements. These are
the following:
(a) It must have high productive factors mobility. This implies not only highcapital but also high labor mobility.
(b)It must generate a viable process of structural economic convergence. Thisparticularly implies similar business cycles and trade patterns.
(a) It must have a fiscal mechanism (i.e. some degree of fiscal integration) sothat transfers could be made to countries hit by asymmetric economic
shocks.
The majority of the US (and to a great degree Anglo-Saxon) views opined that
EMU is far from being such a currency area. The first feature (particularly regarding
labor) is notoriously missing8. The second feature is also very erratic in the sense that
periods of economic convergence are succeeded by periods of even greater
divergence. Finally, the last feature is simply negligible9. Instead of it there were the
inadequate Maastricht Treaty criteria and then (with the onset of the 2007-8 crisis) the
equally inadequate and hastily conceived Stability and Growth Pact criteria.
On the basis of the academic arguments of OCA theory the US academic
antipathy towards the EMU took flesh and bones. The stance of the majority of US
economists towards the euro was nicely summarized by Dornbusch (2001) in his
famous expression: It cant happen, its a bad idea, and it cant last. Jonung & Drea
(2009) offer an excellent but partisan (trying to vindicate the EMU) survey of US
economists opinions. They meticulously plot both the different stances (e.g. OCA
theory prone academics versus the practically oriented FED economists) and theevolution of the US debate. The general conclusion is that the US debate underwent
significant changes, continuously evolving in response to actual events, starting in the
early 1990s from a rather skeptical view of the EMU as being unlikely to happen, or
at least not according to schedule, to an acceptance of the euro in the late 1990s,
sometimes combined with the prediction that it would not last very long. But as soon
8Labor mobility within the EU is relatively low. According to an ECB report, in 2000 only 0.1% of the
total EU-15 population (or 225,000 people) changed official residence between two member countries
(Heinz & Ward-Warmedinge (2006)). Additionally, most of this labor mobility reflected the influx of
Eastern European migrants. In a marking contrast, labor migration between US states was 5.9 % of itstotal population in 2000 (Heinz & Ward-Warmedinge (2006)).9Only 1.24 % of EUs total GDP is being used for fiscal transfers (McDougall 1992).
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as Jonung & Drea were ready to declare the victory of European political will over
US skepticism10 the eruption of the European sovereign debt crisis put a sudden
brake. As already shown, US criticisms returned with vengeance (accompanied with
the increasing conflicts between the US and the EU11).
Actually, the OCA theory is the closer thing mainstream economics have to
the Marxist disproportionality (or uneven development) thesis. The latter argues that
capitalism is characterized by the uneven development of either the regions within a
single economy or between different countries. As such it is the exact opposite of the
convergence thesis that is derived by definition from the neoclassical growth model12.
Marxist Political Economy argues that convergence is a utopia and capitalism is
inherently prone to uneven development. This unevenness refers primarily to the
production sphere and is then expressed in the sphere of circulation. Mainstream
economics cannot have this production-centered emphasis as they are by construction
economics of the exchange sphere. The OCA theory is the closest possible notion tothe disproportionality argument. It essentially states that unless there is a production-
based convergence then any circulation-based unification is futile. And as such it has
been vindicated regarding the EMU. The European integration project, particularly
regarding its monetary unification, has proceeded from failure to failure through acute
political voluntarism. Each previous monetary unification project ended in failure;
beginning with the Werner plan, following with the snake in the tunnel, the
European Monetary System and the Ecu. Each failure was responded with an even
more ambitious leap forward. The EMU and the euro are by far the most ambitious
leap. However, it is faced with far more serious problems from its predecessors(which unlike it had provisions for an organized dissolution mechanism in case of
failure) and the prospects of an ever more disastrous failure. The gist of its problems
is capitalisms inherently uneven development and the concomitant inability to create
a unified state behind the economic integration.
Concluding, this mainly Anglo-Saxon explanation of the Greek crisis while
sharing the fiscal profligacy argument of the first explanation recognizes a rather
weak structural cause. It concerns mainly the sphere of circulation (i.e. how the
common currency is related to diverse national economies) and has not much to do
with the sphere of production per se. Concomitantly, Greek and the Eurozone crises
have to do mainly with the architecture of the European monetary system.
10In a similar vein, De Grauwe (2003, p.58), while accepting the OCA theory and pointing out himself
to certain EMU deficiencies, he rejects US skepticism: The traditional theory of optimal currency
areas tends to be rather pessimistic about the possibility for countries to join a monetary union at low
cost.11
For an analysis of the intra-imperialist contradictions between the US and the EU see Mavroudeas(2010a, 2010b, 2012).12
For a review of the convergence thesis see Mavroudeas & Siriopoulos (1998).
