Europe's current financial crisis is deeply rooted in failings of political leadership and institutional design at both the European Union (EU) and national levels. Eurozone members created an integrated financial system that permits national fiscal profligacy in a European environment of collective irresponsibility. In this article, I explore the trigger mechanism of the fiscal crisis. While Greece by itself did not cause the crisis, its debt problems brought into sharp focus the euro's shortcomings. Using Ostrom's framework (Reference Ostrom1990) of collective action, I argue that Greece's predicament is the result of two factors: leadership failure and a flawed institutional design. They enabled mismanagement and bred corruption, making public finances hostage to collective action problems associated with common pool goods: everyone consumes but no one wants to pay. Mismanagement breeds distrust and corruption, and they in turn lead to more mismanagement. However, identifying Greek profligacy as the root of Europe's problems misses the point. Greek policymakers interact with their EU counterparts within a political and institutional environment that creates uncertainty and promotes collective irresponsibility by elevating national benefits over European obligations. Ostrom's framework is important because a single explanation highlights Greece's institutional shortcomings and points to EU structural conditions that have made matters worse.
The argument is first placed within a framework of collective action. I explore the Greek domestic political scene and then analyse interactions with the EU. The findings have implications for Ostrom's framework, Europeanization and the future of European integration.
Institutional design, political leadership and the public purse
The ability to address citizens’ needs depends on the structure of state–society relations, the level of trust citizens put in state institutions and mechanisms of participation, and, in Greece's case, EU policies. In cases involving common pool resources (CPRs) and at different moments in time, interest groups have incentives to ‘capture’ the state apparatus. Policy outputs reflect the free-riding and rent-seeking preferences of entrenched groups, leading to a cycle of corruption and fiscal disaster.Footnote 1
Elinor Ostrom and her colleagues have developed an institutional theory that highlights problems with managing CPRs (Ostrom Reference Ostrom2005; Ostrom et al. Reference Ostrom, Gardner and Walker1994). CPRs are natural or man-made resources sharing two attributes: the difficulty of excluding individuals from benefiting from these resources, and rivalry, which means that benefits consumed by one individual are subtracted from those available to others. While the argument has been applied mostly to natural resources such as fisheries or water basins, it can conceivably be applied to a general class of problems dealing with CPRs (Ostrom and Hess Reference Ostrom and Hess2007). Not all state-provided goods and services may be classified as CPRs, but many have such attributes. Public works, such as transport or environmental projects, and public services such as health, education and pensions raise collective action problems that are present in CPR environments. The framework is therefore useful in identifying institutional shortcomings that have led to the sovereign debt crisis.
Because many CPRs are provided by the public sector (at least in Greece), they raise uncomfortable dilemmas for consumers and providers. Ostrom et al. (Reference Ostrom, Gardner and Walker1994) identify two main issues: free-riding – which leads to problems of under-investment and over-consumption – and rent-seeking, which leads to lack of transparency and corruption. Because it is difficult or costly to exclude users, consumers of CPRs have few incentives to pay for the provision of such goods. Public authorities may raise taxes to ensure payment, but potential taxpayers have incentives to evade taxes. Why should they pay if they think other free-riding beneficiaries avoid the tax? Free-riding reduces potential revenues, leading to fewer resources available to provide the good or service. Because CPRs are rivalrous goods, they create externalities. Lower consumer cost increases the rate of consumption. Health facilities, for example, may be inundated with patients seeking affordable care. Private groups may also seek public funds that generate disproportionate benefits for themselves, and civil servants may seek extra-salary benefits. Both consumers and providers of CPRs have incentives to abuse the public purse and promote lack of transparency to hide the true cost of the transactions.
Such problems have significant implications for public finances. Public expenditure in democratic societies such as Greece may increase dramatically to accommodate the preferences of different interest groups as they are able to ‘capture’ the state and impose their will depending on the electoral fortunes of ‘friendly’ political parties. The longer the party stays in power, the more entrenched affiliated groups become. When another party moves into office, public expenditures rise because the new party rewards its own constituent groups. It is politically expedient in many cases not to take on entrenched groups but to widen the circle by simply adding new groups. It maximizes constituent votes and minimizes political conflict. As a result, a cycle of mismanagement and corruption will probably develop. Free-riding adds to inefficient taxation and lack of transparency. When sanctions are not enforced, revenues fall sharply and expenditures rise. Policy outputs reflect the preferences of entrenched interest groups, which in turn depend on state hand-outs and the need to stay entrenched in order to survive. As long as national income rises at a rate equal to or faster than the deficit, whether through productivity gains or borrowing, people are willing to tolerate inefficiency and corruption. When it does not rise at that rate, problems arise.
