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This is why the current euro zone plan for Greece is going to fail

- July 23, 2015

An anti-austerity protester throws a bottle at riot police in Athens (AP Photo/Petros Giannakouris)
Now that the Greek and German parliaments have voted to accept common bailout terms, many hope that Europe’s latest crisis is ending. They will be disappointed, because the current deal does not address the fundamental political problems underlying the economics.
Liberals and Germans tend to blame the crisis on lazy Greeks, who ran up unsustainable debt to support their cushy lifestyles and are now refusing to pay the bill. Leftists and Greeks blame German-mandated austerity for crippling the Greek economy and greedy bankers for demanding that impoverished debtors pay back money they should never have been lent. Both have a point. Greece borrowed and spent too much and has a sluggish, overregulated economy. However, austerity policies have trapped the economy in a vicious circle that has made its debt problem worse rather than better.
The more fundamental problem is political. There are more than enough economic resources in Greece to pay its bills. The problem is that the Greek state is too weak and illegitimate to extract those resources from the people who possess them and use them for public purposes.
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Governments can raise revenue either by taxing their citizens or borrowing on the basis of future revenues. The latter is easier, since all you need to do is find someone to lend. Taxation requires developing an extensive administrative apparatus of tax collectors, auditors, and census takers, which is legitimate enough to raise taxes voluntarily or strong enough to take them if the citizens don’t want to pay. This is hard to develop. Up until the 20th century, most countries relied heavily on debt to finance their expenditures, taxing the economy indirectly (through e.g. customs duties and tariffs) that were easier to collect than income tax. Even today, many developing countries have not developed the administrative structures or legitimacy to get their citizens to freely share their wealth.
Greece has long had a serious problem collecting taxes. One estimate suggests that Greeks owe their government about $86 billion in unpaid taxes (approximately the amount it asked for in this latest bailout) and suggests that Greek governments generally collect only about half the revenue due to them in any given year. German governments, in comparison, collect almost all the taxes they are owed. Greeks have long viewed their state and their country’s elites as unjust and illegitimate, and so have refused funding as a kind of self-interested civil disobedience. This may be rooted in historical habits of resistance to Greece’s long departed Ottoman overlords, but has continued through to today’s more-or-less democratic political system.
If Greece is to resolve the crisis, it will have to pay creditors a lot of money, which it will need to pay with taxes. This means that a central element of the crisis settlement has to be political—a plan to help Greece develop a truly modern, effective state. That will require political reform as well as the sort of economic reform often discussed.
Syriza’s failures illustrate this political problem. It came into government with enormous legitimacy and popular support, which it could have used to modernize the state and arrive at a reasonable deal with other European countries and institutions, promising credible long-term reforms in return for immediate concessions. This would have required Syriza to carry off the tricky challenge of convincing the Greek public of the need to accept difficult changes, and the country’s creditors that the promises would be kept. Instead, Syriza spent its political capital bashing creditors rather than convincing them that they were committed to truly turning Greece around, blundering around and losing legitimacy until its negotiating strategy collapsed.
However, Germany and other European nations deserve greater blame. They are the stronger party, and have failed to take the lessons of their own spotty history of debt repayments to heart. Germany’s post-World War I debts—ironically, incurred by a regime lacking the democratic legitimacy to collect taxes—led to immense popular suffering and social turmoil and caused the Great Inflation, the ur-trauma lying behind modern Germany’s most notable economic obsession. Germans, above all others, should understand that debt can trigger political catastrophe, and that generosity might potentially avert it.
A truly sustainable settlement would focus on political reform as much as economic changes, looking to strengthen the Greek state so that it can collect taxes and pay at least some of its debts. This would require not only technical help, but careful politics. Humiliating the Greek state will damage its legitimacy (and tax collecting capacities) in the eyes of its citizens. The EU has already midwifed transformations like this in the past – in Germany itself (where the context of the EU helped Germany achieve democratic stability after the Nazi era) and in smoothing Eastern European countries’ transition from communism. Reforming Greece would likely be an easier challenge, but it would require Brussels and Berlin to change their mindset.
They would need to support and mentor the current government, despite their doubts about Syriza, in undertaking the kind of changes that occurred in Germany after 1945 and Eastern Europe after 1989—creating clean and efficient administrative institutions, an apolitical and effective judiciary, a meritocratic bureaucracy and much more. The current course of austerity, and bailouts aimed at ensuring that the European Central Bank and IMF get repaid, make it harder for the Greek economy to grow, and have pernicious political consequences, convincing many Greek citizens that their government either can’t or won’t help them.
Sheri Berman is professor of political science at Barnard College, Columbia University.