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II.3 The Greek problem has national origins exacerbated by errors in EMUs
structure
The third mainstream explanation of the Greek crisis is a middle-of-the-road
blend. It can be branded as policy-driven (national disease) cum EMUs rectifiable
structural flaws. It is arguing that while the Greek crisis has been caused by a
combination of national policy errors (high fiscal deficits and debt) coupled with
problems created by the incomplete economic unification of the EMU. Consequently,
it is argued that a deepening of the economic and political unification of the EU will
solve these problems. Essentially, this explanation comes from mainly European
analysts that are in favor of European unification but have ideological or practical
reservations regarding the actual process of this unification. To a great extent these
views have Keynesian (or even post-Keynesian) origins.
De Grauwe features prominently among this stream. In De Grauwe (2010a,p.1) he argues that the major responsibility for the Greekcrisis rests with the Greek
authorities who mismanaged their economy and deceived everybody about the true
nature of their budgetary problems. Then he adds that:
The crisis has exposed a structural problem of the Eurozone that has
been analyzed by many economists in the past. This is the imbalance
between full centralization of monetary policy and the maintenance of
almost all economic policy instruments (budgetary policies, wage
policies, etc.) at the national level. Put differently the structural problem
in the Eurozone is created by the fact that the monetary union is not
embedded in a political union. (De Grauwe 2010a, p.4)
In another paper he explicitly rejects the fiscal profligacy argument for Spain
and Ireland (but not for Greece):
Are such difficulties due to irresponsible fiscal policies? This could be
the case for Greece, but not for Spain and Ireland, so fiscal profligacy
cannot be identified as the in-depth source of eurozone problems. (De
Grauwe 2010b)
The same argument is voiced by Lane (2012): Although Greece (and Italy)
has a debt profligacy record (opp.51), the origin and propagation of the European
sovereign debt crisis can be attributed to the flawed original design of the euro
(opp.65). Thus, the main flaw is that the monetary union was not accompanied by a
banking and fiscal union (opp.49).
Similar concerns are being advanced by explicitly post-Keynesian economists.
Botta (2012p.3) argues that Actually, the current eurozone crisis seems to have been
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decisively aided by the original institutional setup of the eurozone and its incomplete
nature with respect to a fully developed federal union.
Again from the post-Keynesian camp, Hein, Truger & van Treek (2011)
emphasize the existence imbalances in the Euro area as the root cause of the euro
crisis. They explicitly reject the first mainstream explanation:
The current euro crisis is considered by many observers above all by
the dominating economic policy makers and advisors in Germany and
also in the European Commissionas a crisis of government deficits and
debt. (Hein, Truger & van Treek (2011), p.3)
The current euro crisis can better be interpreted as the consequence of
preceding private debt and current account imbalances and not as a result of
excessive public deficits. In the four countries outlined above, the privatesector obviously tended to spend more than its income. This was associated
with government surpluses (Ireland, Spain) or amplified by government
deficits (Portugal, Greece), which led to very high and rising current account
deficits in the four countries.(Hein, Truger & van Treek (2011), p.9)
This post-Keynesian emphasis on EMUs imbalances and particularly those
associated with the balance of payments (hence the current account) is quite
interesting. As such it points out to a structural characteristic of the EMU which
sometimes it has been branded as neo-mercantilism: the Eurozone is structured in
such a manner as to merit the trade surpluses of the Northern countries against the
trade deficits of the Southern countries. This argument can be found also, as we will
explain later, in the more radical post-Keynesian financialization explanations of the
crisis. Tellingly, several of the post-Keynesians belonging to this third middle-of-the-
road explanation of the Greek crisis they participate also to the radical
financialization thesis (e.g. E.Hein). On the other hand, the current account
imbalances argument has been taken up by more conservative theorists that do not
ascribe to the financialization thesis but aim for a more unified European integration
(e.g. Merler & Pisani-Ferry (2012)).
There are a number of problems with this third mainstream (and quasi-
mainstream in its post-Keynesian variant) perspective. The first has already been
mentioned. It offers a structural explanation but this is a weak one. It attributes the
structural problems to the sphere of circulation and neglects the sphere of production.
