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Greece: A 2,500 year parallel

Old habits die hard. So the adage goes. As the Greece bailout drama unfolds, the curious mind began prodding, 'Maybe its in their history?'. The questioning mind always seems to find a way to some provisional answers. Till more questions goad it on to continue the journey. 
5th century BC Greece's economic history, interestingly, provides some thought-worthy parallels to Greece's present-day problems. 
History
The discovery of gold and silver mines at Siphnos provided Greece access to easy revenues. As was the flavour of the day, once the Gods took their share the rest of the profits from the mines were distributed among the subjects. The Greek citizens abhorred direct taxes but approved taxing foreigners, taxing property and indirect taxes. The easy prosperity somewhat fuelled imperial ambitions and marked the beginning of a sense of entitlement among the subjects. 
While rulers in Asia managed to impose a direct tax on their subjects, Greece continued living off its bounty of riches. Attempts to impose direct taxes by unfortunate rulers ended with the rulers being expelled from power. To fuel its 'defensive' ambitions, Greece resorted to relying on 'contributions' from its allies. Notably, Greece's citizens did not contribute to this effort. Propelled by the twin engines of mineral riches and 'debt' from allies, Athens went through a period of persistent budget deficits. The profligacy manifested in the erection of ornate structures and paying citizens to attend public festivals.

The Peloponnesian War provided an outlet to the build-up of military offensive power. But it also led to the destruction of Greece's accumulated wealth. Athens then underwent a laddered borrowing cycle that eventually ended in default. The War had destroyed Athens.

Subsequent attempts by Greek 'politicians' to cut back distributions generally ended in failure. The average Greek continued to feel entitled to riches that were now history. Athens lost much of its influence and never really regained its pre-war prosperity. The burden of the war fell largely on the wealthy through taxes and the visible destruction of a democratic Athens by an autocratic Sparta was perceived as a failure of democracy by the citizens.

A mountain of debt followed by default, imposition of taxes and pressures on wages caused Athens' gradual descent into a state of civil war and the decline of democracy.

Post the war, traces of ideas based on socialism/communism (equal share of wealth, land etc.) emerged (Plato's Republic). The Athenian economy subsequently went through years of painful adjustment that included among other things, focus on exports to fund imports of essential foodstuffs. Its main export engine - pottery - steadily waned in quality as competitive pressures built up from neighbouring nations. Athens' export competitiveness was blunted at precisely the moment when her import prices were rising. The resulting balance of payment problems continued to confound Athens several decades after the war. Revenues continued to be raised from liturgies (reliance on donations from the wealthy) and property taxes. Direct taxes were avoided as far as possible.

As Greece went about rebuilding her naval capacity, she relied on Persian finance to fund her 'defensive' ambitions. A jittery Persia ceased funding beyond a certain point and Greece was forced to rely on 'contributions' from its other allies to continue the rebuilding effort. This too failed beyond a point.

The war had had a debilitating effect on Greece and the economy went through several decades of painful adjustment. Reliance on direct taxes were minimal but the economy gradually limped back to a new normal, largely on the back of the engine of mining.

Present: The Parallels
Several centuries apart, the Euro gave Greece access to cheaper finance. The secular bullish wave of the global economy lifted Greece, leading to reliance on debt-funded growth. Things looked rosy and debts and budget deficits built up gradually...till the 2007/08 recession played the role of the Peloponessian War several thousand years earlier.

The recession has brought Greece to its knees, teetering on the brink of bankruptcy. As it looks forward to years of austerity to undo the damage, the government's proposal to raise taxes hasn't gone down well with the public. The move to impose a greater incidence of tax on the wealthy has had the same effect. Rioting, protests and bombings followed...civil unrest is increasing.

Greece now hopes for a bailout with Germany, France and the IMF playing the role of the Persian financier. As it finds itself in a position to forcibly increase exports to solve its balance of payments crisis, the Euro poses its own set of problems for Greece. Years of lost competitiveness which were masked during the boom years have resurfaced starkly. The traditional means of regaining competitiveness through cut in wages has proved unpopular so far and is likely to remain so in the future. Reducing the budget deficits through slashing expenditure, raising taxes, borrowing all look sketchy at the moment. As with 5th/4th century Greece post the war, there is a good chance that Greece is entering a period of sub-par growth.

Greece doesn't have many options on its plate as it braces up to meet the challenges that confront it today. It can either leave the Euro and face a step change currency devaluation which will boost exports, but will also hurt it badly as most of its fat debt is denominated in Euros. The defection will also raise its borrowing costs at precisely the moment when it looks desperately for ways to slash its interest servicing costs. But staying on the Euro will come at a heavy price. Germany is almost certain to demand strong austerity measures of Greece in return for a bailout, to prevent a recurrence in the future.

Through history, economically sound solutions (slashing wages, raising taxes, cutting spending) have often proved to be exceedingly difficult to implement politically. Greece almost certainly faces years of stodgy growth ahead. I can't help but question the sustainability of the Euro. Monetary dependence with fiscal independence serves to encourage profligate countries to indulge in excesses, protected by the safety of a bailout in an eventuality.

Comments

dexkid said…
And we wanted another repetition of history as if the recession wasn't enough! :)

Btw Moral of the story I guess is -
Pain is integral part of life. Learn to bear it.

Nice write up Mr HS.
:-)

Suffering is temporary, pain is constant.

History, sadly, repeats itself. So while insights into the past will not prevent running into trouble, it might help you cope better with it!

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