European Union failures in Greece and some possible explanations By



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European Union failures in Greece and some possible explanations


By

George C. Bitros1




Abstract


The European Union (EU) failed repeatedly to hold Greece accountable for violations of the Treaties it signed over the past five decades. In particular, the EU not only did not express reservations in the face of these violations, but on two crucial occasions, in 1979 and again in 2000, it even rewarded Greece with concessionary decisions, which contributed significantly to its present calamities. Hence, there arises the following question: How can we explain these EU failures in the case of Greece? The objectives of this paper are twofold: First, to highlight the circumstances which prompted the EU Authorities to treat Greece as a special case, and second, to sketch briefly the rudiments of an answer to the preceding question.
JEL Classification: F02, O55

Keywords: European integration, Europeanization, financial assistance, convergence, institutional failure





Correspondence: Professor George C. Bitros

Athens University of Economics and Business

80 Patission Street, 6th Floor, Athens 104 34, Greece

Tel: ++30 210 8203740 Fax: ++30 210 8203301,



E-mail: bitros@aueb.gr

  1. Introduction


Prior to 1974 Greece achieved: high economic growth rates (≈ 7%); remarkable price stability (<2.5%), which enhanced the international competitiveness of Greek products and services and maintained the balance of payments under manageable control; enviable reduction of unemployment (<2.5%); significant improvement and expansion of social services; and it achieved all these results by incurring a very limited public debt (<12.5% of GDP in 1974). After 1974, economic growth fell to about one third (≈ 2.4%) and the unemployment rate more than doubled in the period 1980 (≈ 6%), while in the decade of 2000 it nearly quadrupled (≈ 9%). The explosive deficits in the Balance of Payments were contained only thanks to large EU aid, and the budget deficits carried public debt to unsustainable heights (≈ 150% of GDP in 2011). So now Greece is under the supervision and tutelage of her creditors.

Some economists may think that the setback happened because, before 1974, the Greek economy was nearly “closed”, whereas after its accession to EU membership in 1981 it opened to international competition.2 But the setback was mostly due to three groups of other factors. The first and most significant has to do with the resistance of Greek governments in introducing structural reforms in line with the “economic constitution” of the EU, i.e. the Treaty of Rome, particularly after 1975. The second is associated with the inefficiencies that took hold in the domain of public administration and the wider public sector; and, lastly, the third group of negative factors relates to the specific economic policies that were implemented.

This paper addresses the following issue: Greece signed an Association Agreement with the EEC in 1961; this aimed at full membership within 22 years.3 The agreement was partially frozen for seven years (1967-1974) at the initiative of the EEC Commission as a reaction to the military regime that assumed power in Greece in 1967. It was re-entered into force upon the restoration of parliamentary democracy in 1974. Subsequently, Greece became a full member of the EEC in 1979 and of the European Monetary Union (EMU) in 2000.4 As noted above, in the course of these years Greece went from riches to rags. Most certainly the major share of the blame should be attributed to the failures of the authorities in Greece herself. But should the EU be absolved of all responsibility for what has happened? The objective here is to search for an answer.



Section 2 pursues two tasks: First, it explains the challenges Greece faced at the time the Association Agreement was concluded in 1961; and, second, it assesses the effectiveness with which Greek governments dealt with these challenges, as well as the initiatives the EU authorities took to assist Greece in preparing for full membership in the 22 years that this agreement allowed. Sections 3 and 4 take up the same tasks as above for the periods of full membership and since 2000 when Greece acceded to the EMU. Then, in view the calamities that befell Greece in recent years, Section 5 poses and attempts to shed light on the following questions: If Greece was unprepared in 1981, and the evidence shows overwhelmingly that it was, why did the EU grant Greece a full membership status? Given that, from a structural point of view, the economy of Greece in the period 1981-2001 was even worse than in the period 1961-1981,5 why did the EU give Greece the green light for the EMU? Since EU experts knew fully well after 2001 what was coming in view of the procrastination of Greek governments to adopt the necessary structural reforms, why did they not react on time but waited, instead, until after the crisis erupted? Finally, Section 6 summarises the findings and draws some conclusions.

