Greece: Adapting to Globalism with the Benefits of EU Membership
In the increasingly integrated and competitive markets of Globalism,
Greece has willingly surrendered its economic sovereignty in exchange for
the advantages of being under the umbrella of the European Union (EU).
Although lingering allegiances to Papandreou-style socialism frustrated
economic reform efforts in the early 1990s, today's Greece is moving with
increasing momentum away from its legacy of economic interventionism. In
contrast to other less-developed nations struggling to make liberal
economic reforms stick, Greece, the poorest member of the EU, has made
astonishing progress reducing its inflation and budget deficit, while
increasing growth. With their eyes fixed on meeting European Monetary
Union (EMU) convergence criteria, Greece has defied skeptics and now stands
at the threshold of being among the first nations to adopt the EU's shared
currency in the year 2001. Like other weaker nations pursuing the remedy
of economic liberalism, Greece's reform effort has included modernizing its
banking system, strengthening its stock market, privatizing state
enterprises and improving tax collection mechanisms. Unlike these other
nations however, Greece as a member of the EU enjoys not only a regular
flow of agricultural subsidies and infrastructure grants, but also receives
EU guidance to the point of losing economic sovereignty. Although it has
forfeited some control in policy-making, economic liberalization in Greece
will ultimately provide its citizens more financial freedoms and clout,
which in turn will produce a more vibrant democracy. Yet, the advantages
Greece gains as member of the EU raises the question as to whether such
regional trading blocs unfairly discriminate against countries denied
membership and even work to defeat the supposed benefits that more
integrated markets provide. By comparing Greece with Turkey, one sees that
while both countries suffer similar economic woes, Greece is successfully
advancing reforms under the wing of the EU, while Turkey continues to
stumble as it seeks to gain such a powerful mentor.
Following the ouster of a ruling military junta (1967-1974), the
debate in Greece was never whether the government would have a large hand
in the economy, but rather how large that hand would be. The post-junta
constitution of 1975, established Greece as a republic with a political
structure modeled on that of France. The Greek government exercised
statist capitalism and directly manipulated economic policy while
simultaneously trying to foster a free-market system ("Greece: a country
study"). Representing 50 % of GDP in the 1970's, the government was
present in all areas of the economy and determined everything from prices
and wages to labor law. With the rise of socialist Prime Minister Andreas
Papandreou in 1981, the state further expanded its share of GDP from 55
percent in 1981 to 70 percent in 1989 ("ABC Country Book on Greece"). With
such an extensive state presence in their society, most Greeks viewed the
state as the fountain of goods, services, and patronage. Well into the
1990s, the solution to virtually every societal ill from failing industries
to unemployment was an expansion of the state (Gianzero 42). Not until
Papandreaou was finally defeated after its 8-year reign (1981-1989) and
Greece was faced with stagnant growth, a bloated public sector, rising
inflation, and a burdensome national debt, did serious economic reform take
place.
Facing a myriad of economic difficulties in the late 1980s and early
1990s, opposing political forces in Greece battled back-and-forth over the
future course of economic policy. In the 1980s, die-hard socialist
Papandreou sought to bolster areas of the economy that lagged farthest
behind Greece's EC partners by extending welfare protection in a variety of
forms. However, unwilling to reform an inadequate tax structure,
Papandreou lacked additional revenues and could only rely on increased
public debt to finance increased spending. This only accentuated Greece's
debt and inflation woes. When Papandreou's was finally forced from power
in 1989 by scandal and economic crisis, his conservative political
opponent, Konstantinos Mitsotakis, ushered in a harsh austerity and
privatization plan that was very unpopular with the Greek electorate.
While his conservative policies were partially successful, they had the
side effect of depressing the economy. Tax revenues fell while pressures
for increased public spending grew to address rising unemployment and prop
up state-owned enterprise for which no buyers could be found. Disgruntled
with the hardship's brought on by Mitsotakis' austerity efforts, the Greeks
voted the familiar Papandreou back into office in 1993. The aging
socialist reversed his predecessor's privatization efforts, but realized he
could not return to old expansionist policies. Although in his later years
Papandreaou acquiesced to some reforms, the influence of his persona as
Greece's socialist icon hindered liberal reform efforts until he finally,
due to ill health, stepped down in 1996. Papandreou's successor
Konstantinos Simitis took up the challenge of making another serious run at
an austerity and reform program ("Greece: a country study"). As
Papandreou's political presence dissipated, Greece began to make remarkable
progress in addressing its economic problems.
