The Greek Sovereign Crisis: A Post-Keynesian Synthesis

Abstract

The Greek crisis shocked many by its magnitude and by the nature of the policies implemented in its aftermath. The radical nature of the so-called Memorandum of Understanding was justified by the imbalances that the Greek economy experienced before the crisis. The current account deficit had been rising, as private and external debts. In addition, the ratio of public debt to GDP exceeded 100%. The crisis has been widely explained by a lack of fiscal discipline, a loss of competitiveness, and the rise of capital inflows. In this article, we seek to refute these narratives and offer a post-Keynesian interpretation of the Greek economic trajectory. Growing private indebtedness boosted imports. The resulting current account deficits were offset by rising capital inflows. Greece’s high level of public debt goes back to the 1980s. The narrow tax base of the country and usurious interest rates are to blame. However, none of these trends was sufficient to trigger the sovereign debt crisis. We argue that the main cause of the Greek crisis lies in the political economy of the Eurozone, and more particularly in its asymmetric governance.

Keywords:

• European Economic and Monetary Union
• Eurozone debt crisis
• Greek crisis
• post-Keynesian economics

JEL CLASSIFICATIONS:

• E12
• E42
• E63
• G12
• H12

Acknowledgments

The author is grateful for comments and suggestions from two anonymous referees, as well as Arnaud Lechevalier, Dany Lang, Mario Seccareccia, and Rudy Bouguelli.

Notes

1 The Global Financial Crisis refers to the worldwide crisis that took place from 2007 to 2009. It was a period of extreme stress for global financial markets and banking systems. The crisis started in 2007, following the collapse of the American mortgage market. The crisis spread to the whole world through the linkages of the global financial system.

2 The fiscal revenue of the state is composed of direct and indirect taxes. Direct taxes are due directly by the legal entity and collected by the state, like taxes on employment income or capital income. Indirect taxes are not.

3 The informal sector is composed of all market activities of production which are deliberately hidden from public authorities, in order to avoid taxes or regulations (Schneider 2011, 5).

4 Article 130 (Treaty on the Functioning of the European Union) states the ECB’s independence.

5 Germany was in a strong negotiating position because it was the last country to give up its monetary sovereignty. Other European States had given up their monetary sovereignty for a long time. Since the collapse of the Bretton-Woods system, other ERM countries had to adapt their monetary policy to that of Germany, because of its impact on their exchange rate against the Deutsch Mark, the reference currency in Europe.

6 Section 32 of the Delors report (1989) states that the European System of Central Banks is independent from member States and European institutions.

7 Axel Weber, president of the Bundesbank, and Jürgen Stark, member of the executive Board of the ECB, have both resigned from their positions after Jean-Claude Trichet’s announcement.

8 The Merkel coalition was formed by the Christian Democratic Union (a center-right party) and two conservative parties: the Christian Social Union and the Free Democratic Party.

9 On July 26, 2012, Mario Draghi gave a speech at the Global Investment Conference. Where, he reaffirmed his commitment to save the Eurozone. His words have had a significant impact. In particular, when he said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

10 The ECB intervenes on sovereign markets through two programs: the Public Sector Purchase Program and the Pandemic Emergency Purchase Program. These programs aim to ensure the good functioning of the monetary system by supporting the monetary policy transmission mechanism and by ensuring price stability. Quantitative easing was not introduced to facilitate government financing operations but it certainly helps to ease financing conditions.

Additional information

Notes on contributors

Léo Vigny

Léo Vigny is a Ph.D. student of the Center d’Economie de l’Université Paris Nord, Université Paris Sorbonne Paris Nord, Villetaneuse, France.