It agrees with the second mainstream explanations with regard to EMUs problems
pointed out by the OCA theory. But it believes that a more unified economically and
politically EU can overcome these problems. In this belief it departs from the harder
versions of the second explanation which believe that an economic and political
unification of the EU similar to that of the US is impossible. This is the second major
problem of this perspective. Its political and economic voluntarism goes against
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historical wisdom. Europe has been the main ground where capitalism was born on
the basis of the nation-state and the national economy. Almost every inch of the
borders of each state have been soaked in blood in wars against its neighbors. Hence
national political and economic identities are deeply entrenched. Moreover, the
current Eurozone crisis has already torn apart whatever feeble pretext existed of acommon European identity and a European solidarity. In stark contrast, national
interests have resurfaced with vengeance. This makes this aim of a politically and
economically unified Europe a utopia unless a major European power (or a bloc of
them) achieves overpowering dominance over the other members of the EU. But,
whatever the power of Germany and its allies is, there is a long and precarious road to
go till it succeeds in this endeavor.
II.4 Mainstream explanations: A Critique
Over time mainstream explanations of the Greek crisis evolved from monistic
explanations to a more eclectic mix. The more articulate of them usually attribute its
origins at two sets of causes (e.g. Nelson, Belkin & Mix (2011)):
(a) internal causes: exorbitant public expenditure, weak tax collecting
mechanism, corruption and clientelism (even sometimes cronyism), over-regulated
labor and product markets, high wages, an non-market friendly institutional
environment, deteriorating competitiveness etc.
(b) external causes: EMUs deficiencies, the repercussions of the 2007-8
crisis etc.
Notwithstanding, this eclecticism hides behind it versions (or combinations) of
the three previously delineated explanations. Moreover, the great majority of
mainstream explanations, irrespective of their differences, ultimately understand the
internal causes of the Greek crisis through the lenses of the Twin Deficits
Hypothesis13. This is their hardcore analytical device since all of them identify the
Greek crisis as simply a (fiscal) debt crisis which evolved in an external debt crisis(i.e. in toto as simply a debt crisis). The adoption of this analytical argument by even
vehement neoliberals is quite interesting given its Keynesian origins. Of course, some
explanations may add a bit of salt here and there; especially by stressing the
importance of clientelism and the institutional framework. Some might even extent
clientelism not only to the working class and the middle strata (which is the typical
argument) but also to Greek capital. These accounts add to (popular) clientelism the
upper-class cronyism of Greek capitalism; i.e. the close crony relations existing
13Only the post-Keynesian variant of the third explanation might differ with regard to the Twin
Deficits Hypothesis by stressing the current account imbalances as an independent factor causing theGreek problem.
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between the systemic political parties and Greek capitalists (especially the private
media and the banking sector). Cronyism is accused of falsifying free competition and
thus hinders growth by receiving rents. Notwithstanding, the gist of mainstream
explanations rests upon the Twin Deficits Hypothesis.
Then wages are posited as the factor triggering both the fiscal and the current
account deficits (and even irrespectively of the controversy between the Twin Deficits
and the Ricardian Equivalence Hypotheses). The typical argument is that Greek
(nominal) unit labor costs increased faster than those of the other European countries.
Thus they worsened both the budget deficit and the current account deficit. To be
frank they could be other analytical choices. For example, as some radical (e.g.
Stathakis (2010)) but also Marxist explanations (Mavroudeas (2010a) argue that the
deterioration of the fiscal deficit can be rightfully attributed to upper-class notorious
tax evasion and cronyism. The former depresses public revenues and the latter
augments public expenditure; thus, in conjunction, derailing the fiscal deficit.However, the mainstream explanations stick, for obvious reasons to the supposedly
high wages as the main cause of the big and persistent fiscal deficits. There is a
wealth of evidence proving this point. Starting from the high bodies of the EU and the
Greek government and moving to the groups of neoconservative economists this
argument is reiterated almost verbatim. For example, the first MOU states that:
Real wage growth consistently outpaced productivity gains over the past
decade, in part reflecting spillovers from very high public wage
increases. The resulting increase in ULC (unit labour costs) erodedexternal competitiveness, not least with respect to the rest of the euro
area. (EC (2010), p.3)
Even those emphasizing the deterioration of competitiveness over the
worsening of fiscal deficits put the blame on the wages. For example, Ioannides
(2012) argues that the basic cause of the Greek crisis has been the deterioration of its
competitiveness, mainly due to the rise of unit labor costs, but also due to the existing
non-market friendly regulatory framework14.
There are a number of well-known problems with this argument.
