the greek saga: competing explanations of the greek crisis - a marxist alternative', 1st world...

7/27/2019 'The Greek saga: competing explanations of the Greek crisis - A Marxist alternative', 1st World Keynes Conferenc

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1st World Keynes Conference

Attacking the Citadel: Making Economics Fit for Purpose

Izmir University of Economics, Izmir/Turkey

26-29 June 2013

The Greek saga: competing explanations of the Greek crisis - A Marxist

alternative*

Stavros D. Mavroudeas

Associate Professor

Dept. of Economics

University of Macedonia

e-mail:[email protected]

&

Dimitris Paitaridis

Dept. of Public Administration

Panteion University

e-mail:[email protected]

Preliminary Draft

Abstract

This paper reviews the alternative explanations offered to explain the

Greek crisis and checks there analytical and empirical validity. The first

part focuses on the mainstream explanations. It distinguishes three main

versions. The first, stemming mainly from the dominant EU circles,

considers the Greek crisis as a historical accident; a case of policy-driven

economic imprudence: it is a Greek disease which contaminates

through contagion mechanisms the rest of the EMU. Hence, it is not

*We are indebted to Costas Passas for constructive comments.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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geared to any structural contradictions of the European integration project.

The second version, having more Anglo-Saxon origins, recognizes certain

structural causes of this crisis; namely the Eurozone being a non-optimal

currency area. It argues that EMUs fundamental flaws cannot be rectified

and its collapse is on the table. The third version is a middle-of-the-roadblend: while the Greek crisis has national origins it abated existing flaws

of the EMU. However, these flaws can be rectified. All these versions are

criticized for failing to account for the economic crisis of 2007-8 and its

effects on the whole European Union edifice. The second part reviews

certain radical explanations offered and particularly those around the

financialization thesis. These explanations are criticized for mimicking

the mainstream approaches; particularly regarding the 2007-8 economic

crisis. They are also criticized for failing to explain satisfactorily the

Greek crisis in both analytical and empirical terms. The last part offers an

alternative Marxist explanation of the Greek crisis. This explanation

stresses two main aspects. First, it is argued that 2007-8 economic crisis is

a crisis a-la-Marx (i.e. stemming from the tendency of the profit rate to

fall) and not a primarily financial crisis and this represents the internal

cause of the Greek crisis. Second, it is shown that apart from the

internal cause there are also external causes. These come from the

relations of imperialist exploitation that exist within the EU and which

relegate a host of countries to the dismal position of the euro-periphery.

I. Introduction

Today the Greek economy is in the spotlights of international attention as one

(if not the major) epicenter of Eurozones crisis. It is considered one of the main (if

not the main) sovereign debt crisis threatening the foundations of the ambitious

european integration project as expressed by the European Union (EU) and

particularly its European Monetary Union (EMU). The Greek economy is considered

to suffer from the twin deficit disease, i.e. to have an exorbitant fiscal deficit that

ultimately led to an unsustainable foreign debt (expressed in a worsening current

account deficit). The fiscal deficit is attributed to the profligate nature of the public

sector. This was covered through external borrowing worsened the current account. In

addition to that, a worsening competitiveness is diagnosed and attributed mainly to

labor market rigidities and institutional unfriendliness to entrepreneurship. This

worsened further the current account.

The whole affair began in the end of 2009. Previously, Greece had for quite

lengthy periods high fiscal deficits and public debt but was able to finance them via

either internal or/and external borrowing without serious problems. Greecesaccession to the EMU placed fiscal deficit and public debt under the constraints of the


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Maastricht treaty. However, these were violated not only by Greece but by almost

every other EMU country since these constraints proved to be rather unsustainable.

The Greek crisis erupted when the newly-elected PASOK government revised

upwardly the estimates of the Greek fiscal deficit amid internal and external talks for

Greek statistics (i.e. manipulation of statistics by successive Greek governments)

1

.This ignited a crisis of confidence in international markets concerning Greece's ability

to meet its debt obligations which resulted in the widening ofbond yield spreads

(particularly the one related to the German bund) and the increase of the cost of risk

insurance on credit default swaps (again compared particularly to that of Germany).

