While looking into the Orwellian language of the last agreement between Greece and its creditors, this article will offer some considerations that go far, far beyond Greece.

The agreement signed between the Greek government and the “institutions” has been covered many times over by all worlds’ media. In an attempt to offer some food for thoughts to our readers we will try not to repeat what has already been reported but rather put the Memorandum of Understanding into a wider context. We will touch upon its economic implications as well as its democratic implications.

Economics and The Memorandum

Micro vs. Macro

In 1958 Albert Hirschman claimed that economic growth always tends to be “unbalanced”, because it rests upon the continuous making and breaking of disequilibria. Hyman Minsky later on came with pretty much the same argument when he said that economic “stability” contains within itself the seeds of future “instability”. During quiet times, said Minsky, economic agents have incremental expectations which lead them to engage in ever riskier activities, until a breaking point is reached.

Historical evidence was provided by Charles Kindleberger: large scale changes in the movement of financial flows are what determine first “economic miracles” and subsequently market crashes and recessions. In good times, households and businesses take up an increasing amount of risk, believing the following year to be always better than the previous one. Then some unexpected event takes place that sends the process into reverse, causing crises and recessions.

More recently Michael Pettis built on these arguments and showed that the underlying microeconomic structure of an economy plays very little role in determining the sustainability of its growth trajectory. In good times the “reforms” put in place always seem to work but when crises come those same policies get harshly criticised. As a proof one can think of countries as diverse as South Korea and Mexico experiencing miraculous growth in the same period of the 90s only to both crash violently once financial flows reverse their direction. Similarly take Germany and Spain in the early 2000s: the former was the “sick man of Europe” while the latter was growing at impressive pace. But most of all consider China whose planned economy stands against anything that the mainstream economic profession believes to be efficient. Yet, it has shown spectacular growth rates for almost 30 years now (but as Hirschman would have predicted even the Chinese economy is loaded with unbalances).

Why is this relevant for the current discussion about Greece? Well, because, history shows that there is no silver bullet – no perfect list of microeconomic reforms – that ensures sustainable growth. This is why the Keynesian school has – since the early 20s – put greater emphasis on the macroeconomic policies such as the management of aggregate demand, investment, exchange rates and monetary policies. And indeed the most successful countries in responding to the 2008 crisis have been those that more or less explicitly made use of the full range of macroeconomic tools, like the USA but also Sweden, Poland and the UK. However as we have already seen in previous articles, by entering the Eurozone, the Member States have “individually” given up these macroeconomic tools while they have not been able to use them “collectively”. Therefore their strategy to exit the crisis has rested merely on microeconomic policies (the so-called “structural reforms”) that by and large failed to achieve any visible recovery.

The latest Memorandum of Understanding between Greece and its creditors continues – as in previous agreements – to treat a macroeconomic problem with a microeconomic approach. It tries, in other words, to correct a massive slump in consumption and investments and a massive deterioration of international competitiveness with a long list of microeconomic reforms, which – as in the past – will likely be ineffective in bringing the country back to growth and full employment. And moreover – as history shows – will not even be sufficient in preventing future crisis.

Micro vs. Micro   

But let us put aside all of the above arguments for a moment. Let us imagine that indeed some “structural reforms” will do the trick and get Greece back from its 25% loss of GDP, its 25%+ level of unemployment and its collapse of investments. Then the next question is: what kind of “structural reforms” should Greece implement?

The MoU is about 30 pages long and contains a very long list of measures. Here we won’t repeat what others have already done, going through every single one of the measures. We will merely focus on the general approach and provide a few examples. The approach of the MoU is perfectly coherent with the past 30 odd years of global policy making. It requires further public spending cuts, “liberalizations”, “labour market reforms” and “privatizations”. As explained before, these are the principle ingredients of the current mainstream economic thinking spearheaded by the main international institutions. Their track record is not really one to be proud of, but little time is devoted to any serious reconsideration.