Unlike many less economically developed countries struggling today to
implement neo-liberal reforms, Greece in the last five years has
successfully reduced both its public deficits and inflation while
increasing economic growth. Like many of these other countries shedding
legacies of state interventionism, Greece has taken up the standard canon
of economic reforms. The current Greek liberalization effort includes: the
partial privatization of profitable public corporations, reforms of the
labor market based on social consensus, granting statutory independence to
the Greek Central Bank, increasing public sector efficiencies and adopting
legislation to both curb public spending and modernize capital and money
markets (Papantoniou). Though these reforms are similar to those have
confounded other countries emerging from authoritarianism and planned
economies Greece has somehow recorded considerable success. In particular,
the budget deficit has declined by 10% as a portion of GDP. From 13.8 % in
1993 to 4 % in 1997 and is forecasted by Greek officials (perhaps too
optimistically) to drop to 2.4 % by the end of 1998. Inflation has fallen
from 12.3% in 1993 to roughly 5% in April of 1998. GDP growth has arisen
from –1% in 1993 to a projected 4% for 1998. What is the impetus behind
Greece's economic achievements? The roots of Greece's unexpected success
lies within the external discipline and incentives provided by the EU and
in particular the clear guidelines and objectives within EMU currency
convergence criteria.
The hope of gaining economic stability and advantage by adopting the
EU's soon-to-be shared currency has provided Greek leadership a powerful
incentive to pull out all the stops in making liberal reforms. The current
picture is so rosy that the Greek Minister of Finance recently forecasted
that Greece would reach Maastricht Treaty currency convergence criteria by
late 1998 or early 1998 with EMU participation to follow in 2001
(Christodoulakis). That Greece might join the ranks of the "first wave" of
EU countries to join the single EURO currency so early has come as a shock
to many pundits of international finance. But just what are these hurdles
that Greece appears on the threshold of surmounting? The Maastricht Treaty
outlines that EU countries seeking to qualify for EMU must meet specific
criteria regarding budget deficits, public debt, inflation, interest rates,
as well the exchange stability of the candidate country's currency.
Specifically, an applicant's inflation cannot exceed the average inflation
of the three countries in the EU with the lowest by more than 1.5%, which
translates into a ceiling of about 3%. The Greek Drachma's international
exchange value also must stay for at least two years within the normal
fluctuation margins of the Exchange Rate Mechanism (ERM) without major
tensions or devaluation. (Joining the ERM in March of 1998, the drachma
has successfully shadowed the ERM for the last couple of years). In
addition, an EMU applicant's budget deficit may not exceed 3% of GDP, or
should be falling substantially by the time they seek EMU admission.
Lastly, overall public debt may not exceed 60% of GDP or must be
satisfactorily declining toward this level (Greece's public debt was 111.7%
of GDP in 1995, but was heading downward) (Euromoney 16). These currency
convergence guidelines are particularly significant in that they represent
the distinct advantage EU membership provides Greece. Specific criteria,
grants and loans, and direct counsel from the EU all set Greece apart from
other countries struggling with reform efforts. Aside from the
comparatively lesser assistance from the International Monetary Fund, other
transitioning nations unlike Greece, are left to themselves to impose their
own discipline and overcome internal political bickering.
Although their liberalization program emulates those other countries
have struggled to implement, the distinctive catalyst in Greek reform
progress has been the influence of the EU. First, the removal of trade
restrictions following EU membership in 1981 resulted its Greece's market
being overwhelmed by more competitive foreign goods. Fearing that the
banking industry would likewise be overtaken from the outside upon EMU in
1999, Greek leadership has since 1987 moved to liberalize a state-dominated
banking industry. Likewise, significant efforts have also been made since
the late 1980s to modernize and expand the Athens Stock Exchange. Lastly,
in an effort to expand its tax base, Greek officials are changing tax laws,
cracking down on rampant tax evasion and making efforts to recover the lost
income within the underground economy.