This led, in April 2010, to the downgrading of Greek government debt to junk bond

status by the international credit rating agencies2 which signified that international

private capital markets practically ceased to fund Greeces sovereign debt. The Greek

government requested EU assistance which took the form of two assistance programs

(Economic Adjustment Programs) encapsulated in respective Memoranda of

Understanding (MOU) signed between the Greek government and the so-called troika

(i.e. EU, ECB and IMF since the latter, after much deliberation, took part in the

programs). The second program was required because of the obvious failure of the

first, despite its numerous revisions. However, the same fate seems to apply to the

second program as well.

The first Greek MOU -signed in March 2010- entailed a 110 billion bailout

loan for Greece given by the troika. It was tied to a Memorandum (MOU) dictating

widespread austerity and privatization measures to restore fiscal balance. The loan (80

bn. by the EU and 30 bn. by the IMF) would be advanced during a 3-year periodwith a 5% interest rate. It aimed at cutting the fiscal deficit from 13.6 % of the GDP

(2009) to below 3% by 2014. It envisaged a 4 or 5 year program during the first two

years of which there would be a cumulative contraction of the GDP by 6.6% which

1On 20 of October in 2009, PASOKs finance minister, G.Papakonstantinou, stated that the fiscaldeficits estimates (6.7% of the GDP) presented by the previous ND government were massaged and

that the accurate estimate is 12.8% of Costas Karamanlis (New Democracy) had been showing were

misstated. He announced that the Deficit is 12.8%. Then he further upgraded the rate to 13.6% on 22nd

April 2010. This caused a lively debate in Greece since PASOKs increase of the fiscal deficit was

disputed by both the Right and the Left as engineered and inflated. Three were the main argumentsagainst the increase of the estimates. First, that ELSTAT (the Greek Statistical Service under its new

PASOK-appointed director) used a new EUROSTAT methodology (which includes in fiscal deficits

those of the wider public sector) which was not used by the other EU members (since it was left to their

discretion its application). Second, that the 2009 Greek deficit (measured with the new more strict

methodology) was compared with the 2008 deficits of the other EU countries. Third, there was a

significant underestimation of the GDP (which inflated the deficit/GDP ratio). Quite tellingly, thesearguments have been advanced even by other PASOK-appointed members of ELSTATs governing

council) and the whole affair is currently under penal and parliamentary investigation of

G.Papakonstantinou and the A.Georgiou (ELSTATs head). 2

Fitch downgraded Greece to A- , in October 2009, and further degraded to BBB+ by the end of

December 2009. Standards & Poors and Moody also followed suit. However, it should be noted that

much can be said regarding the destabilizing role of the rating agencies. In particular, it has been

argued convincingly that ex ante they tend to underestimate fragilities and they tend to overestimateproblems ex post (when fragilities have caused them); for a review of the relevant literature and a study

of the problem see Grtner et al. (2011).
http://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Yield_spreadhttp://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Junk_bondhttp://en.wikipedia.org/wiki/Junk_bondhttp://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Yield_spreadhttp://en.wikipedia.org/wiki/Bond_%28finance%29


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would be recovered, to a great extent, during the next three years by a cumulative

5.3% growth.

Table 1. First GreekMOUs projections

2009 2010 2011 2012 2013 2014

Real GDP growth (Percent

change over the previous

period)

-2 -4.0 -2.6 1.1 2.1 2.1

General government balance

(percent of GDP)

n.a. -10.5 -14.2 -15.6 -15.9 -15.6

General government gross debt

(percent of GDP)

115.1 133.2 145.2 148.8 149.6 148.4

Source: EC (2010, pp.12 - 13)

Moreover, the whole program was strongly frontloaded (EC (2010), p.42)

aiming at a speedy return to private markets for long-term funding in early 2012.