To overcome mismanagement and corruption, Ostrom (Reference Ostrom1990) proposes rules, or design principles, that govern enduring and successful CPR regimes. They include a transparent monitoring system accountable to owners (or appropriators) of the resource, consistent enforcement of graduated sanctions, and effective leadership in managing the system. For example, to address the problem of raising taxes to offset costs associated with CPRs, taxes must be clearly monitored and sanctions consistently and effectively enforced. The design principles form a cooperative institutional structure. They create confidence; benefits and costs will be reasonably and accurately distributed among users and owners, and defectors will be sanctioned accordingly. The more institutional arrangements deviate from these principles, the more likely it is for players of this game to see it as a poor means for optimal outcomes. Repeated interactions also create reciprocity and trust among players (Ostrom Reference Ostrom2003: 43). However, this can only develop over time and is most likely to succeed when the number of players is reasonably small. The implication is that as the number of entrenched interest groups increases, the cost rises and trust plummets.
The latter concept is important because low levels of trust breed corruption, which in turn exacerbates the fiscal dilemma. Trust exists at two levels: a systemic/societal level and the individual level of political leaders. Generalized trust refers to close bonds between people of a given society that cut across race, creed, economic interests and other social cleavages (Rothstein and Uslaner Reference Rothstein and Uslaner2005). In societies where groups are significantly economically unequal and with few (or inefficient) policies in place for resource redistribution or advancement opportunities, there is less concern for people of different backgrounds. People with fewer resources or incomes are likely to reason that others have more because of unfair advantages. They will look for benefits or rewards from their own peer group. In such a case ‘Generalized trust is low while particularized (or in-group) trust is high. In turn each group looks out for its own interests . . . Society is seen as a zero-sum game between conflicting groups’ (Rothstein and Uslaner Reference Rothstein and Uslaner2005: 46). Policymakers can take steps to increase trust. They may not do so because of strong opposition from entrenched groups both within and outside their own party, because of the high political cost in terms of votes potentially lost from disaffected constituents, or because of a sheer inability or unwillingness to muster the political and intellectual capital to make reform happen.
Trust at both levels is mutually reinforcing. National leaders pursue policies to reward their own constituents. Thus, lower levels of generalized trust provide incentives for policies that lower national benefits and increase particular or in-group benefits. These policies promote corruption and are in turn used as evidence of unfair advantages which lower generalized trust. Politicians feel they can hide their misdeeds or, equally likely, people do not care if their leaders loot the public purse because they depend on the same system for their own rewards. Corruption acts as an extra tax on citizens, skewing public expenditures towards activities which provide more opportunities for corruption (Mauro Reference Mauro1998). Businesses or professions may also bribe politicians to restrict access to competitors (domestic or foreign), increasing the cost of market entry and lowering economic growth (Zak and Knack Reference Zak and Knack2001).
Greece's sovereign debt crisis may be viewed as the outcome of interconnected CPR games at two levels: Greece and the EU. Each has its own objectives, but outcomes at one level affect the other. Mismanagement and corruption in Greece have their own dynamic but they are facilitated by permissive EU rules, especially inconsistent monitoring and enforcement of sanctions, and the lack of EU leadership. Leadership and design flaws increase the likelihood of mismanagement and corruption in Greece, which are in turn exacerbated by EU leadership and design flaws. Below, I first provide evidence from Greek politics and then I analyse Greece–EU interactions.
Public policy and Greek politics
Drumming up external support for his reform plans, Prime Minister George Papandreou blamed domestic politics: ‘We developed a lot of corruption at the highest levels and we did not take the structural measures to change our economy, to move our economy, to make it more competitive’ (quoted in Elliott Reference Elliott2010). How did this situation come about?
Institutional Design Flaws and the Greek Crisis
State–society relations in Greece after the Second World War developed a relationship of mutual dependence. Although much of post-war Greek economic development was state-led (Pagoulatos Reference Pagoulatos2003), the country's entry into the EU coincided with a change to a more ‘state-fed’ model. This refers to different levers of control, a less visible state profile and greater state–society interpenetration. Aiming to right past wrongs, the victorious socialist party (Pasok) led by Andreas Papandreou in 1981 promised to transform society by providing social justice and a more equitable distribution of wealth. Despite reductions in income inequalities, the end result was a disastrous experiment with nationalization and the ‘colonization of public institutions by the party cadre’ (Kalaitzidis Reference Kalaitzidis2010: 95). The familial nature of social capital that characterized the post-war years was replaced by ‘unsocial’ capital based on a small and tight-knit number of interest groups with selective incentives and rent-seeking behaviour (Paraskevopoulos Reference Paraskevopoulos2007). Pasok members changed – according to Sotiropoulos (Reference Sotiropoulos1996) – from a militant group to a fragmented community of public employment seekers. Within five years, the size of the public sector exploded, the budget deficit rose from 2.3 to 10.4 per cent of GDP, and the country continued to experience double-digit inflation (OECD 2011).
Power alternated in the ensuing decades between the two main political parties, Pasok and the centre-right New Democracy (ND). However, Pasok has had the most impact on the country's politics because it has been in power for 21 of the last 30 years. Lack of economic growth, high inflation and political instability due to corruption scandals in the late 1980s strengthened the patronage system and group penetration of the state apparatus (and the public purse). Despite anaemic attempts by ND to redraw the boundaries of the public sector in the early 1990s, state operations grew more complex with diffuse and blurred responsibilities among agencies.