(1) There is an extensive literature disputing whether (nominal) unit labor
costs are a convincing measure of competitiveness.
(2) The famous Kaldor paradox argues that competitiveness is not an
exclusive virtue of low wages; on the contrary. A crucial corollary of the Kaldor
14There are some dissenters on this point. For example Hardouvelis (2010) - who had influential
governmental advisory positions during several Greek administrations and Malliaropoulos (2010) donot appear to agree, at least wholeheartedly, that increased wages are the main cause of the
deterioration of competitiveness.
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paradox is that competitiveness depends not only on costs and especially wage costs
(costs competitiveness) but also on qualitative factors (structural competitiveness).
(3) Contrary to the assertions of the EU and the Greek government, Greek
wages have been constantly lagging behind productivity increases. Furthermore,
Greek productivity increases have been much better that, for example, those of
Germany. Thus, the Greek real unit labor costs (i.e. the wage share in the product)
have been falling continuously for several decades.
(4) A decrease in wages aiming to restore competitiveness presupposes that
rival economies will maintain their wages stable or, at least, will reduce them less.
However, the universal trend is a downward push on the level of the real wages. This
can take place by two ways: a) directly through legal acts including the MOUs and, b)
indirectly by the increase15 of the reserve army of employees due to depression,
political turbulence and war conflicts.
Some of these arguments have been voiced, rather shyly, even in the ECB
bulletin before the onset of the crisis. Thus it has been convincingly argued that the
data on labor compensation and productivity suggest that the weakness of the external
accounts of several EMU countries comes from the international specialization of
their economy, rather than from the faulty management of the labor market. The
ECB (2008, p.92) confirms this when it claims that in the first 10 years of the EMU
the member economies with an overweight in labor-intensive sectors lost positions in
favor of emerging economies with a relative comparative advantage, whereas member
economies specialized in the higher-price and higher-quality segments of mature
industries and products even gained market shares. This implies that the loss of
competitiveness of some EMU economies was caused by structural deficiencies and
not by wage increases.
But the mainstream explanations of the Greek crisis have also wider problems.
First, they totally underestimate the role of the 2007-8 capitalist crisis. This, as
said before, is unanimously considered as a mere financial crisis without origins and
causes in the sphere of real accumulation. However, if this crisis is so significant andlengthy as it appears to be, it must surely have some basis on the main sphere of
economic activities (the sphere of production).
Second, they consider the Greek crisis as independent of the 2007-8 crisis.
This is a point on which both international and Greek pundits agree. Most
international reports (those of the EU, ECB and IMF included), before the onset of the
Greek crisis, maintained that the Greek economy was insulated from the 2007-8 crisis
and that, once the crisis erupted, it was left unattached. Indicatively, in a pre-election
15Richard M. Goodwin (1967) has ingeniously described the relationship between the level of the
reserve army of employees and accumulation of capital, as a unified and cyclical process.
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debate in 2009 both G.Alogoskoufis and N.Christodulakis 16 agreed that the Greek
economy is insulated from the crisis because its banking sector is better capitalized
than those of the West. The 2007-8 crisis has only an exogenous impact on the Greek
economy by worsening the international economic environment and setting off grey
expectations about sovereign debts.
Last and compounding all the previous problems, all three mainstream
perspectives fail to appreciate the fundamental structural dimensions of the
problem at hand and instead relegate it either to policy errors and/or to weak structural
origins. The first perspective, faithful to the typical neoclassical approach to economic
crises, considers the Greek case a national specificity created by bad policies. The
second perspective recognizes a rather weak structural cause. It concerns mainly the
sphere of circulation (i.e. how the common currency is related to diverse national
economies) and has not much to do with the sphere of production per se.
Concomitantly, Greek and the Eurozone crises have to do mainly with the architectureof the European monetary system. The third perspective also attributes the structural
problems to the sphere of circulation (with the additional argument that, contrary to
the second perspective, these problems can be surpassed) and neglects the sphere of
production.
III. Radical financialization explanations
Several radical explanations17 of the Greek crisis have been advanced. The
main points that differentiate them (apart from the methodology and the analytical
tools) from the mainstream explanations are the following:
(a)They emphasize the crisis-prone nature of capitalism. Consequently, moreemphasis is placed on the structure of world capitalism and on the 2007-8
crisis.
(b)They are critical of the neoliberal dominance of economic theory andpolicy over the last three or four decades and put the blame for the
problems that arise to neoliberalism.(c)They criticize the neoliberal architecture of the EMU and argue either for
its dissolution or for its radical overhauling.