Although the programs aims mentioned apart from fiscal consolidation the

improvement of competitiveness as well, most of its measures concerned the public

sector leaving the private sector mainly unaffected, at least directly (see EC (2010)

table 1, p.51). The first MOU underwent several reviews (five in total) and respective

recalibrations and changes both in required measures and aims. However, very soon it

was obvious that the program was not working and needed radical overhauling. The

main reason for its failure was the deeper than expected recession caused by the

program. The inherently pro-cyclical character of the IMF programs was augmented

by its frontload character (at the request of the EU), the lack of ameliorating

mechanisms (e.g. currency devaluation) and the deterioration of the world economy

(double dip). The contraction of the GDP (as shown in Table 2) was 21.5% for the

period 2009-12 and 8% (instead of the projected 6%) for the period 2009-10. This

derailed the fiscal balance and the gross debt ratios. Consequently, it became obvious

that (a) fiscal consolidation was not achievable at least within the scheduled time

horizon and (b) in order to avoid default the Greek economy required further financial

assistance.

Table 2. Actual GDP growth rates

2009 2010 2011 2012

Real GDP growth (Percent

change over the previous

period)

-3.1 -4.9 -7.1 -6.4


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Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pco

de=tec00115

Thus, in February 2012, a second Economic Adjustment Program was initiated

and a respective MOU signed between the same covenanters. This second bailout

package worth130 billion was accompanied by another harsh austerity program and

a voluntary debt restructuring agreement with the private holders of Greek

government bonds (banks, insurers and investment funds) called Private Sector

Initiative (PSI). The PSI organized a 53.5% nominal write-off voluntary and a bond

swap with short-term EFSF notes and new Greek bonds with lower interest rates and

longer maturity (their initial maturity was prolonged to 11-30 years). This is the

biggest debt restructuring ever done, affecting 206 bn of Greek government bonds

and leading to a 107 bn write-off. This made again looking feasible the target of

120% outlined in the first MOU. However, the net debt reduction was only 16 bn since the write-off was supplemented with the new loan. A new feature of the second

MOU was its emphasis not only on fiscal consolidation (as in the first versions of the

first MOU) but also on wider changes in the Greek economy in order to improve

competitiveness. Thus, the private sector was also affected by a series of measures.

This had only shyly been done by the first MOU. With the second MOU not only

fiscal consolidation but also increased competitiveness became the standards of the

adjustment program. On the other hand, building upon the measures dictated by the

first MOU and its reviews, the new austerity package deepened even further the

recession of the Greek economy leading to a dismal -6.4% for 2012 amid growingsocial and political unrest. The new pro-MOU government difficultly elected in June

2012 asked for a 2-year prolongation of the adjustment program (which would require

an additional third bailout worth of 32.6 bn.) which was denied by the troika. Thus,

the new government legislated a new 18.8 bn. austerity program including a vicious

labor market deregulation. In return, the EU lowered interest rates, prolonged debt

maturities and provided 10 bn. for a debt-buy-back program.

However, doubts continue to linger about the feasibility of the adjustment

programs. Growth rates continue to trail dismally behind their projections and this

derails both the public debt to GDP and the fiscal deficit to GDP ratios. Additionally,

public revenues from taxes and privatisations also continue to disappoint. Tax revenue

is hit hard not only from tax evasion but also by the recession. Privatisations do not

appear promising in a deteriorating national and international economic outlook.

Therefore, the aim of a 120% public debt to GDP by 2020 and a speedy return to

finance through private markets seems unachievable.

This paper reviews the various competing explanations of the Greek crisis. It

categorizes them in two main categories (mainstream and radical) and then proposes

an alternative Marxist explanation.
http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115


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The mainstream explanations, which derive from either neo-classical or neo-

Keynesian economics, are divided in three perspectives:

(a)The first one considers the Greek crisis as a Greek disease (i.e. caused by specialpolicy errors and structural deficiencies). Therefore, it emphasizes mainly policy

errors and recognizes structural deficiencies only as a consequence of these

nationally-specific policy errors. This perspective is usually conferred by

European pundits coming from the dominant EU circles.