  1. 1961-1981: What went wrong that the EU Authorities ignored


The tariff regime that the Association Agreement established was favourable for Greece. In particular, the Agreement created a declining tariff advantage over a period of 12 years, which was designed to bring about two results: First, to give the Greek economy time to start growing through increased exports to the Community, and hence with lesser constraints to her Balance of Payments, and, second, to adjust to the more competitive countries of the EU, thus enabling it to stand on its own in the face of the demanding conditions within the Community. Eichengreen (2007), Georgakopoulos (2002) and many other researchers have found that the agreement yielded favourable effects for Greece, since it helped the products of her traditional industrial sectors gain shares in the EU markets and perhaps it contributed also to her rapid economic growth over this period. However, when the usefulness of the Association was debated in the late 1950s, the issues regarding exports were neither the only issue nor the most important. The main focus of the debate was on the structural reforms that Greece would have to adopt in order to integrate smoothly into the Community within the 22 years of adjustment that were provided for in the agreement. To ascertain beyond any doubt that this was the case, here is how Papandreou (1962) summed up the challenge that Greece confronted at the time:
"Greece has recently concluded an Association Agreement with the European Common Market with the prospect of full membership some 22 years hence. It is fair to say that, given the terms of the association, Greece has a small margin of time in which to achieve the structural transformations needed for survival in the European Common Market."(p. 25)
Moreover, regarding the nature and range of the “structural transformations” that were needed, Papandreou (1962) was certain that these ought to be oriented towards the social and economic environment envisaged by the Treaty of Rome. Below is a sample of the reforms he considered urgent for Greece’s survival, not just in the Custom Union of EEC, but in the expected economic union, the “European Common Market”:

“There is a pressing need to streamlining the presently cumbersome “system” of government regulation of economic activity. In some sense there is “too much” government on the Greek economic scene, while there is too little research and too little planning, and the organizational apparatus for the execution of various plans is practically absent. The mosaic of fiscal credit and market regulations which are subject to abrupt changes without notice can hardly be expected to encourage private investment activity of the right kind.”(p.103)


“Where the market mechanism, the competitive process is allowed to perform the resource-allocation task, it ought to be allowed to work. The rewards for success should be high – but so should be the penalties for failure. The barriers to entry – which in Greece reach unusual heights – ought to be lower if not removed. “Saturated” lines of endeavour and “closed” professions ought to be exposed to the rigors of the competitive process.”(p. 104)
“The overwhelming emphasis which is presently given to large and spectacular but narrow-scope projects must give way to a systematic exploration of the developmental possibilities of small industry (including agriculture-based small industry)…”(p. 104)
“…It is essential to come to understand that an efficient export sector cannot be grafted upon an inefficient economy. Greece’s low capacity to export is a symptom of structural weakness, of resource misallocation, of missing links in the distribution chain – and should be handled as such. Special measures, such as preferential credit and fiscal treatment for export-oriented firms, while of doubtful effectiveness in the short-run, are often distinctly harmful in the long-run.”(p. 105)
So, given that what had to be done was well-known to all parties who decided to place Greece on a path of full EU membership, the question is: Did they rise to the challenge their responsibilities entailed?

In Bitros (2013) I explain in considerable detail why and how Greek institutions failed miserably to deliver on this historic opportunity. The passing of the new Constitution in 1975, which gravely eroded property rights and set the stage for the expansion of the state and the destruction of private markets; the backtracking of Papandreou, who as leader of the Pan-Hellenic Socialist Movement (PASOK) in the 1970s proposed reforms opposite to the ones he recommended in his 1962 monograph; and the wide nationalizations of banks and industries that a supposedly conservative government introduced and the Confederation of Greek Industries swallowed passively, are only a few examples of ill-conceived reforms that pushed the social and economic structures towards an organisation based on central direction and control. If one finds this assessment subjective and prejudiced, one may be reminded of, say, the following assessment to which Georgakopoulos (2002) arrived upon examining the factors responsible for the bad performance of the Greek economy after 1981:



“…besides, of course, the inappropriate economic policies, which do not seem to have initiated the troubles but which certainly led to a deterioration in the situation, a number of external and internal factors could be mentioned, including the 1978 and the 1985 oil price increases, the rise of the South Eastern Asia countries, which were producing a similar range of manufactured products at lower cost, the inappropriate model of Greece’s development in the post-war years etc. However, the most important factor seems to have been full membership of the European Community, something for which the economy was totally unprepared. This sounds strange for a country that has been an associate member of the European Economic Community for 20 years and was supposed to gradually align tariffs and prepare itself for the final accession as full member, while receiving substantial amounts of resources from the EU budget. Although the country was simply supposed to prepare itself to become a full member of the European Communities it was, in reality, totally unprepared.”