Overall, radical explanations are shy of recognizing the general deficiencies of
the capitalist system; although several of them do mention them but in a rather
16They are both academic economists which have served as finance ministers the former of ND and the
latter of PASOK.
17
The term radical is used here to denote approaches belonging to heterodox economics. That meansperspectives belonging to the radical post-Keynesian, institutionalism, Radical Political Economy etc.
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implicit of disguised manner (e.g. Polychroniou (2013)). However, they do not think
that the immediate problem is capitalism as such but rather its forms of management.
Therefore, they strive for an end to neoliberalism and a return to more humane form
of capitalism (or variety of capitalism, for those ascribing to the varieties of capitalism
approach - VoC). The more politically radical versions consider this step a movetowards a long but unspecified march to socialism. Several of these more politically
radical approaches have a relation to Marxism and some even ascribe to Marxism as
such. However, in this work we will treat them as separate from Marxism per se. This
does not reflect a sectarian view but crucial analytical and political considerations.
The gist of these considerations is twofold:
First, the rate of profit i.e. the crucial Marxist variable for understanding
capitalism and especially its crisesis absent from their analyses. Instead some form
of Keynesian lack of effective demand or neo-mercantilism argument is employed.
Second, even the more radical versions that refer to socialist transition cannot
and in fact are unwilling todefine the exact process through which the overturn of
the capitalist assault is a link in the transitional socialist program.
The focus of this chapter would be on the financialization versions of the
radical explanations. This does not imply that other versions do not exist. For
example, there is another radical version that recognizes the Greek crisis as a mainly
fiscal crisis but attributes it to the tax-evading and crony nature of Greek capitalists
(e.g. Stathakis (2010)). Others (e.g. Laskos & Tsakalotos (2012)) add to this the
argument about the trade imbalances existing within the EMU that we have seen in
the third middle-of-the-road variant of the mainstream explanations. The more
traditional underconsumptionist explanations of crises (either of the Marxist Monthly
Review (MR) or the Keynesian variant) are not popular regarding the Greek crisis.
The main reason is that they do not fit to empirical data as the period preceding the
onset of the crisis was characterized by a spectacular growth of consumption. Thus,
underconsumptionist views usually hide behind the financialization thesis. The latter
is by far the more popular radical explanation of the Greek crisis.
The financialization thesis argues that in modern capitalism finance (i.e. theoperation of money capital) assumes an increasing primacy in relation to other
capitalist activities18. With regard to Marxism the origins of this thesis go back to
Hilferdings (1910 (1981)) seminal work and his implicit notion (never explicitly
stated) that in modern capitalism finance takes a dominant position. It was somehow
reiterated by Sweezy (1942). However, neither of them broke the classical Marxist
18In fact the notion of financialization covers a wide range of phenomena: the deregulation of the
financial sector and international capital flows, the proliferation of new financial instruments, the shift
to market-based financial systems, the emergence of institutional investors as major players onfinancial markets etc. However, the definition adopted in this paper focuses on the politico-economic
(and thus macroeconomic) aspect of the term.
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relationship between surplus-value and interest. The former is extracted 19 by
productive capital at the sphere of production and then it is redistributed between
profits (accruing to productive capital), interest (accruing to non-productive
finance capital) and commercial profits (accruing to non-productive commercial
capital).
A major change took place in the end of the 20th century. The predominance of
neo-conservatism and the structural transformations of particularly the Western
economies dictated by it led to widespread empirical beliefs (or stylized facts) that a
new era of capitalism has come: finance has broken lose from the grips of
productive capital and has established it dominance on the former. Several neo-
Marxist (but with a growing distancing from Marxism) and Institutionalist currents
(e.g. the Regulation Approach) have already been signaling this conclusion. This led
to the formation of the financialization thesis. Thus, in the beginning of the 21st
century the term as such was coined by radical approaches belonging to theKeynesian and Marxist approach (particularly their ambiguous merge in the Monthly
Review tradition). It was actually launched through a series of papers (by Kippner,
Crotty etc.) in an influential collective volume edited by Epstein (2005).
It was energetically adopted by post-Keynesianism who developed the concept
and its analyses (e.g. Stockhammer (2004)) and sometimes treated the term as their
exclusive property (e.g. Treeck (2008)). Seldom post-Keynesians posit
financialization within stages of capitalism theory arguing that a new stage of
capitalism has emerged by the end of the 20
th
century. This new stage is characterizedas finance-dominated capitalism (Hein (2013)) or finance-dominated regime of
accumulation (Stockhammer (2009)); the latter borrowing the terminology of the
Regulation Approach. The post-Keynesian launch of the term financialization was
based on the Keynesian notion of the rentier;i.e. an unproductive stratum collecting
various rents which are being subtracted from profits available for productive
investment. Thus, the rentier is a drag on capital accumulation.