Political imperatives necessitated a lack of transparency. For example, until recently, official data regarding the number of civil servants were collected by three bureaux, each with its own methodology: the Office of the Prime Minister, the Labour Ministry and the national statistical service, now known as Elstat. Numbers varied by as much as 20 per cent, creating uncertainty, confusion and lack of transparency. Things got so bad that in 2010 the government admitted that it had no idea how many civil servants it employed. The resulting census estimated slightly over 768,000 employees (about one in five working Greeks), without counting those working in the broader public sector, such as public utilities and other state-run companies (Kathimerini 2010a). The number is due to be reduced by 150,000 by 2015 with mergers, agency closures and retirements (Hope Reference Hope2011), but the process has been delayed by political and judicial obstacles.
The mutual dependence of interest groups and the state creates incentives for rent-seeking. Various economic and professional associations within and outside the public bureaucracy have been able over time to dominate the policy-making process, feeding from the public trough while promoting their sectoral interests in return for votes (Mavrogordatos Reference Mavrogordatos2005). In privatization cases, such as Olympic Airways, sale plans were drafted that required no employee layoffs by the new owners; unsurprisingly, they gained no private interest and yielded consternation by the European Commission (Featherstone and Papadimitriou Reference Featherstone and Papadimitriou2007). In the case of Hellenic Railways, where there is talk of a future sale, losses outpaced revenues by 8 to 1 in 2009. The company has a debt of €10 billion backed by the taxpayer, requiring annual interest payments of €500 million (Kassimi Reference Kassimi2010). Together with public hospitals, the 52 state-run companies (DEKO) constitute an open sore of public losses. In 2009 alone, DEKO lost €18.3 billion (a figure not included in official deficit data), an increase of 72.6 per cent from 2008 (Kathimerini 2010b).
High barriers to market entry in the form of inflated fees and protection from competition are often guaranteed by law. For example, more than 150,000 Greeks are estimated to work in 135 closed professions, including pharmacists who are guaranteed 35 per cent profit margins in health products, doctors who hold a monopoly on establishing private clinics with medical laboratories, truck drivers who have resisted the issue of new licences since 1986, and others (data from Hope Reference Hope2010a). In one instance, the seamen's union objected to attempts at liberalization regarding home-porting by cruise ships. Much to the dismay of travel agents, shopkeepers and hoteliers, roughly 400 unionists repeatedly blocked the entrance to Piraeus, Greece's main harbour, preventing passengers from disembarking. Strikes by taxi owners, another closed profession, in July 2011 caused chaos throughout Greece and opened divisions within the ruling socialists (Nedos Reference Nedos2011).
To sustain the system of mutual dependence, my argument predicts that both the state and individual groups have incentives for irresponsibility and corruption. By irresponsibility I mean that individuals or groups shift the blame to a vague ‘other’ in order to rationalize their own failings and ineptitude. For example, even as most Greeks admit that the bloated public sector is the country's biggest problem, Spyros Papaspyros, the now retired head of the union of civil servants (ADEDY), astoundingly proclaimed: ‘We are not going to become sacrificial victims, regardless of the struggle to save the country’ (quoted in Hope Reference Hope2010b: 2). The way in which individual irresponsibility leads to a collectively suboptimal outcome is perfectly encapsulated in the widely heard slogan: ‘I did not steal; I will not pay’.
Diminishing levels of generalized trust breed corruption. Although Greeks routinely show little trust in political parties and politicians but not the government itself (Kalaitzidis Reference Kalaitzidis2010) – with the exception of the last four years – some analysts maintain that ‘untrustworthiness is a structural phenomenon characterizing the transactions of Greeks’ (Lipovats Reference Lipovats1991: 248). An analysis of Eurobarometer data reveals a very low score of social trust in Greece (Paraskevopoulos Reference Paraskevopoulos2007). Transparency International reports that corruption is endemic. In its 2010 report based on a sample of 6,122 adults, it calculated that Greek households in 2009 paid on average €1,355 for public services such as speeding up the issuing of construction permits or driver's licences and €1,671 for private services such as doctors, lawyers or banks. The total national amount, which does not include government and corporate levels, rose by 23 per cent from 2007 to €787 million in bribes in 2009 – €462 million to civil servants and €325 million for private services (Der Spiegel 2010).