Upon achieving EU membership in 1981, Greece gradually eliminated its
protectionist policies and soon suffered its first economic shock.
Attempting to trade with the EU on an even playing field, import
penetration grew faster than export performance. Greek firms' sales and
profits shrank as local products lost out to more competitive foreign
products; as a result domestic manufacturing activity declined and
unemployment rose. Greek trade became weaker as its market became
increasingly tied to the EU (Stavrou 110). In 1980, about 48% of Greek
exports and 40% of imports were destined to, or originated from, EU
countries. By 1991 these percentages had risen to 64% and 62%
respectively. Although the volume of trade to the EU increased, the
relative openness of the Greek trade market declined. Measuring openness,
as the ratio of the sum of exports and imports to GDP, Greece's market
openness declined from 50% in 1985 to about 40% in 1992. Yet despite the
invasion of outside products, Greece remains highly internationalized and
sensitive to developments in foreign trade as compared to larger nations
such as the US, whose sum of exports and imports is less than 20% of GDP
(Greece: a country study).
Fearing the type of shock that Greek exports suffered when they had to
compete with foreign goods, the majority of Greek banks in the 90s have
been scrambling to reshape themselves before EMU occurs in 1999 and
protections disappear. To address it inefficiencies, the Greek banking
system has undergone almost complete liberalization since 1987. Interest
rates once fixed by the central bank are now set by market conditions
(Rudnick). Barriers to foreign-exchange transactions, capital movements,
and entry into banking have been removed. State banks, which dominate 70%
of the market, are being forced to become more competitive by complying
with new solvency ratios and capital adequacy requirements and continue to
loss market share to a growing number of smaller leaner private banks.
Reeling from a legacy where the state for political reasons forced its
banks to capitalize ailing public industries, state-owned institutions are
frantically attempting to purge bad loans from their balance sheets.
Despite some reform measures, state banks remain woefully inefficient with
most of them spending upwards of 75-80% of their net income in operating
expenses. Time is running out and many banking analysts predict that Greek
banking stands to lose as much as 40% of its market share when foreign
banks enter the fray after EMU ("Facing a test of strength" 34). While
state banks struggle to modernize and consolidate to increase their
strength, better-positioned private banks continue to improve the services
they offer their customers and invest abroad. Steadily increasing in
numbers, private banks have specialized in areas shunned by
state-controlled banks including private banking, consumer lending and
mortgage loans. Although they control only 5% of the market, privately
owned bank are setting the standard with such novelties as launching mutual
funds composed of stocks purchased both on the Athens Stock Exchange and
internationally ("Athens fires the starting gun" 22). Such private
dynamism has the Goliath state-banking sector looking to the David-sized
independent banks for survival techniques.
As part of their total effort to expand and modernize Greece's capital
markets, Greek liberal reformers are hoping that Greece's increasingly
stable economy and EU support will bolster the confidence foreign investors
have in the Athens Stock Exchange (ASE). Traditionally marked by low
activity and little movement in stock prices, the Athens Stock Exchange as
late as 1995 was capitalized at only 18% of GDP (WDI). The ASE began to
move in a more modern direction in 1987 when Greek monetary authorities
finally permitted the free repatriation of foreign funds invested in Greek
securities ("1996 Guide to Greek Financial Markets"). Further
modernization efforts since then include legislation enabling the formation
of brokerage firms, the introduction of an automated trading system and the
establishment of a central securities depository. The ASE is highly
concentrated, with the fifteen largest companies representing almost 70% of
total capitalization. In recent years market diversity has gradually
expanded. The public offer of Hellenic Telecommunications in 1996 along
with other companies significantly added to the exchange's size ("1996
Guide to Greek Financial Markets"). Current plans call for the further
enhancement of stock-exchange operation by linking the Athens exchange with
peripheral terminals such as Thessilonika where it is hoped Balkan
companies can be encouraged to list their shares (Greece: a country study).
