Thursday 2 February 2012

Can Greece reform itself? Can Germany and Europe help?

Many of us have pondered how is it possible for Greece to have missed most if not all the targets that were set by the Troika? How incompetent can they be? Why is it that after two years with Greece on the brink of oblivion the Greek politicians still play games and refuse to implement what they signed up to? How difficult is it to reform the Greek economy? What can Germany do?
German Experience
Let me attempt to answer using my personal experience. Back in the late 1990’s I found myself as a postdoctoral fellow in Germany with the Max Planck Gesellschaft. It was in the city of Jena (Thuringia) of the former East Germany. Jena is famous for the Carl Zeiss optics and also for the battle (1806) that subjugated Prussia to the French empire (Napoleon) which in turn gave its name to a Paris Metro station. When the German unification (or takeover) happened Jena changed drastically. More than 20,000 people working at the Carl Zeiss Jenoptik factory were fired and in a city of 100,000 it meant misery. Unemployment soared and political extremist was rife. Despite the resources thrown by Germany, Thuringia was still a Least Favourite Region 7 years (EEC classification) after the “change”.  Incidentally, the whole of Greece was classified as a Least Favourite region for most of the 80-90’s. At work even after 6 years you could divide your colleagues into two groups. Those that embraced the new order of things and those that chose to resist and live in the past. It was not an age division but rather a cultural and a character differentiation. Sometimes the more enthusiastic proponents of change were of the older generation. My professor was in charge of reading the Staatssicherheit files (Stasi) and making sure that people who did serious harm were put aside. Although many “politicians” that were entangled with the old regime conveniently reformed themselves to survive, many were side-lined or forced to early retirement. Slowly the 2-stroke Trabants were replaced by the Audi’s vorsprung durch technik. It took many years and the enormous resources of West Germany to make the change. Germany run deficits of up to 13.2% and threw more than ½ the total savings of West Germany to subsidise the East. Europe also help by first endorsing the unification and also financial even unwittingly. The result in Europe was the collapse of the Exchange Rate Mechanism through the rapid appreciation of the DM caused by the increase in interest rates. Effectively, the rest of Europe paid for the unification efforts of Germany through the devaluations.
I mentioned East Germany because there are many parallels with Greece. Although Greece was on the other side of the Iron Curtain (Churchill 1946), the economic policies for many years were little different. Greece had and still has a state run economy. Decades of state mismanagement has created not only a state monster but also generations of politicians and people who learned to accept and navigate this labyrinth as was the case in GDR. Many of the ones with a conscience that refused to accept corruption, political oppression and nepotism as a way of life left the country. Contrary to East Germany there was no wall to stop them. As a result the forces of healthy change were weakened. Politicians were voted in on the promise of favours or job allocations. No one cared about prudent policies or good governance. In addition, the EEC (later EU) subsidies provided the requisite money with few if any strings attached (remember COMECON). Politicians used these subsidies in order to get re-elected. There was no need to change anything! Thus, Greece started exhibiting many of the characteristics of a failed state. The bureaucracy failed and together Greece failed.
The EU woke up to the problem rather late and it demanded from Greece to change all this in space of few months. However, none of the politicians or the political parties that are heavily responsible for this mess has been removed, reformed or changed. The analogy with Germany is trying to change Ostdeutschland into West Germany by keeping Eric Honecker and its party fully in control of the implementation. It cannot happen.
I am not trying to excuse Greece or the Greeks from their responsibility. Greece needs help from Europe in order to reform, not just financial assistance. They need to change their memes (cultural genes) and this takes time. The money that Troika is pledging to Greece is seen by many as way to propel and support a corrupt political system. After all, the Greek cabinet is little changed from two years ago. Strict conditionality should be placed on the politicians. Perhaps the EU could help by encouraging the current PM to form a new political party to cover the middle ground that is now disintegrating. Not doing so would push ordinary Greeks to the extreme left and right. This is not in the benefit of Europe.
Please excuse my exaggerated and possibly dramatic analogy (being Greek I cannot help it) with East Germany. East Germans suffered hard and long and many generations paid a high price in terms of lost potential, lost aspirations and lost lives. We should try to avoid a repeat of this bad movie.
Greece needs more than financial help. It needs a dream and a hope. Many East Germans dreamt and hoped of the day their country and families would be united. What are the Greeks dreaming about? More taxes? What are the aspirations of the young unemployed Greeks? Immigrating? The Greek political establishment in power for the last 30y has failed and needs to be swept aside. Europe is more than just an economic union. It is an ideal fostered and hammered through many centuries and many bloody wars. Now is the time for the European ideal to take the driving seat.