Scandals are not unique to Greece, but the inability or unwillingness to prosecute those responsible fuels perceptions of more corruption. Two recent examples are particularly illuminating. The first scandal, named after the German group Siemens, implicated mostly politicians, civil servants and private businessmen of the left. According to testimonies by those implicated and from investigative reporters, Siemens paid more than €100 million in the period 1998–2004 to ministers and members of parliament (MPs) for contracts involving the 2004 Olympic Games in Athens. In addition, procurement laws passed by Pasok and ND ‘allowed hundreds of millions of euros in contracts to go to Siemens and Intracom without tender’ (Gilson Reference Gilson2010). Judicial action was launched in 2004 by the incoming conservatives. The process was allegedly accelerated for political reasons, but it has since atrophied through political and judicial obstacles. The second scandal, named after the monastery of Vatopedi, involves accusations of bribes for land swaps between members of the Church, politicians of the right and civil servants. The land swaps were carried out in 2007, although the wheels may have been set in motion by two former Pasok ministers in 1999. Losses to taxpayers are estimated to be at least $136 million, in addition to the bribes paid to complete the deals (Carassava Reference Carassava2008). Inquiries have got nowhere due to the statute of limitations. The recent prosecution of Akis Tzochatzopoulos, a high-profile former Pasok minister, on charges of embezzlement, tax evasion and corruption exudes the aura of change, but it is unlikely that the case alone can shift the tide of perceived impunity. It is clear that impunity at the top diminishes generalized trust and fuels more corruption throughout the system.
Corruption leads to a lack of transparency, which undermines public finances. In 2004, the incoming conservative government accused the previous socialist government of understating the budget deficit in order to meet the criteria for Economic and Monetary Union (EMU). After an internal audit, the Greek government told Eurostat that major defence purchases at the beginning of the decade artificially lowered the budget deficit used to qualify for EMU because they were accounted on the date of delivery rather than purchase. The action was in part politically motivated because it meant that ND would breach the 3 per cent ceiling needed for EMU. After bitter recriminations between members of both parties, Eurostat expressed no faith in the accuracy of Greek data and demanded a recount of budgets since 1999. The proposed method vindicated Pasok and resulted in the Commission referring Greece to the Council of Ministers for having an excessive deficit.
During a subsequent audit in 2010 conducted by the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – the ‘troika’, as they are collectively known in Greece – as part of the process finalizing the rescue package, it was discovered that ‘fiscal targets were consistently missed, despite the benign economic environment, due to systematic overspending, endemic tax evasion and persistently overoptimistic tax projections’ (European Commission 2010a: 3). As a result, government expenditures as a percentage of GDP ballooned in 2009 to 50.4, up 7.3 per cent since 2000, while revenues plummeted to 36.9 per cent. Social transfers (mostly health and pensions) and employee compensation accounted for 65.5 per cent of government spending in 2009. Despite draconian austerity measures since 2009, Greece still needed €5.7 billion of extra spending cuts and revenue increases in 2011–12 to meet its targets (Hope Reference Hope2011).
Were Greeks cooking the books? In an interview with a television station, Walter Rudermacher, the head of Eurostat, and members of the Commission clearly stated that this was the case (Skai TV Reference Skai2010a). On the eve of national elections in October 2009 the Greek government reported to Eurostat an estimated 2009 budget deficit of 6 per cent of GDP. Three weeks later, the incoming socialists more than doubled the estimate to 12.5 (later revised to 15.6) per cent. The Commission found severe irregularities in data collection, no respect for accounting rules, a lack of coordination between the three responsible bodies – Elstat, the General Accounting Office and the Ministry of Finance – non-transparent or improperly documented bookkeeping by many Greek public institutions and a lack of individual accountability, leaving ‘the quality of fiscal statistics subject to political pressures and electoral cycles’ (European Commission 2010b: 4).
Why was there such massive underreporting even as the Commission heightened its surveillance of Greek data? In one instance, Rudermacher (in Skai TV Reference Skai2010a) reported that data sent to Eurostat regarding interest payments for public telecommunications were suspiciously low: ‘The number we were given was €45 million but the correct number was €495 million’. The reason, he says, was because the relay of data was done by telephone without proper documentation. In the same TV show, Manolis Kontopyrakis, former general director of Elstat, notes that the data he sent to the Commission included only validated data, which in one instance meant conveniently not reporting €3 billion in public hospital debts over the period 2005–8. Finance ministers of Pasok accuse their conservative predecessors of creative accounting (and vice versa), while Elstat officials blame technical irregularities and political pressure.
The Failure of Greek Political Leadership
Ostrom (Reference Ostrom1990) notes that effective leadership is an important design ingredient of CPRs. Greek political leaders have repeatedly failed to deliver on their promises to end corruption. Upon Andreas Papandreou's death in 1996, Costas Simitis became Pasok's leader and assumed the premiership. He embarked on a series of ‘modernizing’ reforms, aiming to end clientelism and corruption (Simitis Reference Simitis2005). His chief aim was to correct macroeconomic imbalances so that Greece could join EMU, which it did in 2001. Despite success in some areas, important structural changes were not made, because of their complex nature, widespread opposition (especially on health, pension and labour policies) and Simitis's inability to tackle dissent within his party's ranks (Featherstone Reference Featherstone2005). By early 2004, Simitis's popularity had collapsed and he resigned from his party's leadership. His successor, George Papandreou, had no time to address these issues because Pasok lost the general election two months later.
