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The Real Cause of the Greek Sovereign Debt Crisis

Mar 01, 2012 Written by  Nasos Mihalakas, Contributor
6141506The Greek sovereign debt crisis has capture the attention of the world, both for what it says about the viability of the Euro and the EU integration project, but also for the warning signs it sends to governments around the world about governance and public finances. In the U.S., politicians both on the right and the left are using Greece as an example of how bad management of public finances can lead to economic catastrophe.

In particular, for the right, Greece is at the edge of the abyss because of the bloated government bureaucracy, unreasonably generous pensions and health-care benefits, and the sclerotic labor market. For the left, Greece’s financial troubles could easily be resolved if people paid their taxes properly, and the wealthy were prevented from tax-evading so blatantly.

However, the true cause of the Greek sovereign debt crisis is the same as the reason why Europe cannot manage the greatest threat to ever hit the Eurozone: the failure of the governance system. The Greek system of governance has failed to address the type of economic issues present in almost every country of the world – issues well known to all, and easily fixable. Poor management of public finances in Greece is not some generically inherent predisposition of the Greek people – rather it’s what happens when you have a bad system of governance.

Even though an agreement was reached on how to reduce the government’s debt, and reform the economy to meet future debt obligation, doubt persists in Europe and around the world. Until the governance system is reformed, and everybody recognizes the connection between governance structure and policy results, Greece is bound to repeat the mistakes of the past. This is because certain systems of governance will always produce certain policy results.

A parliamentary system of governance, where executive and legislative branches blend and tend to be dominated by the same actor, will often spend more, save less, and kick the proverbial can down the road. Federal/republican systems of governance, where there are district separations of powers and checks to the government’s authorities will often be more cautious, reserved and adhere to the philosophy of small government. This is not always true, and of course there are exceptions to every rule, but Greece and Southern Europe are making a might powerful case for this argument.

The Greek System of Governance

The current system of governance came into force after the collapse of the military junta in the summer of 1974. After a decade of military rule, a poor (by European standards) and still-developing country had to pick up the pieces, and fast. The Constitution of 1974 - later amended three times - has two relevant characteristic for this discussion.

First, it established a parliamentary democracy system of governance (in name only) and made it virtually impossible to make meaningful changes; constitutional amendments have to be approved by two consecutive parliaments, with an enhanced majority in one of them. Most importantly though, it concentrated most government powers in the hands of one office, that of the Prime Minister, in order to facilitate and expedite economic and social reforms needed by a poor and developing country.

The Greek system of governance is typical of a lot of countries around the world, and especially developing countries in the Middle East and North Africa. It is characterized by one fundamental and overarching principle: the supremacy of the Prime Minister.

Constitutionally, Greece is a parliamentary democracy which fully respects the principle of "separation of powers." In reality however, all meaningful powers emanate from the office of the Prime Minister, for the self-justifying reason that "a developing country needs a strong leader on the top, who can swiftly address and resolve all urgent issues."

The Prime Minister is elected by the Parliament, and is usually the leader of the party controlling the absolute majority of Parliament members. The Prime-Minister recommends ministers to the President (primarily for ceremonial duties) for appointment or dismissal. Government regulations which explain and implement Parliamentary laws are drafted and executed by the government, without the need for further review or consent by the Parliament. Therefore, the Prime Minister, for all intents and purposes is fully in charge of the executive branch of the government.

On the other hand, as the leader of the party with the most seats in the Parliament, the Prime Minister enjoys enhanced control of the legislative process as well. Up until the constitutional reforms of 2001, Parliamentary committees exercised little power in the legislative process, and most of the work was done through the party leadership positions in the Parliament. But, even with the enhanced role of the Parliamentary committees during the past decade, most money-spending legislations (pensions, local or special taxes, or charges of any nature on behalf of agencies, and government bills resulting in an expenditure or a reduction of revenues) have to come with the consent/signature of the Minister of Finance – who of course serves at the pleasure of the Prime Minister.

Furthermore, Greece uses a complex reinforced proportional representation electoral system which discourages splinter parties and makes a parliamentary majority possible even if the leading party falls short of a majority of the popular vote. The law in its current form favors the first past-the-post party to achieve an absolute majority (151 parliamentary seats), provided it receives more than 41 percent of the nationwide vote. This is meant to enhance governmental stability (by discouraging coalition governments or bipartisan cooperation), while at the same time creating a two-party system in Greece.