The incorporation of the term in Marxist analyses followed a bit letter. The
Monthly Review (MR) school has used similar terms long ago (e.g. Sweezy (1994),
Editors (2008)) but not actually coined the term. Thus it adopted it rather lately in
order to explain the 2007-8 crisis since pure underconsumptionism had serious
explanatory difficulties (e.g. Foster (2010)). Coming from a different perspective
from that of the MR, Lapavitsas (2008) adopted the notion of financialization and
gave it a strange twist. He argued that financialization is a new stage of capitalism.
Till now his argument had nothing original comparing to its previous definitions.
What gave it its special flavor is the thesis that in this new stage of capitalism finance
19For an empirical interpretation of this scheme, see section IV.
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capital 20 not only dominates productive capital but it also exploits directly the
working class through usurious activities (through the provision of loans). Thus the
term financial exploitation was initially coined. After a series of criticisms (e.g. Fine
(2009)21) for confusing capitalist exploitation with pre-capitalist usurious exploitation
it was cosmetically changed to financial expropriation. However, the essentialmeaning of the term remained the same.
This paper rejects the financialization thesis on both analytical and empirical
grounds (as it will be shown in the next chapter). For reasons of brevity this critique
can be summarized as follows22. The basis of this rejection is that in analytical terms
financialization theories argue that capitalism has somehow returned to a pre-
capitalist stage: the period when capitalist relations were not yet born but the pre-
capitalist figures of the merchant and the bankeras they operated within feudalism
prepared the ground for capitalisms birth. The crucial point of the operation of
merchants and bankers in feudalism was unequal exchange and usury as a rule incontrast to equivalent exchange as a rule in capitalism. This functioning on the basis
of unequal exchange was able because of the monopolistic and heavily regulated rules
of the feudal system. Once however the primary accumulation of capital took place
and capitalism established the monopolistic feudal rules were abolished and capitalist
competition ruled. Then the operation of money capital took its characteristically
capitalist modus operandi. The financialization thesis argues that this is liquidated
and that there is a return to the pre-capitalist modes of operation. In other words,
financialization theories maintain that interest ceases to be a part of surplus-value
and that it acquires an independent existence. Concomitantly, money capital is notonly autonomised from productive capital but also dominates the latter. But, if the
latter is the ultimate source of wealth, this domination would necessary entail - and
this is actually a conclusion of financialization theories - a stifling of productive
investment and thus of the accumulation of capital. The obvious question is how is it
possible in the long-run such a deformed capitalism to exist. Additionally, regarding
the 2007-8 crisis, financialization theories argue that it is not an a-la-Marx crisis (i.e.
rooted in the sphere of production) but a financial crisis (a crisis of financialised
capitalism). In this they agree with mainstream theories. An obvious question is that if
the current crisis is so deep and prolonged as the financialization theories accept
then how it cannot be based on the fundamental economic sphere (the sphere of
production).
20The term finance capital is not identical to Hilferdings concept (which denotes the fusion of
productive with banking capital under the dominance of the latter). It refers to capital operating in thefinancial system (i.e. money and capital markets).21
Fine (2009) uses also the notion of financialization but in a different sense from that of the
approaches mentioned before. For him it does not constitute a new stage of capitalism and of course
finance capital cannot acquire an autonomous means of exploiting the working class (it will always be
dependent upon the extraction of surplus-value by productive capital). Thus, financialization is a
special phase of neoliberalism. New forms of operation of money capital and novel institutional
arrangements are policies that are used by capital in order to surpass its problems and contradictions.22Tom (2011) offers an interesting critique of financialization theories which concludes by showing
that they ultimately ascribe to a Keynesianpossibility theory of the crisis.
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Two versions of the financialization thesis can be discerned with regard to
the Greek crisis. The first one is by Lapavitsas and of course it ascribes to his notion
of financialization. The second one is expressed by Milios & Sotiropoulos and has
affinities with the post-Keynesian notion of financialization. Notwithstanding, their
main differences have to do with two more practical issues: (a) the North Southdivide in the EU and (b) whether Greece should remain in or leave the EMU.