As a result, Kostas Karamanlis, ND's leader, swept to power promising to improve the economy, stamp out widespread corruption and promote a more transparent and effective state administration. Rising unemployment and inflation, an inability to reform higher education, an inept response to wildfires in 2007 and failure to control protracted violence following the shooting of a 16-year-old in December 2008 lowered expectations and damaged his standing at the polls. The financial audit of the Greek economy in 2004 failed to yield the expected results. It increased political tension by predictably blaming the previous socialist government for the economic mess, but it also undermined Greek credibility among EU allies. To make matters worse, ND MPs agreed to a special investigation but refused to vote for a criminal investigation, fuelling suspicion that the party had something to hide (Carassava Reference Carassava2008).
Scandals tainted and helped to end Karamanlis's tenure of power, but Papandreou's campaign during national elections in 2009 signalled a return to politics as usual. On the one hand, an embattled Karamanlis pleaded with voters to return more conservatives to parliament to deal with the impending economic crisis. On the other hand, Papandreou promised voters, ‘there is money available’. Raising expectations that he would open the public purse, he won with almost 44 per cent of the national vote, an increase of 5.8 per cent from 2007. A few weeks later he made a complete U-turn. His first act was to ‘discover’ that the situation was worse than he thought and predictably to blame the previous government for the mess. Did he not know Greece's situation? It appears he did. George Provopoulos, the governor of the Bank of Greece, said in an interview on Greek television (Skai TV Reference Skai2010b) that he informed both Papandreou and Karamanlis that the budget deficit had reached 8 per cent by the end of August 2009 and would probably climb much higher by the end of the year. Papandreou's campaign promises were clearly irresponsible.
In such a corrupt environment, irresponsible leadership runs through the entire political system. Antonis Samaras, the current ND leader and prime minister, voted down the first rescue package because his party's vote was not needed, even though he agreed with most of the proposal. In turn, he put forward an alternative programme which included acceptance of almost all the austerity measures in the rescue package (referred as the Memorandum in Greece) and a mix of revenue-enhancement schemes based largely on selling public assets (which are included in the second rescue package) (Terzis Reference Terzis2010). The problem is that there are few buyers now or in the near future, given the country's financial state – making revenue projections ring hollow. Aleka Papariga, leader of the Communist Party, decried the measures as evidence of capitalist conspiracy, whereas Alexis Tsipras, the leader of the Coalition of the Radical Left, demanded – among other things – a renegotiation of terms for reasons of national pride. Laos, a right-wing party, accepted the need to take the measures but demanded to be included in a coalition government to implement them.
Lapses in data collection and reporting constitute evidence of institutional design flaws. Just as Ostrom (Reference Ostrom1990) predicted, they undermine monitoring and accountability and exacerbate problems of free-riding and rent-seeking. Corruption has brought to parliament ineffective or irresponsible political leaders whose inability to grasp the depth and magnitude of the crisis has led to popular resentment.
The EU dimension
Amid the euro crisis, Herman Van Rompuy, the EU president, alleged, ‘what went wrong wasn't what happened this year. What went wrong was what happened in the first 11 years of the euro's history’ (quoted in Barber Reference Barber2010). Problems with the Stability and Growth Pact (SGP) weakened the euro's institutional foundations, while the failure to grasp early on the European dimensions of the Greek plea for help missed the cascading damage to other member states that was soon to follow.
The Institutional Dimensions of Monetary Integration
When EU members were about to embark on Stage 3 of EMU, several governments expressed concerns about whether those members inside the eurozone would remain faithful to the fiscal and financial prudence enshrined in the Maastricht convergence criteria which made EMU possible (Hosli Reference Hosli2005). Other concerns, most vocally expressed by Germany, centred on fears that members known for their profligacy – widely understood to be (not only) Italy – would continue with ‘business as usual’ and undermine the stability of the euro. The SGP was created in 1997 to reduce the possibility that members might free-ride, that is, take advantage of low interest rates but relax economic vigilance by incurring high government budget deficits (Heipertz and Verdun Reference Heipertz and Verdun2010). Monetary policy was delegated to the independent ECB, while national budgets continued to be set up by national governments. However, the Commission was empowered to monitor inflationary and budget deficit levels. When eurozone members’ budget deficits were about to breach the ceiling of 3 per cent of domestic economic output, the Commission recommended that the Council of finance ministers (Ecofin) issue an early warning. In case of actual breach, the Commission recommended that Ecofin issue an excessive deficit procedure, calling on members to coordinate their economic policies and the individual state to devise a credible plan for reducing the deficit.
The problem with SGP proved to be political reluctance to maintain and enforce the rules (Heipertz and Verdun Reference Heipertz and Verdun2010). Between 2001 and 2004, the Commission recommended five early warnings and five excessive deficit procedures. Only three warnings and one procedure were issued by Ecofin. When the Commission reported in 2003 that Germany and France had breached SGP rules, Ecofin suspended the deficit procedure in response to political pressure by the two leading EU powers. In 2005 Ecofin decided to make the rules more flexible. While agreeing to the usefulness of peer pressure and the surveillance system, the rules were interpreted in a way that allowed national governments under economic duress (low or negative growth, social security reform, or high unemployment) to exceed the deficit limit as long as they reduced it again later.
