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.
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It is misleading to claim that Mr Papandreou was forced to resign because of the austerity measures. When the first measures were taken in the beginning the crisis, domestic and foreign analysts were quite surprised to see that reactions were very limited (perhaps you can remember the Spanish "indignado" motto "Shout so that Greeks wake up"). Greeks had realized and accepted the fact that they really could not go on living on loans. There were many actually who saw the crisis as an opportunity to resolve chronic issues within the Greek society (living values, production orientation, and so on).
Things changed dramatically when people realized that austerity measures were unfair, mostly due to administrative and government ineffectiveness and corruption. While pensioners, civil servants and private sector employees where dramatically hit by the measures, massive tax evasion and privileged civil servant classes were left intact.
The main reason for Mr Papandreou's resignation is therefore not the austerity measures themselves but the fact that he and his government completely failed to implement a fair austerity.
Kostas, I think your argument is not tenable for a number of reasons.
First, the fact that the Greek population initially supported austerity or passively accepted it is factually correct, but not a valid counter argument. It just shows that it took time for the negative effects of the austerity to make themselves known.
Second there is a pile of evidence (see recent blogs for some sources) that austerity deepens recessions irrespective of the perception of fairness. (I am not saying, by the way, that fairness is not important, just that it is not central. Very early on I called for distributional aspects of the crisis to be recognised: http://www.ceps.eu/system/files/article/2009/04/w… )
Third, it is not clear that the measures taken by the Greek government are as socially regressive as you claim. Some measures did hit the wealthy. There is a good study of this here: http://www.etui.org/Publications2/Policy-Briefs/E… Again, to be clear, I am not suggesting that they could not have been done in a more progressive way, but my basic point remains: it was the fact that Papandreou implemented strict austerity measures that deepened the recession that led to his downfall, not the secondary issue of whether the austerity was 'fair' or not.