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The Greek crisis and the major flaw in the EU edifice

Gérard Roland, E. Morris Cox professor of economics and professor of political science | July 1, 2015

The Greek crisis should not have happened. Puerto Rico, a US territory is currently facing a major debt crisis, similar in many ways to Greece. The obvious solution will be a major debt reduction in exchange for local reforms to prevent a new debt buildup. Nobody is considering kicking Puerto Rico out of the United States and out of the dollar zone.. Yet, this is what is happening to Greece. The Grexit started when Greek Finance Minister Varoufakis was excluded from the meeting of the Eurogroup on Sunday June 28 and when the ECB decided to freeze Emergency Liquidity Assistance (ELA) at its current level, leading to the temporary closure of Greek banks. Whatever will happen in the coming days in Greece and Europe, whether Grexit materializes or is reversed, the Greek crisis reveals a major flaw in the EU edifice: the democratic deficit. The current crisis risks bringing down the whole EU edifice, and lead to uncontrollable political crises in various countries, because of this major flaw.

Greek flag

Greek flag

What is the democratic deficit? Since its inception with the Treaty of Rome in 1957, European institutions have been working on the basis of cross-country consensus. The European Commission was supposed to be non politicized and work only towards further European integration. The European Parliament, the only body directly elected by European voters, initially only had consultative powers. Its powers have increased gradually, but the real power always stayed with the Commission and mostly with the European Council, composed of heads of governments of member states. Citizens of the European Union were thus not able to influence the political orientations of the European Union since their only direct vote for European institutions was for a Parliament with no decision-making powers comparable to national parliaments. Decision-making in the European Commission and the Council has thus traditionally been shielded from voters. The same goes for the Eurozone. The eurogroup finance ministers are not directly accountable to voters even though they make decisions that affect all European citizens.

This tradition of non-politicized and consensual decision-making has had the advantage that decisions were most often very centrist, and thus never far away from the views of a large part of the European electorate. It led to the development of an “enlightened” European elite, in positions of power in European institutions, quite confident that they were making the right decisions, even though they were not directly accountable to European voters. This has indeed been the case throughout most of recent history. Until 2008…

After the 2008 crisis, the consensual view of European decision-makers in the Eurozone became disastrously wrong. As individual countries were hit by the crisis, fiscal deficits started soaring, either because of major banking crises, such as in Ireland, Spain and Cyprus, or because of falls in GDP in countries with an already high public debt, such as Italy or Greece. The European policy reaction has been the wrong one. What was needed was a Keynesian policy of boosting aggregate demand via monetary easing and fiscal spending at the European level. This diagnosis is textbook economics, and most mainstream economists agreed with it since 2008. It was learned from the disastrous experience of the Great Depression. Policy-makers at the time like President Hoover in the US, the predecessor of Franklin Roosevelt, or Chancellor Brüning in Germany chose to balance budgets at the time, leading to a terrible deflationary spiral that led to millions of job losses, and to the election of Hitler in Germany. After the 2008 crisis, the “enlightened” European elite, mostly under the influence of misguided German policy-makers, chose to repeat the mistakes of Chancellor Brüning, by imposing harsh austerity policies on European countries. As in the Great Depression, this led also to millions of job losses and to political radicalization favoring extreme-right and extreme-left parties. This radicalization is particularly worrying. Since traditional social-democratic and conservative parties are all supportive of the consensus view on austerity (sometimes with a barely audible whisper of criticism), voters can express their dissatisfaction only by voting for extremist, and usually anti-European, parties. Voters should not be blamed for this. The EU democratic deficit is to be blamed.

Nowhere was the effect of these misguided EU austerity policies worse than in Greece where the unemployment rate soared to 28%, worse than what the US experienced in the Great Depression. Spain fared hardly better with an unemployment rate of 26%. It should thus be no surprise that in January 2015 Greek voters voted in Syriza, the extreme-left party headed by Alexis Tsipras. It is not clear that Syriza has a serious program to get Greece out of the crisis, but it received a democratic mandate to end the austerity policies. The newly elected Greek policy-makers have courageously affronted Eurozone policy-makers to negotiate an end to the disastrous austerity policies in Greece. Nobody doubts that this entails a significant debt reduction. Nobody doubts also that Greece needs to completely rebuild its institutions if it is not to become a failed state. The response of Eurozone leaders has been to attempt to humiliate the new Greek government and to worsen the political crisis in Greece.

There are several reasons to the eurozone reaction. The first is that parts of the European elite think that austerity is the right policy. They misguidedly think US policies since 2008 are dangerously inflationary. The second reason is that they fear that concessions to Greece would embolden voters in Spain and other countries to vote for extremist parties that oppose austerity, like Podemos in Spain. The third reason is that governments in Spain, Ireland and Portugal who accepted EU austerity policies would look bad if a country like Greece rejects austerity without being punished by the eurogroup. The fourth, more subtle but no less important, is that the “enlightened” European elites are furious that the Greek government did not play by the rules of the game of consensual decision-making by technocrats shielded from the influence of voters. This fury achieved its climax when Tsipras decided to hold a referendum on the proposals of the “Institutions” to the Greek government. The elite view is that voters should not be bothered with such decisions affecting their lives. Such decisions should be left to the technocrats like the Troika who brought disaster on Greece, but are accountable to nobody.

All this leaves a very bitter aftertaste. If the Eurozone is to survive the Greek crisis, it will be discredited as an unemployment-creating machine. When Martin Feldstein wrote many years ago that the introduction of the euro would lead to war within Europe, I thought it was a gross exaggeration. Today, I see these words as prophetic. Never before has the tension between EU member states been as strong as today. It is an irony that the European Union, that has acted as a magnet of democracy to help end dictatorships in Southern Europe and in Eastern Europe, is itself run in a very undemocratic way. The European Union can only go in two directions: either move forward, and make EU and Eurozone institutions truly democratic within a European political Union, or go backwards and see the achievements of the last decades unravel. Given the current mess, the latter seems more likely. The “enlightened” European elite will be blamed for this.

Comment to “The Greek crisis and the major flaw in the EU edifice

  1. Not a surprise that Finance Minister Yanis Varoufakis of Greece is an acknowledged expert in game theory (Galbraith has stated that Varoufakis knows as much about game theory “as anyone on the planet”).

    Abruptly leaving Brussels on Friday evening and appearing on Greek television an hour after midnight was a stunning game maneuver. Now he is proclaiming his resignation threat to the Greek people unless they reject the bailout terms…this is the well-known ultimatum strategy.

    And longer term, well-recognized by Merkel and Renzi, will be an ad infinitum series of loan reduction demands as this tragicomedy that has been playing for almost 5 years could continue until finally all debt has been forgiven, which is of course the ultimate game strategy of the “Marxist libertarians”.

    An investigative press should try to find out the size and location of Varoufakis’ financial wealth — which is probably significant and probably located outside Greece — so Varoufakis probably wouldn’t be experiencing any pain personally from his suggested alternative “solution” which is a return to the Drachma, and of course, he could return to a western University to teach and write while waiting out the ensuing storm back in Greece.

    And let’s not forget that Greece has 19 billionaires who have undoubtedly secreted their wealth in safe havens.

    “Make a toast to the wavering millions. We need leaders but get gamblers instead. Spare a thought for the stay-at-home voter, whose empty eyes gaze at reality shows.”
    (Bettye Lavette, Salt of the Earth)

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