Institutional design flaws were not lost on policymakers and financial analysts. SGP rules were malleable and subject to interpretation: why should policymakers adhere to flexible targets when they could not adhere to strict ones? While supranational surveillance systems were in place, data collection and dissemination remained firmly in national hands. Not surprisingly, the threat of sanctions rang hollow as national leaders continued to take advantage of low interest rates to cover their budget deficits. As long as they could come up with a ‘plan’, everyone could have his/her cake and eat it too.
In an insightful article, Otmar Issing (Reference Issing2010), a former member of the board of the Deutsche Bundesbank and a member of the ECB's executive board, argues that a Greek bail-out means the end of the euro because it violates EU treaties and opens the gate for more aid to other members. Monetary union is based on two pillars: the stability of the euro guaranteed by an independent European central bank, and fiscal ‘solidity’ delivered by individual member states. By accepting the rules of monetary union, member states also accept the consequences. Because it is a ‘no transfers’ community of sovereign states, transferring funds from those who obeyed the rules to those who did not ‘would create hostility toward Brussels and between euro area countries’ (Issing Reference Issing2010). To quote Guido Westerwelle, Germany's foreign minister: it would be intolerable to ‘throw German and EU money out of the window and thereby reduce the pressure on Greece to reform’ (quoted in Evans-Pritchard Reference Evans-Pritchard2010).
The argument raises the spectre of moral hazard, but it makes little sense. Because Germany helped revise the rules to suit its own circumstances, it could not stand on high moral or political ground. On the one hand, helping a fellow government in need encourages the same profligate behaviour one is trying to discourage because it minimizes adverse consequences. As long as members believe there may not be punishment for ‘bad’ behaviour, they will continue doing exactly what they were doing in the past, leading to an inefficient redistribution of resources in the EU. On the other hand, not helping the government in need exacerbates the magnitude of the problem, raising the price tag and creating political conflict with long-term unanticipated consequences. The more leaders hesitate to respond, the greater the potential political conflict and the higher the eventual price tag in the event of a bail-out. An irritated German Chancellor Angela Merkel openly suggested that eurozone members should be expelled if they did not comply with the euro's fiscal criteria but has since suggested that rescuing Greece also rescues the euro. There is no cost-free solution to this problem, but continual EU hesitation has exacerbated an already-tense situation.
In response, EU leaders created the temporary European Financial Stability Facility (EFSF) and later the permanent European Stability Mechanism to provide liquidity to troubled sovereigns. Unfortunately, markets remain unconvinced that governments will have the money or political will to service bonds at maturity. Contagion has been limited thus far because the ECB has unwillingly become a lender of last resort not only to banks (which is what it is designed to be) but also to governments by allowing banks to use government bonds in mostly rescued countries as collateral for loans. By June 2011, €418 billion had been lent by the ECB, fuelling fears of the loss of independence and even recapitalization if rescued countries default (Barber Reference Barber2011). Another €100 billion from the EFSF was made available to the Spanish government in July 2012 to rescue its failing savings banks (cajas), increasing fears of impending Spanish trouble (Kanter and Minder Reference Kanter and Minder2012).
The Failure of Political Leadership
The key issue is whether EU leaders believed they would finally come to Greece's rescue. In hindsight, the answer is obvious, but there were indications that a bail-out would have been the final outcome as the crisis unfolded. EU officials applauded the Greek prime minister's efforts to stabilize his country's economy as early as January 2010, four months before the rescue package was announced. If the intention was to keep the pressure on Greece to reform but provide assistance in the end, the final outcome was worse than intended. Chancellor Merkel said over the weekend prior to the EU summit in March 2010: ‘Help is not on the agenda. I don't think it's advisable to upset the markets by raising false expectations for the summit on Thursday’ (quoted in Evans-Pritchard Reference Evans-Pritchard2010). She was proved wrong on the agenda and wrong on the markets. On 25 March she agreed to a rescue facility to provide €25 billion to Greece (later raised to €110 billion over three years), if needed, via bilateral loans from eurozone members and the IMF.Footnote 2 In return, the Greek government agreed to take drastic measures of fiscal consolidation. At the end of the three-year period, Greece should have more debt (estimated to be 160 per cent of GDP) but be in a better position to service it.
Why did EU leaders hesitate? There are two plausible explanations: the novelty of the situation and national political objectives. While the first explanation cannot be discarded, there is evidence to support the second. Both create confusion and uncertainty; uncertainty elevates cost because investors lose faith in the government's credibility. When investors believe that the Greeks cannot service their debt obligations on their own but do not know what EU governments intend to do about it, they are more likely to dump Greek government bonds for safer financial vehicles, driving up borrowing costs and precipitating Greece's financial disaster. The price of the rescue package goes up.