Greek leaders remain confident about the ASE's future. In addition to the
success of recent stabilization efforts, they are counting on a
privatization program to provide more companies who will enter the market
to raise capital. On top of successfully qualifying for EMU, Greeks also
hope that flows of EU money for infrastructure projects will eventually
convince investors to take risks in Greece's still undersized stock market.
Along with modernizing an antiquated banking system and stock market,
Greece is working to reduce rampant tax evasion and recover the lost
revenues of its sizable underground economy. In a country such as Greece,
with a large service sector and a multitude of very small enterprises, the
proliferation of unreported, untaxed, and unregulated activities is a
natural occurrence. Estimates of the Greek underground economy have ranged
from 35% to 50% of the officially reported economy (Greece: a country
study). In conjunction with its large and untapped black economy, tax
compliance in Greece has historically been weak. This is doubly true
during election cycles when administration officials habitually overlook
non-payment to win the good graces of the electorate. As an example of the
kind of deception that takes place on tax returns, the average Greek
lawyer, according to tax statements, earns only half as much annually as
the average Greek factory worker. Yet despite these suspiciously low
earnings, there are 23,000 lawyers in Greece, three times the proportional
number of either Spain or Italy ("Pay up like Eurogentleman" 98). Today,
things are changing on both counts as Greece has become convinced that
without this lost revenue; it will never fully emerge from its backward
status within the EU. To boost income and reduce deficits, the Greek
Minister of Finance in 1997 began sending out so-called "commando units" to
arrest tax evaders—estimated at 30% of all taxpayers. Also, tax collectors
in the 90s have been given increased authority to investigate suspected tax
dodgers. They now have the right to examine an individual's credit card
bills and utility bills to detect hidden incomes. Furthermore, other
recent reforms have included adding a "profession" tax in which the
self-employed would be expected to pay set tax rates based on their
declared profession and forcing farmers to file tax returns (1996 Guide to
Greek Financial Markets). If Greek officials do not have enough incentive
to come to grips with tax evasion and the underground economy, EU
representatives have begun to stipulate such reforms as a condition for
further aid. Such interference is indicative of the significant level of
influence the EU has over the Greek economic policy.
Caught between the stick of not-so-subtle EU directives and the carrot
of considerable amounts of infrastructure and agricultural monies, Greece
has acquiesced to EU direction in almost every facet of its economy.
Whether it is hurdles Greece must pass to gain EMU accession and the EU's
blessing, or outright requirements for receiving generous EU loans and
grants, the EU is often Greece's most powerful political constituency. The
instances of the EU's overt manipulation of Greek policy are plentiful.
For example, in February of 1991, as a stipulation for receiving loans of
Ecu 2.2 billion, the EU insisted that Greece address the issues of
widespread tax evasion and work to broaden its tax base (Greece Country
Study). Desperately needing to continue tapping the EU's Delors II program
funding Greek infrastructure projects, entailing some $US 20 billion up to
1999, Greece has repeatedly kowtowed to EU economic directives and foreign
policy. As an added incentive for such compliance, Greece receives
annually crop overproduction subsidies as part of the EU's agricultural
policy (1996 Guide to Greek Financial Markets). To avoid EU disdain and
keep financial supports flowing, Greece has willingly pursued Maastricht
convergence requirements and perhaps less willingly muted its objections to
Macedonian independence. EU advise has contributed greatly to Greece
liberalization efforts by pushing such reforms as lifting of price
controls, privatizing public enterprises, and the slowing of civil servant
wage increases. Other EU's influence often comes in the form of
requirements for economic compatibility. Such was the case when Greece
imposed a value-added tax in 1987 to comply with the EU tax harmonization
policies (Greece: a country study). Likewise, EU directives regarding the
congruity of banking services and free flow of capital across borders
generally have led Greek financial institutions to liberalize faster than
it would otherwise. Is all this intrusion by the EU and the loss of a
great deal of Greek economic independence worthwhile? Will liberalization
efforts led to a stronger economy and democracy for Greece? The answer to
both questions is yes.
The long-term future or Greece, after it suffers through the shocks
of economic liberalization, promises a freer and more productive citizenry
who will in turn shape a stronger democracy. Generations of heavy state
control in Greece, as other countries facing the pressures of Globalism,
created inefficient institutions and a technologically stunted society.