Moreover, if these assessments are not convincing enough, one may be reminded that the “structural transformations” Papandreou (1962) called for 50 years ago are only now being introduced as an integral part of the multiple austerity programmes which have been imposed on Greece by her Creditors.

Drawing on the above, the responsibility of Greek governments and their advisors who promoted publicly the advantages of Greece within the European family of nations, but, at the institutional level, did everything in their power to turn Greece into a quasi-collectivist state, is a fact, and it will not escape the ire of historians in the future. However, what is of interest here is the question if, and to what extent, responsibility lies also with the EU. When the European Commission “froze” the Association Agreement in 1967 reacting to the imposition of military rule in Greece, the message was clear and loud: It stressed the commitment of the EU to democracy, and, by doing so, it created a precedent for all European nations with aspirations similar to those of Greece. Yet, after the restoration of Democracy in 1974 and the re-activation of the Association Agreement, the European authorities failed to notice that the institutional changes in Greece were inconsistent with the main pillars of the Treaty of Rome. Let me explain: Bitros and Karayiannis (2013) establish that Democracy is impossible to take root and flourish without a free market economy. Quite expectedly this finding explains why the founding fathers of the EU constructed the Treaty of Rome on the twin pillars of democracy and the free market economy. However, as mentioned in the preceding paragraph, the institutional changes in Greece, particularly after 1974, worsened its structural imbalances even further than in 1961. The barriers to entry into markets became higher and more widespread. The shielding” of professions became universal. Individual labour contracts were replaced by collective ones. With the acquiescence and support of governments Labor Unions, particularly in the public sector, grew gigantic and interlocked with the political parties in a way rendering them uncontrollable, and so on. In view of these changes Greece not only became oblivious of her obligations under the Treaty of Rome, but also distanced herself from them by moving in the opposite direction. Therefore, the European authorities, as guardians of the Treaty, ought to have warned Greece on the provisions highlighted in footnote 2 above. Perhaps they did express their displeasure through official channels; but nothing openly enough for Greek citizens to hear and nothing in the nature of a friendly but candid reminder that Greece was going astray.6



This implies that the relevant European authorities experienced a notable failure. It was a failure by omission which could have been mitigated only if Greece had not been granted full membership status in 1979.7 Was their decision justified? On account of all available evidence it was not, since from a structural point of view Greece’s economy in 1981 was in a worse state than in 1961, and further away from the imperatives of the Treaty of Rome. During the period 1961-1981, per capita income in Greece converged significantly to that of the EEC average. Yet, even though improvement in living standards might have created optimism among European politicians and technocrats regarding Greece’s ability to survive within the European common market, the EU authorities ought to have disallowed Greece from entering into the EEC totally unprepared as she was. Why did they do so is an issue to which I will return later, in Section 5.

  1. 1981-2001: Divergence instead of convergence


The Agreement of Accession of Greece to the EEC came into effect in 1981. In that year, PASOK won the elections and Papandreou8 as its leader became Prime Minister. While serving as head of the main opposition party after 1974, Papandreou had taken a highly anti-American and anti-European stance. Actually he won the elections claiming that the EEC and NATO “represented the same evil syndicate”, and upon his proclamations to take Greece down to a Third-World socialist path. In this political climate, and being as astute as he was, it did not take him long to conclude that: (a) Greece commanded certain geopolitical advantages that he could leverage in return for EU accommodation with his policies; (b) since the EU had condoned the strongly interventionist policies of previous Greek governments, no issues regarding convergence along the lines mandated by the Treaty of Rome would be raised, and (c) given the wide gap in living standards that existed at the time, and the cost Greece would absorb by opening her markets to European competition, a strong case could be made for renegotiating the terms of the Accession Agreement as well as asking for generous financial assistance. The EU refused to renegotiate the Accession Agreement but, pretty much, gave in to all other demands made by Papandreou’s governments in the 1980s. It thus established a precedent of ill-conceived concessions that contributed significantly to the inertia towards that lead to the present calamities of Greece. The following examples suffice to highlight the nature and extent of EU responsibility in the face of the behaviour and practices of Greek governments regarding Greece’s obligations vis-a-vis of the Treaty of Rome.