(b)The second perspective, usually stemming from Anglo-Saxon commentators,argues that whatever national disease was aggravated by EMUs structural

deficiencies. That is, EMU is characterized as a non-Optimal Currency Area

(OCA) which is prone to asymmetric shocks that exacerbate national diseases.

Thus, this second perspective emphasizes the European structural dimension. It

argues that EMUs fundamental flaws cannot be rectified and its collapse is on the

table.(c)The third version is a middle-of-the-road blend: policy-driven (national

disease) cum EMUs rectifiable structural flaws. It is argued that while the

Greek crisis has national origins it abated existing flaws of the EMU. However,

these flaws can be rectified.

All these versions are criticized for either attributing the problem to policy

errors or having a weak structural explanation. The first perspective, faithful to the

typical neoclassical approach to economic crises, considers the Greek case a national

specificity created by bad policies. The second perspective recognizes a rather weakstructural cause. It concerns mainly the sphere of circulation (i.e. how the common

currency is related to diverse national economies) and has not much to do with the

sphere of production per se. Concomitantly, Greek and the Eurozone crises have to do

mainly with the architecture of the European monetary system. The third perspective

also attributes the structural problems to the sphere of circulation (with the additional

argument that, contrary to the second perspective, these problems can be surpassed)

and neglects the sphere of production. Thus, all three mainstream perspectives fail to

appreciate the fundamental structural dimensions of the problem at hand.

According to them the Greek crisis, the Eurozone sovereign debt crisis and moreover

the 2007-8 global crisis have nothing to do with the sphere of production. The 2007-8

global crisis is considered solely a financial one, having nothing to do with real

accumulation. A more robust account should refer to the deeper structural problems

that arise from the sphere of production.

The category of the radical explanations is examined by focusing mainly on

the more popularfinancialization thesis; i.e. the argument that modern capitalism is

radically different from classical capitalism since money capital has not only broken

loose from productive capital but it is actually dominating the latter. The other radical

stream, underconsumptionism (which is usually blended with the financializationthesis) is neither particularly popular nor applicable regarding the Greek crisis. The


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financialization perspective emphasizes the structural component but only regarding

the sphere of circulation which is, implicitly or explicitly, assumed to dominate the

sphere of production. Two versions of the financialization argument are discerned

regarding the Greek crisis:

(a) The first version places financialization in the context of the North Southdivide. It attributes the imbalances that caused the Greek crisis predominantly to

this divide as it is articulated in the EMU.

(b) The second downplays the significance of the North - South divide as anerroneous dependency argument. Instead, it attributes the Greek crisis to mainly

national elements and less to EUs or EMUs structure.

Both perspectives are being criticized for analytical and empirical deficiencies.

More generally, they are too criticized for having a weak structural emphasis by not

considering the problems in the sphere of production.

Finally, a Marxist explanation of the Greek crisis is proposed. This

perspective offers a strong structural explanation by attributing the fundamental

causes of the Greek crisis to problems grounded in the sphere of production. More

specifically, it emphasises two structural components. First, it is argued that 2007-8

economic crisis is a crisis a-la-Marx (i.e. stemming from the tendency of the profit

rate to fall - TRPF) and not a primarily financial crisis and this represents the

internal cause of the Greek crisis. Second, it is shown that apart from the internal

causethere are also external causes. These come from the relations of imperialist

exploitation (i.e. unequal exchange) that exist within the EU and which divide it

between North (euro-core) and South (euro-periphery) economies. Greece obviously

belongs to the second group.

The paper is structured as follows. The next part surveys the mainstream

explanations. The third part analyses the radical explanations. The fourth part presents

the Marxist explanation. Finally the last part concludes.

II. Mainstream explanations

As mainstream explanations of the Greek crisis are categorised those inspired

from the neoclassical and/or neo-Keynesian perspectives 3 . Unsurprisingly, these

3The term mainstream economics is used in its broadest meaning. It signifies the dominant traditionof economics. This was initially expressed by the neoclassical economics and the post-Keynesian

neoclassical synthesis (which merged neoclassical methods and Keynesian approach macroeconomics).