Finally, candidates for Parliament are chosen by the parties, which receive government funding and ballot access proportional to their past performance – making it harder for individuals to run independent of one of the main political party. Access to ballots is contingent on approval by the party leadership, firmly controlled by the party leader.

So, there you have it. The party leader controls the candidates for Parliament, and how the party members vote in Parliament. If the party gets the most seats in Parliament, its leader becomes Prime Minister (head of the government), who then appoints/dismisses all the cabinet members. The Prime Minister controls the legislative process indirectly, through the cabinet and his parliamentary team. With no judicial review of the constitutionality of legislation, no challenge from the local governments, and no supervision from the President (a ceremonial figure-head), the Prime Minister is in complete control of the executive branch and the legislative process/results.

The End of Ideological Divisions

In Greece, the two main political parties, the conservative, pro-business "ND" and the socialist "PASOK" lost track of their ideological origins and manifestos long ago. Flip-flopping in and out of government since 1975, they focused only on how they can shower their respective constituents with benefits, while attracting independents to their promises for reform. In the end, after more than 30 years, these two parties look and act indistinguishably: pro-EU and pro-NATO, pro-free trade and open markets, pro-public health/education, pro-higher pensions yet low taxes, etc.

Under this system of governance, policy innovation was doomed to fail. With no real counter-weight to its power, successive governments ruled with an iron fist. Instead of using their enhanced powers to fix the public finances, they refrained from any politically risky policy, and instead used their control of the public purse to stay in power for as long as they could. Usually, within two terms, the people got sick of the ruling party, and would overthrow the government by elevating the opposition which promised to reform and fix the ailing economy and bloated public finances (just like its predecessor). Alas, during the past 30 years, the country has been through this scenario at least five times, alternating between ND and PASOK, and fixing nothing.

Lessons for the U.S.

The lesson for the U.S. is not "more government spending leads to more government debt and possible bankruptcy." Rather, the lesson for the U.S. should be that "politicians need to make choices and expect to be judged for their choices by the people." The whole reason for having a system of governance, and a government for that matter, is so that it can make decisions, take action, and address critical issues that cannot be solved individually. If the system cannot deliver, then the system itself needs to be changed, not just the people in charge of the system of governance.

In Greece, like in the U.S., everyone knew what needed to be done to improve the collection of taxes, reform the entitlement system, and free the many small and medium size entrepreneurs (the largest percentage of the population compared to any other EU country) from overbearing government regulations. If in 20 years from now the U.S. economy is equally bankrupt, should we not blame the system of governance for not delivering or fixing the problems?

Lessons for the Arab World

The lesson for the Arab World, and all the post-Arab Spring democracies, is that governing should be a team activity, and that concentrating power in one office is how you end up with a dictator. They need to pursue systems of governance that force political parties to work together and collaborate. For example, Egypt’s new Parliament, despite its heavy Islamist composition, is on the right track, if the Muslim Brotherhood indeed forms a coalition government with the liberal left.

On the other hand, it is important to advance a system of governance that allows for meaningful competition among the various branches of government and real checks and balances to the powers of the government. It might be hard to institute judicial review of government actions, considering that it took the U.S. at least over 100 years for the Supreme Court to gain the prestige and legitimacy it now enjoys. However, active and effective oversight of government actions and policies by the legislature should be both required and easy to achieve.

In Conclusion

Focusing on the symptoms of the Greek sovereign debt crisis, does no good to the either the people of Greece or others around the world who are trying to learn from this tragedy. What Greece is going through right now is the result of bad policies of course, but these policies were inevitable considering the system of governance in place.

Governance matters, and process (how laws are made and policies are set) is just as important as the content. If you don’t believe it, just look at Greece!

Nasos Mihalakas is a Washington DC-based foreign policy expert and contributing analyst for Wikistrat. Contact: This email address is being protected from spambots. You need JavaScript enabled to view it.

Photo: John Kolesidis/Reuters

Tagged under Greece    sovereign debt    crisis    economy    entrepreneur    Euro    parliament    dictator    Arab Spring   
Last modified on Thursday, 01 March 2012 04:57

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