Lapavitsas et al. (2010a, 2010b) argue that the Greek is a debt crisis. In this
they agree with the mainstream explanations. But they add that it is symptomatic of a
wider malaise (2010a, p.11). Its roots lay in (a) financialized capitalism and (b) the
EMU. Financialized capitalism caused the 2007-8 crisis which is not an a-la-Marx
crisis but simply a financial crisis. The rate of profit has not role in it. In Lapavitsas
own words (and without any attempt to substantiate it) it did not fall but also it did
not grow. The crisis was caused by financial leverage that created unsustainable
bubbles. The crisis affected the fragile foundations of the EMU. The latter is not anOCA which, according to Lapavitsas et al., is based on three pillars:
(a) the independent ECB which commands monetary policy
(b) fiscal stringency
(c) relentless pressure on wages in order to ensure competitiveness
Lapavitsas accurately points out that ECBs monetary policy follows the needs
of the euro-core countries (the North). However, the third point agrees with the
mainstream arguments on competitiveness. Then Lapavitsas et al. argue that the North
(and especially Germany) was more competent in pressurizing wages and thus
acquired a permanent competitive advantage against the South (the euro-periphery).
This is again the mainstream argument in reverse: it is not the lazy Southerners but
the over-prudent Northerners that caused the problem.
Thus, the Eurozone was polarized in a North with trade surpluses and a South
with debts: the North gave loans to the South in order for the latter to buy its products.
The eruption of the 2007-8 crisis disrupted this structure as international financialmarkets questioned the creditworthiness of Souths sovereign debts. Thus, the
Eurozones crisis began. According to Lapavitsas et al. the EMU transmitted the
world crisis in Europe because of the imbalances that were latent within it. Again, till
this point Lapavitsas et al. analysis does not differ essentially from post-Keynesian
analyses which accept a NorthSouth divide argument23.
23For example Stockhammer (2011, p.90) argues that this was not primarily a Greek crisis but a Euro
system crisis. The Euro has long been a political project based on dubious economics (opp.94). EMUis part of the global neoliberal pattern which began with the deregulation of finance (the neoliberal
mode of regulation) and gave rise to a finance-dominated accumulation regime. This polarized EU in
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The final conclusion of Lapavitsas analysis is that the EMU cannot be
rectified; although he sometimes refers to a European Marshall scheme as a solution
only to immediately discard it as implausible. Thus, he concludes that the only
solution for Greece (and indeed the rest of the euro-periphery) is to exit the EMU.
Regarding the relationship with the EU (i.e. in economic terms basically the CommonMarket) he remains agnostic.
Lapavitsas explanation suffers from the general weaknesses of the
financialization thesis. He neglects any reference to the production structure of the
Greek and the other EMU economies (for example differences in technological
structure and productivity as expressed in their Organic Compositions of Capital
(OCC)) or qualitative issues (productive specializations). Thus he is unable to see the
existence of relations of economic (imperialist) exploitation between the North and
the South (or else relations of broad unequal exchange24) and he understands only a
reversed and problematic version of the narrow unequal exchange. Moreover, heaccepts uncritically the mainstream arguments about Greek relatively high wages
being the cause of Greeces deteriorating competitiveness (for example he accepts
uncritically the high (nominal) unit labor costs argument).
His analysis suffers also on the financialization plain. The Greek financial
system was significantly less leveraged than the Western ones. Additionally, Greek
workers private debts are a relatively new phenomenon (they began with the
introduction of the euro) and they are smaller than their Western counterparts.
Therefore, financialization cannot be discovered in Greece and has to be importedfrom outside. Thus, in Lapavitsas analysis financialization is imported through
public (and not private) external debt.
The last error of Lapavitsas analysis concerns his policy suggestions. If the
Greek crisis is simply a debt crisis then there may be solved not by exiting the EMU
but by reforming it towards a full OCA (i.e. by unifying it fiscally and politically). If
the crisis is something more profound and has to do with the sphere of production and
relations of unequal exchange stemming from it then exiting the EMU and remaining
within the Common Market want suffice. A full exit from the EU is required. But
Lapavitsas shies away from this conclusion.
Milios & Sotiropoulos (2010) financialization explanation of the Greek crisis
is different. Contrary to the conclusions reached by Lapavitsas et al., Milios &
two groups: a Northern one following export-led growth and a Southern one following credit-led
growth (opp.86).24
Emmanouel (1972) distinguishes two categories of unequal exchange in international trade:
(a) Broad unequal exchange: it is derived from differences in the OCC, i.e. a more developed
country (with higher OCC) exploits a less developed country (with lower OCC).