Hesitation may be attributed to the novelty of the situation. Because EU members did not anticipate an attack on the euro, no mechanisms were put in place to guide the EU's response. Was it a national or an EU problem? The Greek prime minister and some EU officials insisted it was the former. In January 2010, Mr Papandreou emphatically declared: ‘The problem we have is home-made . . . We need no bilateral loans, we have never asked for bilateral loans’ (quoted in Elliott Reference Elliott2010). ECB president Jean-Claude Trichet echoed the sentiment. Ruling out help for Greece, he said: ‘Each country has its own problems. It [the Greek budgetary crisis] is a problem that has to be solved at home. It is your own responsibility’ (quoted in Elliott 2010).
Other EU officials openly disagreed. As early as 2 December 2009, EU Monetary Affairs Commissioner Joaquin Almunia said: ‘the problems in Greece are problems of the euro area’ (quoted in Petrakis Reference Petrakis2009). He saw the risk posed by the Greek problem as an issue of contagion. In a tightly interconnected system such as the EU's financial system, damage in one area can quickly spread elsewhere. Angel Gurria, head of the Organization for Economic Co-operation and Development, said the crisis was spreading ‘like Ebola . . . It's not a question of the danger of contagion; contagion has already happened’ (quoted in Cendrowicz Reference Cendrowicz2010).
Representing only 2 per cent of the eurozone's GDP, Greece is not in itself a big issue, but a domino effect of creditors’ default might make it so (Zahariadis Reference Zahariadis2012). Portugal and Ireland have already had to be bailed out, and Greece received a second rescue package of €130 billion in February 2012. Almost 70 per cent of Greece's sovereign debt is held by foreign investors. The Bank for International Settlements estimates that Greece had an external debt of €184 billion as of 30 June 2010, of which it owed €53.5 billion to French investors, €36.8 billion to German investors and €12 billion to British investors, among others (Nikas Reference Nikas2010). A Greek default will have calamitous effects on European banks. As the global financial crisis has amply demonstrated, private bank assets have a bad habit of becoming public liabilities when the economy turns sour. While many eurozone banks passed the stress tests conducted by the Committee of European Banking Supervisors in cooperation with the ECB in 2010 and 2011, ‘grave reservations’ (Jenkins Reference Jenkins2010) remain over the transparency and effectiveness of the exercise. Moreover, analysts are concerned about the ability of some of these banks to finance their long-term debt, as competition for funding stiffens from sovereign and corporate issuers. If contagion pushes banks to default, entire economies may implode. Greece's rescues momentarily lessen that possibility.
There is credible evidence to suggest that national considerations delayed the EU's response. Some national leaders did not wholeheartedly commit to an EU solution, fearing the wrath of cash-strapped voters at home. Alessandro Leipold, a former director of the IMF's European department, claimed that ‘meandering strategy and poor communication’ undermined the bail-out: ‘The cacophony coming out of European capitals has destroyed market confidence’, increasing the price of the rescue package (Cendrowicz Reference Cendrowicz2010).
The problem was particularly acute for German Chancellor Merkel. Despite having comfortably won national elections in September 2009, Chancellor Merkel's Christian Democrats and her Free Democrat partners faced a tough election in the state of North Rhine–Westphalia on 9 May 2010. At issue was the ability of her coalition to hang on to the majority in the Bundesrat, the upper house of parliament, which represents Germany's 16 states. The election campaign in North Rhine–Westphalia was mainly about scandals, taxes and regional issues such as education and public spending cuts. The Greek rescue package did not figure prominently in the campaign but analysts believe it made a difference. Greece appealed for concrete help from its EU allies in late February, but a rescue package was not voted by the German parliament until 7 May. Cognizant of polls showing the majority of Germans opposed to footing the bill and of derisive comments by German MPs calling on Greece to sell off islands and artefacts to fund the deficit, Merkel postponed making a decision on the Greek package for several weeks until panic in financial markets forced her hand. The drawn-out debate over implementation fuelled speculation that Germany wanted to avoid it all together. ‘Chancellor Merkel hesitated over the Greek bailout, and the whole issue stirred up public fears over the economy, unemployment and the stability of the euro’, said Manfred Güllner, head of the Forsa polling institute (quoted in Moore Reference Moore2010). Merkel's governing coalition has since suffered six state electoral defeats in 2011 for similar reasons (Somaskanda Reference Somaskanda2011).
SGP rules and lack of national political resolve exacerbated the Greek problem, turning it into a eurozone disaster. The EU instruments created to deal with the crisis have proved inadequate to pacify the markets or voters. Rumours of an imminent Greek default continued unabated.
Conclusion
Consistent with Ostrom's institutional argument (1990), design flaws and leadership failure created conditions of Greek corruption and led to financial disaster. The Greek trigger is not simply a national problem; European monetary integration makes it an EU problem. The eurozone's fiscal crisis was brought about as much by Greece's own profligacy as by EU institutional adolescence and lack of political resolve.