On the labour market, the MoU contains requests for further weakening of workers’ rights and concludes with this sentence: “Changes to labour market policies should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth“. This is quite an astonishing statement. It seems to convey the idea that only labour market “liberalization” promotes “sustainable and inclusive growth” in spite of the overwhelming body of evidence that such deregulation of labour law – pushed through by European governments of all colours in the past 25 years – has created unprecedented levels of unemployment, widened inequalities and provided young people with precarious and poorly paid jobs.

As far as privatization is concerned, the MoU requires Greece to sell basically all its most valuable assets for a targeted amount of 50bn EUR; an enormous sum that will hardly be reached, considering the current depressed economic climate in the country. Privatization is always and everywhere a contentious issue, the economic benefits/damages of which are hotly debated. However among the assets to sell the MoU makes explicit reference to the electricity grid and the Ports of Piraeus and Thessaloniki. But the electricity grid is a natural monopoly! It cannot be duplicated and it is an asset of strategic importance. This is why basically all countries in the EU and elsewhere have it under public control. Privatizing a natural monopoly may lead to rent extraction which decreases the aggregate welfare of the society. A similar argument can be made for the ports of Piraeus and Thessaloniki. While ports can be duplicated in theory, the sheer size and importance of these two make it virtually impossible to do it. In addition, they are key drivers of the touristic industry of the country and it is not clear what Greece would gain from losing control over them.

Finally on the fiscal front, the MoU contains endless measures to increase revenues, rising in particular indirect taxes which are the most regressive, ie. they hit the poor the most. But a particular clause of the MoU is worth mentioning. When dealing with people in tax arrears (people who did not pay some of their taxes because they could not afford it), the Greek Government shall eliminate the 25% ceiling on wage garnishments and lower the 1.500 EUR on bank account balances that can be seized by the authorities. In other words, people who could not pay their taxes because they lack the means to do so will be sanctioned even more heavily than previously foreseen. Their wages could be curtailed by more than 25% and their accounts depleted below a 1500 EUR limit previously considered as necessary to live.

In sum, the set of microeconomic measures contained in the MoU seems to have been written in complete disregard of historical evidence (labour market), some basic economic principles (privatization) and distributional impacts (taxation policies). As said above, microeconomics is probably irrelevant in solving an economic crisis; heedless microeconomics might even be harmful.

Democracy and The Memorandum

A final consideration must be given to the “democracy” of the MoU. Political scientists have long argued that in policymaking there is a distinction between “input” legitimacy and “output” legitimacy. Simply put, the former implies “government by the people”, where voters select their representatives; the latter instead is “government for the people”, where unelected institutions are legitimized ex-post in view of the outcome that they have achieved.

This distinction is very relevant in the case of the EU and even more so in the case of the various programmes which have been applied to crisis-hit Member States over the past 7 years. The international institutions that have written and overseen those programme – like the latest one with Greece – are largely unelected and unaccountable to the voters. Their legitimacy therefore can only be based ex-post on their “outcome”. While at the same time, governments which are supposed to implement those programmes are bound to “input” legitimacy. They need the support of the voters ex-ante.

This has proven a toxic mix for incumbent politicians in the EU Member States subject to more or less stringent forms of “programme”. On the one hand they must adopt a set of reforms that did not receive “input” legitimacy since they were agreed upon outside the democratic discussion. On the other hand they will be the ones blamed if the “outcome” of such programmes is not even legitimized ex-post. Moreover, the degrees of freedom of the government within these programmes are often very limited. The latest MoU with Greece for example states very clearly in the second paragraph that the Greek government will need the consent of the “institutions” before taking any action (even outside the already ultra-detailed list).

The implications of this set up are quite extreme. If the Greek voters on the 20^th of September elect a government committed to implementing the MoU, they will essentially not only endorse the list of reforms it contains – as if it were an electoral programme – but they will also implicitly agree that unelected “institutions” will maintain a veto power over any other policy their government may wish to adopt.

To conclude – unless anti-MoU parties win – there will be no possible “input” legitimacy coming from this election. The only form of potential legitimacy will therefore be based on the “outcome”.  And the chances of success of the MoU – as discussed above – are rather slim given the past results, its micro-economic emphasis and its ideological bias. A Greek tragedy indeed.