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The immediate problem in the eurozones periphery is of course economic, but

these problems can be better understood in the context of domestic political cultures.
Why have countries in the south accumulated so much debt? Is it the result of a recent
scandalous event or the consequence of a longer tradition? In this post, and in next
weeks, I hope to examine the political culture Greece and Spain, with the aim of
pointing to possible political roots of economic crises. As I am not an expert in neither
countries, I might be overgenerralizing The eurozones economic troubles have deep
political roots, and economic reforms on their own that fail to incorporate the political
story behind balance sheets are insufficient no matter how harsh and austere.

Part I: Greece and its Young Democracy
The first thing the government does in an election year, Greek finance minister
George Papaconstantinou admitted in 2009, is to pull the tax collectors off the streets.
This statement well illustrates the political culture in Greece, one that contributed to the
countrys indebtedness.
Two leaders with radically different political orientations put forward their vision
of a post-authoritarian regime after the fall of the Junta dictatorship in 1974. Constantine
Karamanlis, the founder of the conservative New Democracy (ND) party and prime
minister between 1974 and 1980 put the country on a path of modernization with
emphasis on accession to the European Community. Opposite to the ND stood Andreas
Papandreou and his Panhellenic Sociallist Movement (PASOK), a radical party that
presented policies what was in many respects the direct antithesis to that of the ND.
Easily put, Greeces post-authoritarian political system was constructed so that the
winner of the majority of seats could govern alone, and as such, each party had to
outperform its rival in the number of advantages offered to its supporters to remain in
power. A direct consequence of the young democracy was party patronage, one that
played a great role in generating the debt crisis.
As a political strategy, Papandreou elevated the people at the center of his
political program and directed State resources to this partisan goal in the form of sharp
pay rises, the creation of public-sector jobs, and tax cuts. Party patronage allowed
PASOK to remain in power throughout the 1980s and 90s, only to briefly relegate its
position to the ND party in 1990 and in 2004. The government made sure to support
those faithful to the party with privileges, and citizens resisted change as it implied the
loss of financial benefits. But constant wage rises and fiscal benefits, as well as the
Athens stock market boom in the mid-1990s, generated a culture more focused on
consumerism than on production. Greek firms gradually declined as they lost
competitiveness to other European manufacturers and large European chains took their
place. Clientelism, corruption, and party patronage developed, and the government lost a
sustainable tax base. The Greek government saw the reduction of a stable tax base that
could fund such prioritiesit only collects on average 7.9 percent of GDP as direct tax
(the EU average is 13.7 percent).
It was forced to borrow, usually the money that the
rich had saved from generous tax cuts. This became even more problematic when
PASOK began introducing elements of a welfare state because the average middle class
still remained unburdened by taxes. Other sources of income, such as EU state-aid funds
and tourism were insufficient in financing the policies that made consumerism possible.
Greece continued to rely on heavy borrowing, and we see an unavoidable legacy of
public debt from this social-democratic phase. The project initially began by Papandreou
in order to gain popularity for his fledgling party became deeply entrenched in the Greek
political culture as PASOK continued to hold office. The rival ND party, when it came to
power, continued this rather convenient path to popularity after unsuccessful attempts at
re-establishing fiscal order.
The lack of political, combined with the inefficient tax system and the gradual
decrease of European adjustment funds accentuated the problem, and government debt
level soared to a rate of around 100 percent GDP as of 1998. When the world-wide
recession hit Greece, revenues from shipping and tourism slumped and so did the flow of
cheap credit. The revised Eurostat release revealed 2009 deficit level of 15.4 pecent GDP
and public debt at 127 percent, a level that is clearly unsustainable.

