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Why the Greeks rejected Europe's bailout

- July 6, 2015

In his book “Alien Rule,” sociologist Michael Hechter considers the problem of foreign occupation and failed states, like modern day Iraq. He argues in favor of governance by outsiders: foreign powers, supra-national institutions, technocrats, corporate boards, or occupying armies that are ethnically, culturally, ideologically different from the governed population. Hechter believes that home-grown governance isn’t necessarily better. He looks through world history – the Republic of Genoa, 19th-century China, Taiwan and Korea under Japanese rule, and occupation regimes after major wars — and identifies conditions under which foreign rulers have governed better and more fairly than locals.

In our era of nationalism, most of us have a knee-jerk reaction against Hechter’s idea. But what else is there to be done about the complex problems of state failure? How can a state with no indigenous capacity overcome social divisions and grow economically and politically without external assistance?
Greece’s experience with the troika — the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB) — was an experiment in alien rule.

The “No” vote in Greece’s referendum on Sunday provides a test case for Hechter’s theory. Greece is not yet a failed state by the usual metrics, but with its deadlocked and corrupt institutions and its bankrupt economy, it appears to be headed that way. While there is as yet no rampant violence, Greece is isolated and diminished.

The country’s own politicians and ideological elites carved the path to ruin. Unlike Ireland, Iceland, or the United States, where the public sector was called in to bail out private banks, in Greece it was the other way around: the state’s incompetence brought the country to its knees.

About 10 days ago, Greek politicians pulled out of negotiations over a third bailout intended to cover the shortfall in public finances before big deadlines for debt payments owed to the International Monetary Fund and European Central Bank. Although an agreement seemed imminent, talks broke down over what now seem like small differences, such as whether the Value-Added Tax on hotel bills should be 13 or 23 percent.

What was really at stake, however, was a growing sense in Greece that the existing debt burden was “illegal and odious.”  After five years of crippling austerity in which Greeks have endured budget cuts and policies that would have been unthinkable in most democracies, Eurogroup negotiations were really about whether Greece is a sovereign nation or the latest case of neo-trusteeship.

In Greece, the troika was perceived as an occupying administration of technocrats. Alexis Tsipras rode a wave of popular resistance to Troika’s rule in getting elected prime minister earlier this year. Nationalist opposition to the troika was not foreordained, however. Greeks, many of whom also identify as European, were willing to bear some adjustment costs for a situation that they had partly created. But they expected solidarity from Europe and results from the troika. Hechter’s historical analysis of cases of alien rule tells us that foreign occupation can gain support from local populations if it is effective in providing public goods and if these goods are allocated fairly. Together, these two conditions can legitimize alien rule.

In Greece, the troika produced public bads – not public goods. Greek officials, labor leaders, and tax-evading citizens also bear much blame, but the plan was flawed from the outset. The constant refrain in European assessments of the Greek debt crisis is that Greeks are “lazy” and “corrupt,” lacking the institutional structure that would allow them to reform. They deeply distrust elected Greek leaders. But if that is the underlying cause of the problem, then how could the IMF have predicted a return to positive growth for Greece in 2012 with just one year of recession in 2011? Clearly, institutional inertia and cultural deficits cannot be corrected in a year or two.

Anyone reading the coverage surrounding the Greek referendum can see that the consensus opinion among top-tier macro-economists is that Greece’s fiscal adjustment was too large. Not only did the bailout funds fail to produce public goods for Greeks, but they were in fact given for an entirely different reason: to reduce the risk of contagion by supporting European banks with heavy exposure to Greek debt. The first rule of neo-trusteeship is that it can only be legitimized if the population perceives the occupier as sharing its interests.

Moreover, the costs of adjustment during five years of austerity were not fairly distributed among the Greek population. Pensioners and other economically weak classes suffered disproportionately while tax evasion among high-income professionals, shopkeepers and shipping magnates was not combated by Greek governments that were collaborating with the troika.

Until recently, Greece’s creditors could have claimed that the problem was too much indirect rule: Bad decisions were still being made by Greek politicians. But the veil was lifted during the last Eurogroup meetings, when the Greek government appeared ready to accept a compromise agreement in exchange for additional funding that would allow it to meet immediate debt obligations to the IMF and ECB. The government put forward a set of measures that could have achieved the fiscal target set by its creditors. The proposed policy mix was sensitive to the underlying preferences of the Greek population. But Greece’s creditors rejected that offer, pushing instead an offer that affirmed the Greeks’ widespread suspicions that European trusteeship was intentionally unfair.

The bailouts of 2010 and 2012 traded Greek sovereignty for the promise of economic recovery, but they delivered few public goods, growing inequality, and social polarization. This allowed Tsipras to mobilize support for a new form of nationalism – resistance against faceless international technocrats.
The clear winner in this battle has been political extremism both on the left and the right. It is not clear if Tsipras and his political party, SYRIZA, are committed to the principle of reforming Greek institutions. They crossed many of their red lines in successive rounds of talks, so prudent negotiators on the European side could have realized that there were limits to how hard they could push. In June 2015, they pushed too hard.

Troika failed as alien rule because instead of providing public goods, it provided bad governance. The resounding rejection of the bailout terms in Greece’s July referendum echoes the lessons of failed interventions in other cases of neo-trusteeship, from Iraq to Afghanistan and beyond. The rhetoric one usually hears from policy experts is that successful interventions must rely on “local ownership” of the programs being implemented. The way the Greek bailouts were negotiated and implemented violated that rule. The July 5 referendum now offers Europe a chance to finally bail on Greece, having barricaded itself against the risk of contagion. Or it can provide a democratic benchmark to structure a new round of negotiations that should focus on debt restructuring and even debt forgiveness rather than on prolonged austerity.

Nicholas Sambanis is a Yale professor of political science and director of the Program in Ethics, Politics, and Economics.