Although Ostrom's framework (1990) explains the Greek trigger for the eurozone crisis, it falls short in two areas. First, it says nothing about timing, which is important in public policy. At what point does CPR mismanagement become a crisis? John Kingdon (Reference Kingdon1995) introduces policy windows as a way of infusing context into the policy process. The global financial crisis opened the window and triggered the crisis. In 2008 and early 2009 financial markets focused on Washington's huge rescue packages and the administration's potential inability to finance its widening deficit. The US dollar plummeted relative to other currencies, while the premium demanded by investors to finance treasury bonds increased. By October 2009, the euro and yen had upstaged the dollar as the globally favoured reserve currency for central banks (Tharp Reference Tharp2009). But did the fundamentals justify the euro's strength?
When the Greek government revised its deficit estimate, it thought it would be politics as usual; but it ignored the global context. Given that Greece had little credibility, the problem was not only that investors lost faith in the Greek government's ability to service its debt, but they did so because they questioned the value of the euro itself. Greece was simply the weak link that enabled them to break the chain. Because they profit by correctly predicting currency movements, betting against Greece also undermined the euro's stability. The more EU leaders hesitated, the more uncertainty prevailed over EU commitment to maintaining the euro's strength, and the more it seemed likely that the euro would weaken, thus fulfilling the bet. Greece could not claw its way out of the predicament on its own because it had no national currency to devalue as a signal of its intention to correct imbalances. It took more than €1 trillion in sovereign rescue funds to restore some confidence in the euro. The point is not that Greece would not have needed to be rescued had EU leaders acted sooner and more forcefully but that the country's (and the euro's) rescue would have carried a lower price tag. Early forceful action would probably also have reduced the cost of rescuing Ireland and Portugal by removing incentives from speculators to bet against the euro.
Second, while Ostrom (Reference Ostrom1990) identifies mismanagement and corruption as mutually reinforcing phenomena, she does not specify whether addressing one necessarily solves the other. The prolonged Greek crisis suggests that corruption is a bigger problem than mismanagement. Problems in Greece go beyond fiscal consolidation; they signify a crisis of trust. Rescue efforts will not yield the expected results unless they also recalibrate state–society relations. So far they have not, testing European officials and Greek society (Kroustalli Reference Kroustalli2011). The effort is exceptionally difficult because some of the same policymakers who created and profited from the system are now asked to reform it.
The analysis undermines conceptualizations of Europeanization as a process of national convergence and compliance. Not only is there a limit to Europeanization (Featherstone and Papadimitriou Reference Featherstone and Papadimitriou2008), but the Greek case signifies a renationalization of EU politics. For years, European integration was made possible by the strategy of subterfuge: bitter acrimony over collective decisions with firm national implementation (Héritier Reference Héritier1999). The point was to promote diversity and to prevent national peculiarities from blocking collective choice. Greece was able to get away with mismanagement for so long not only because of national politics but also because repeated interactions created a permissive system of EU rules that blurred accountability, limited sanctions and undermined collective leadership. The rescue effort has been decidedly coloured by national criteria. SGP rules were set up to prevent national mismanagement, but they have also been used to prolong it. Whereas Europeanization is viewed as national adaptation to European norms, the Greek case shows it also reinforces national idiosyncrasies.
The future of EU integration hangs in the balance. Ostrom's framework (1990) is useful in explaining the trigger mechanism for the crisis and in highlighting some of the solution's shortcomings. Constraints imposed by Europe can sometimes ameliorate domestic institutional failures; closer monitoring and better enforcement may help. But in the absence of stronger democratic accountability and EU political leadership, their domestic effects will be limited. At first sight, the competitiveness pact along with tighter fiscal monitoring and fines appear to strengthen Ostrom's rule (Reference Ostrom1990) for graduated sanctions. The hope is that they will increase the likelihood of successfully managing the euro. However, effectiveness is limited by the other two design rules: accountability and political leadership. The new budgetary and macroeconomic surveillance framework ostensibly promotes cooperation and monitoring by delegating more powers to the European Commission. However, without stronger democratic accountability and transparency, the system may reduce trust in both national and supranational institutions. National politicians will more credibly shift the blame for unpopular decisions to unelected ‘eurocrats’. This is already happening in Greece as a result of austerity measures. Trust in national politicians is depressingly low and faith in EU institutions is coming under attack. The same is true in other countries, such as Finland, Slovakia and Germany, where many voters and some policymakers openly question the need to rescue EU members (Cienski et al. Reference Cienski, Pignal and Wiesman2010; Peel Reference Peel2011). EU leaders are unable to coalesce around common objectives. The ECB president calls for a finance minister for the EU, while the head of the IMF, Christine Lagarde, insists on bank recapitalization. Deep structural EU flaws go beyond Greece. Addressing the Greek problem will help, but it will not solve Europe's sovereign debt crisis.