3.1 The debacle of financial assistance




Table 1: Net1 inflows of financial aid from the European Union as a percentage of GDP


1981

0,003

1991

0,046

2001

0,031

1982

0,012

1992

0,039

2002

0,027

1983

0,016

1993

0,044

2003

0,020

1984

0,016

1994

0,041

2004

0,022

1985

0,017

1995

0,035

2005

0,016

1986

0,024

1996

0,048

2006

0,021

1987

0,029

1997

0,039

2007

0,018

1988

0,025

1998

0,039

2008

0,020

1989

0,029

1999

0,043

2009

0,009

1990

0,032

2000

0,043

2010

0,013

Sources: 1. Ministry of Finance, Introductory Report of the Budget, Athens, various issues.

2. GDP from the AMECO data base.

Notes: 1. This term implies that the amounts of funds used to compute the percentages in this table are net of the annual contributions of Greece to the EU budget




A central policy objective of the EU has been to promote the convergence of the economies of the member-states at the national and regional levels. The implementation of this policy is pursued by various means, including the provision of financial assistance. Table 1 below shows the net assistance Greece received annually over the period 1981-2010 as a percentage of the Gross Domestic Product (GDP). From these figures it turns out that the assistance averaged 2.7 percent of GDP per annum, a very generous percentage by any comparison. Were the objectives of these policies and generous financing achieved in Greece? Or, to put it differently, did this huge transfer of resources help Greece converge at the national or regional level? Let me work out the answer, first with respect to convergence at the national level.

Suppose that the trend growth rate of Total Factor Productivity (TFP) in Greece was nil throughout the 1981-2001 period. Then, from the growth accounting point of view, her GDP would be expected to grow at the trend rate at which the above EU assistance flowed into Greece. This implies that GDP would be increasing at the trend rate of 2.7%, and, given that population did not increase much, per capita income would be growing roughly at the same rate. Hence, if the trend rate of growth in the EU during the same period fell, say, in the neighbourhood of 2%, Greece would have converged to EU average living standards, albeit at a slower rate than in the period 1961-1981, when the trend growth rate in Greece was much higher than in the EU. Did this expectation come true? No; definitely not. According to the European Commission (2003, 7) Greece converged by 5.94% and 2.34% in the periods 1960-1970 and 1970-1980 respectively; diverged by 6.13 in the period 1981-1990; converged by 1.14% in the period 1990-2003; and most certainly it must have diverged greatly since 2003 due the deep recession in recent years. Therefore, on account of this analysis it is reasonable to conclude that the EU failed to steer Greek governments into channelling the financial assistance into growth promoting investments, instead of using it mostly for consumption purposes.



Turning next to the presumed convergence among various regions of Greece, the evidence from the available literature is in favour of the view that the divergence actually widened. For example, Siriopoulos, Asteriou (1998) and Petrakos, Rodriguez-Pose (2003) find divergence among Greek regions for the periods 1970-1996 and 1981-1997, respectively, and the same trend is reported by Petrakos, Psycharis (2006) using improved data and more sophisticated econometric techniques. Thus, given that a large share of the EU assistance was earmarked for projects that sought to promote convergence of the less to the more affluent regions of Greece, these findings indicate that the policy failed at this level as well, and indeed not without EU responsibility, for three reasons: First, because the EU designed and put in place the allocation mechanisms of the assistance. Second, because EU had final authority for approving the projects and monitoring their implementation; and third, because the EU failed to prevent the widespread abuses that accompanied the administration of the assistance by successive Greek governments.

Furthermore, with regard to the last point, it is important to note that, even worse than the failure of the financial assistance to boost convergence, were its unintended effects on the attitude of citizens and on the integrity of the relatively feeble institutions that existed in Greece. Today it is customary for foreigners to refer to Greece as a highly corrupt and inefficient country. But few wander what the easy money of financial assistance would do to their countries and institutions, if the donors trusted that governments would abstain from the temptation to use the assistance unscrupulously in order to perpetuate their presence in government. The astonishing realisation though is that, in the case of Greece, the EU Authorities failed badly, because had they read the report that Porter (1947) submitted to the USA administration, they would have concluded that Greek governments could not be trusted to put in place the necessary mechanisms for utilising the assistance effectively and without compromising its intended purposes.



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