Greek Premier Papandreou joins his Irish and Portuguese counterparts, Brian Cowen and José Sócrates. Having wielded the axe at the bidding of the Troika he now finds himself on the chopping block. Those insisting on the need for austerity and painful structural reforms make frequent reference to the importance of moral hazard and getting incentives – especially those of politicians – right. But what incentive do elected policymakers have to impose austerity if certain electoral defeat is the only reward they can expect? The imposition of drastic austerity measures in the teeth of a demand-side crisis is bad economics. Imposing it from the outside by largely non-elected bodies but through the national democratic process is also bad politics.
We will see what the emerging national unity government will manage to achieve. As I pointed out when the then defence minister Venizelos – who may well be Greece’s next prime minister – was about to replace the then finance minister, the problem is not one of domestic political leadership. Greek public finances are not in a mess because the government failed to implement necessary austerity measures, but on the contrary because it rather effectively implemented such measures, deepening and prolonging the recession. Unless the whole policy framework is shifted, changing the heads doing the talking will make no appreciable difference. But Greece and its politicians cannot change that framework on their own: it requires, finally, a European solution. Unless, of course, the new Greek leadership decides that its ‘incentives’ are such that it has no choice but to leave the euro area.
In some ways Papandreou deserves respect. Unlike the case of Brian Cowen, who had been finance minister in Ireland for five years prior to the crisis, his government was clearly in no way responsible for originating the financial crisis (although earlier socialist governments must take their fair share of the blame for Greece’s structural weaknesses). He has fought for over two years now to right the capsizing Greek tanker under terms dictated by European politicians and institutions overwhelmingly from the centre-right. Yet the fact remains that you cannot right a ship by pumping the water, not over the side, but back into another part of the hull. The policies were doomed to fail, the more so the greater the vigour with which they are implemented. It is a cliché, of course, but future historians will surely portray him as a figure worthy of a Greek tragedy.