The shocks of rapid modernization and liberal economic reforms will likely
displace at least a generation of Greeks-- many of whom during this
dramatic transition have little hope other then survival. As wages for
unskilled wages decline and a premium rises for technology-based and other
professional skills, many factory laborers with find themselves with a
declining living standard or on welfare. On the other hand, the
environment of Greeks will for others also be one of increasing
opportunity. As competition, free trade and technological advance provide
both cheaper goods, easier communication, freedom of movement, and a
growing economy, living standards in Greece will rise. This increasing
living standard will equate to greater economic clout and political power
for an increasing number of Greeks. Old clientelism may be replaced with
new clientelism, yet competition and the gradual limitation of Greece's
intrusive government will work to push such frictions to productivity and
equality aside. As subsequent generations gain the skills to claim the
jobs of Globalism's technology-driven society, a new, information-fed
generation citizenry will demand both more representative democracy and
efficient government. With the strength and guidance of this powerful
mentor, the EU, Greece has a distinct advantage succeeding in the
competitive world market. Yet, is this advantage of EU membership unfair
and does it not discriminate against those who cannot benefit from such
regional trading blocs? Do such trade pacts and unions defeat and
discourage the unfettered power of the free market?
The sad fact of Globalism is that many transitioning countries need
considerable help in adapting to the more integrated and competitive global
market and they are simply not getting this help. Greece's recent success
in stabilizing its economy and adopting liberal reforms can be directly
attributed to aid and advice of its powerful patron saint, the EU. Yet
other countries such as Turkey, Russia, and many of the former Turkic
republics of the collapsed USSR have all to varying degrees been unable to
free themselves from their pasts and adjust to more integrated markets.
Yes, trading blocs such as NAFTA and the EU distort the "natural" forces of
the free market. Yet, as proponents of such pacts argue, these regional
trading agreements are but a necessary precursor to a future international
market that is completely interconnected. The tragedy of today's Globalism
is that countries are not receiving the extensive aid and assistance they
need and may regress to some isolationism and derivation of a failed past.
The responsibility for this likely occurrence will rest at the feet of the
worlds great powers who fail to realize that the expense for not aiding
transitioning nations will only multiply over time. Although the IMF is
make feeble attempt to shore up many floundering nations and the US and
other nations are dispensing foreign aid, this effort is far too meager and
lacks urgency. Examining Greece and Turkey, one can see how Greece is
making great strides in dealing with global forces due in large part to its
EU membership, while the Turkey, excluded from the EU, continues to stumble
in its effort to make reforms.
Strikingly similar in the economic problems they both share, the
secret to how Greece is surpassing Turkey in adapting to the forces of
Globalism lies in its advantageous position as a member of the EU. Greece
joined the EU in 1981 and Turkey has been an associate member since 1963.
Although it is an associate member of the EU and joined in a customs union
with the EU in 1995, Turkey still is at a disadvantage to its Aegean
neighbor for not being an EU member. The guidelines, pressures, loans, and
advice that Greece benefits from as it strives toward EMU in 1999, are
elements that Turkey sorely needs. The EU dynamic is all the more apparent
as these two nations share many of the same economic problems. Both
countries have struggled with high inflation, unemployment, urban
concentration, a bureaucratic public sector, large budgets and trade
deficits and huge foreign debts. Turkey and Greece together have both
fought to overcome legacies and state-controlled industries and labored
hard against political interest groups to privatize. The two economies are
dominated with small family-owned enterprises whose production levels
remain static for their inability to incorporate modern technology
(Gianaris 4). Yet, like other countries around the world, the price of
keeping Turkey at arm's length, as the EU has consistently done, will carry
a high price. If Turkey remains rejected in its overture to the EU and
continues to struggle economically while its historical enemy Greece and
even ex-communist countries enjoy the warm embrace of the EU, it may depart
from its Western-style secularism and look to the East for alternative
alliances. Such a trend could mean greater regional unrest and much
greater expenditures as it creates a less reliable ally and loses an
important anchor for stability in the Central Asian and Middle East
regions.
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