Levy PPB 124 2012
2.2 Spain and the housing bubble
The Spanish problem is more about private debt. A housing bubble supported the
Spanish economy, bringing about wealth effects that were too good to be true. The low
interest rates guaranteed by membership into the eurozone certainly contributed to the
bubble, but just as in Greece the Spanish government played a large role in bringing
about and sustaining the housing bubble. Economic policy based on house ownership
dates back to the Franco dictatorship following the Spanish Civil War. Democracy was
installed when Franco died, but the Gonzlez government continued to use the housing
boom to relaunch the Spanish economy during the recession that overlapped with the
dictators death. A sustained increase in housing prices stimulated consumption and
demand, eliminating the need for significant development in the industrial sector where
had Spain become less competitive, and the Gonzlez government explicitly intervened
in the economy to make sure housing supply continued to increase. The 1998 Land Act,
for instance, the build anywhere law, helped speed up the process of obtaining building
permits; tax relief programs and successive reforms of the mortgage market made home-
buying more affordable; large investments in transportation infrastructure generated new
areas of market value; and a lax environmental policy also posed less obstacles to
urbanization. This policy brought about a growth rate of nearly 4 percent every year from
1995, and the Spanish dynamism was often an object of admiration.
The highly decentralized nature of the Spanish administration also posed
problems. Spain is composed of seventeen Autonomous Communities, and each
community has the authority to administer a large portion of public finds and interpret
laws in its own way. As regions competed with each other for the highest growth levels,
regional governments voluntarily advertised to private investors the benefits of investing
in housing, an asset whose price rose at an average of 12 percent per year; these
communities even earned important revenues for themselves by re-zoning Greenfield
sites for urban development. The rising property values came to supplement an under-
funded pension system as a guarantee of income in old age, and the Spanish government,
made no particular effort to tame the bubble. The housing stock increased by 220 percent
during 1997 and 2007, and the global meltdown generated a massive blow in the
construction industry that once contributed to one tenth of GDP in 2007. Spanish
indebtedness rose to 84% of GDP.
The collapse of the housing sector created the twin problems that the Spanish
government faces today. Most importantly, the fall of the construction industry and
household default on mortgage payments brought banks to the brink of bankruptcy.
Investors are already withdrawing money from Spanish banks. The government has
continuously injected credit into Spanish banks, accumulating public debt in the process,
but it does not seem to have been enough to stop the bank run. No one knows exactly
how much more banks need to deleverage, and whether the Spanish government has
enough. The collapse of the construction sector also brought about a wave of
unemployed, leading government revenue to decline all the while spending is rising in the
form of unemployment benefits, aggravating its debt situation. The government cannot
continue giving out generous benefits to the jobless. Spain needs to reform its
dysfunctional labor market, one where a group of ageing workers with secured contracts
receives continuous wage increases at the expense of temporary contracts for the young,
who are the first to be laid off during a downturn. Even during the crisis, these insiders
received wage increases as inscribed in their contracts, and their real income rose by
3.2% while the economy contracted by 3.7%.
The Spanish economy is so fragmented
with traditional privileged relationships that simple austerity cannot address alone. Spain
needs an entirely new social contract. The Economist nicely explains this problem:
scrapping thousands of bureaucratic rules will not just make the economy more efficient
but also recast the relations between government and citizen. However unambiguous the
economic reform, the politics is always almost hard.

2.3 Summary: The Periphery, a common socio-political experience
The specific tales differ from country to country but the eurozone periphery
arguably shares a common socio-political experience. Greece, Spain, and Portugal were

(Economist, 21536865)
latecomers in the democratization trend in Europe, and governments during the 80s and
90s failed to enact the reforms that were necessary to strengthen their economies. C.K.
Polychroniou at the Levy Economics Institute goes further in his analysis. He claims that
socialists in the souththe PASOK in Greece, the PSOE in Spain, and the PSP in
Portugalwho ruled from the 80s well in to the 2000s failed to adopt a progressive
agenda. Rather, they adopted a neoliberal program with smaller social benefits and a
regressive tax policy, cutting taxes for the rich and large corporations. According to
Polychroniou, this phenomenon did not rise out of thin air. Regressive policies served the
interest of the powerful domestic elite who helped the party remain in power. As trade
unions declined and ideological confusion arose with the fall of the communist block,
ideology served opportunistic goals. When things got difficult, socialists were not
hesitant in putting forth neoliberal programs to regain popularity. Polychronious
argument seems to be directed towards the socialists, but it is unclear whether things
would have been different had the conservatives ruled instead. More important is that the
Greek, Spanish, and Portuguese democracies are relatively young and have yet to develop
a fair system based on law and order. The problem is indeed most troubling in Greece,
but privilege-based relationships also built up in Spain and Portugal over the past two
decades, hindering the development of a strong macroeconomic program and a strong
government-labor union relationship. The cultural history behind debt exposes the danger
of blind austerity. Austerity programs tend to impact the already fragile lower class and
the young, as the upper class remains untouched from privileges. Continuing austerity
could lead to a political turmoil and pit classes against one another.