(b) Narrow unequal exchange: it is derived from differences in the wage rate and the rate of
exploitation, i.e. a higher wages country is exploiting a lower wages country.
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Sotiropoulos (2010) argue that it was not the loss of competitiveness that gave rise to
high indebtedness, but the other way around. More specifically, EMU by bringing
together countries with very different rates of growth and profitability, gives rise to
high levels of borrowing for the euro-periphery countries. That is because euro-
periphery countries have higher profit rates which attract capital from the euro-core.This trend was augmented since euros adoption because EMU allowed euro-
periphery countries to borrow at low interest rates. Foreign loans boosted euro-
peripherys domestic demand, therefore giving rise to increasing inflation and the
deterioration of competitiveness. Milios and Sotiropoulos essentially reject the North
- South divide as an expression of the problematic dependency theory. For them
foreign loans were not a trick to rob Greece but a perfectly natural phenomenon that
helped boost growth. On this point they totally agree with the mainstream arguments
in Greece that the EU helped Greeces development. Indeed, the pre-crisis
mainstream argument was that current account deficits were good imbalances because
euro-periphery countries with relatively low levels of real GDP per capita were
catching up with richer north European economies. Greater growth opportunities and
expectations of faster productivity growth justified elevated levels of fixed investment
relative to the pool of domestic savings, hence the need for a current account deficit.
The reality is different. Sustained current account deficits were by and large not used
to finance investment in productive assets but to buy euro-cores imported goods.
Thus, Greeces productive structure instead of being developed it was actually eroded.
Because of this error Milios & Sotiropoulos implicitly accept the mainstream
convergence thesis which has been fully disproved (as it has been shown in previous
chapter).
Till this point Milios & Sotiropoulos analysis replicates much of the idyllic
success story (the strong Greece) presented before the crisis by the mainstream
academic and official circles. Then they add the financialization thesis. Modern
capitalism is a financialised one leading to extreme leveraging and financial bubbles.
When the 2007-8 crisis (which they too understand as a mere financial one) erupted
the till then malevolent euro-peripherys CA deficits were blown apart. In order to
sustain them fiscal deficits were augmented and this led to the euro-peripherys
collapse.
The EMU played only a peripheral role in this affair. Milios & Sotiropoulos
accept that EMU is not an OCA. Furthermore, they argue that EMU is a neoliberal
project that imposes austerity on the workers by exposing them to international
competition. The eruption of the crisis exposed EMUs weaknesses (because of the
asymmetric shocks that cannot be contained within it) and its class nature (as the great
burden of the MOUs was placed on the working people). However, the solution is not
the exit from the EMU but the progressive restructuring of the EU.
Milios & Sotiropoulos financialization explanation suffers from the generaldeficiencies of this approach already mentioned above. They share also the particular
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errors characterizing Lapavitsas analysis and criticized above. On the points that they
differ they err on the other side. For example, instead of Lapavitsas reversed version
of narrow unequal exchange they throw out any theory of unequal exchange.
Finally, their analysis of the EMU and the EU is simplistic and cannot see the
relations of economic (imperialist) exploitation that exist within them. The same holdsabout their policy proposals.
In toto, the financialization explanations of the Greek crisis have a weak
structural emphasis by not considering the problems in the sphere of production. For
this reason they fail to account adequately for the Greek case.
IV. A Marxist structural explanation
All the above explanations attempt to shed light on the causes that led to
current economic depression. Despite of their different viewpoint and the political
implications that arise from them, they share a crucial common analytical feature.
Neither of these explanations attributes the depression to the internal logic of the
system that creates economic crisis as an iterative process. They either attribute the
depression to policy errors or to weak structural factors pertaining mainly to the
sphere of exchange.
In contrast to the previous explanations Marxist Political Economy offers a
strong structural explanation of the Greek crisis by attributing its fundamental
causes to problems grounded in the sphere of production. More specifically, it
emphasises two structural components. First, it is argued that 2007-8 economic crisis
is a crisis a-la-Marx (i.e. stemming from the tendency of the profit rate to fall - TRPF)
and not a primarily financial crisis and this represents the internal cause of the
Greek crisis. Second, it is shown thatapart from the internal cause there are also
external causes. These come from the relations of imperialist exploitation (i.e.
unequal exchange) that exist within the EU and which divide it between North (euro-
core) and South (euro-periphery) economies. Greece obviously belongs to the second
group.
Thus, this part of the article is further divided in two sub-sections. The first
sub-section offe