After the neo-liberal onslaught of the end of the 20th

century (as expressed by monetarism initially and

the rational expectations theory subsequently) mainstream economics became even moreconservative.The majority of the Keynesian theory followed suit by adopting significant parts of the neoconservativeagenda. This realignment was expressed in the New Keynesians or New Consensus Macroeconomics.
http://en.wikipedia.org/wiki/Neoclassical_economicshttp://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Keynesian_economicshttp://en.wikipedia.org/wiki/Neoclassical_economics


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explanations are offered not only from established academic voices but also from

institutional centers of the politico-economic establishments both in Europe and

elsewhere. As it has already been argued in the introduction, these mainstream

explanations of the Greek crisis fall into three distinct perspectives.

II.1 A primarily Greek disease

The first version has now become a bit arcane. It was expressed vociferously

during the beginning of the Greek crisis and before the eruption of the Eurozone

crisis. In its initial version it centered mainly upon the public sector as this basically

came under attack with the first MOU. Subsequently, after the first MOUs reviews

and as the private sector came also under attack, it was expanded to the whole Greek

economy. In a nutshell, it identified the Greek disease with two major deficienciesof the Greek economy: (a) large and persistent fiscal deficits financed through

borrowing (which created large external debts) and (b) a falling competitivess. It

argued that these deficiencies were caused by particular Greek national characteristics

(special policy errors and structural deficiencies), i.e. it is a Greek disease.

Therefore, it emphasizes mainly policy errors and recognizes structural deficiencies

only as a consequence of these nationally-specific policy errors. Again unsurprisingly,

this version was expressed predominantly by the EU, the ECB, commentators and

think-tanks of the euro-core countries but also by the Greek governments that signed

and support the troika MOUs. Of course it was echoed and popularized by Greek and

international media in order to justify and legitimize the first MOU.

The gist of this version is that Greece is a special type of economy (and

country) which is prone to fiscal profligacy. It is argued that it is characterized by

large and persistent fiscal deficits and a falling competitiveness, characteristic of the

lazy European South as opposed to the prudent European North. More specifically,

the mainstream mantra maintains that the Greek economy is characterized by low

productivity, high wages and a big public sector. High wages are the product of the

big public sector which is clientelist (thus voters are bought through provision of

employment and wages). In addition, the public sector has low productivity and afalling ability to collect taxes (due to clientelism fomenting tax evasion).

Consequently, fiscal deficits are accumulated. These are financed through loans

resulting in a widening external debt (expressed in a deteriorating current account).

Cheap borrowing was possible because since the entrance to EMU Greece benefited

from low interest rates. In addition, Greece exploited EUs benevolence by forfeiting

statistical data and thus violated the provisions of the Maastricht Treaty (that founded

the euro). With the advent of the 2007-8 crisis international financial markets started

scrutinizing fiscal deficits and external debts. Consequently, the unsustainability of

the Greek debt was discovered and the Greek crisis erupted. Thus, the deep fiscal cutsof the first MOU were justified. This was a political choice since the Greek and EU


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establishment aimed to pass piecemeal the MOU strategy. Therefore, it focused

initially on the public sector and public employees by staging a truly defamation

campaign aiming at creating a rift between public and private sector employees. The

slant of the lazy and corrupt public employees is the trademark of this first version.

However, as soon as the first MOU program started failing austerity had to be

expanded to the private sector. In order to justify this expansion the problem of

competitiveness was surfaced. It was argued that not only the public but also the

private sector is characterized by low productivity, high wages and rigid labor market

regulation culminating in a falling competitiveness. Consequently, the current account

worsened not only because of public borrowing but also because of diminishing

exports and increasing imports. High wages fueled consumption which was directed

towards imports, since domestically produced goods were uncompetitive. The

trademark of this new propagandistic campaign was that Greek workers collectively

(private and public sector) are overpaid and inefficiently working.

Typical examples of this perspective are offered by papers from the governing

EU and ECB bodies and from the Bank of Greece. For example, in the beginning of

the first Greek MOU (EC (2010), p.6) the origins of the Greek crisis are defined as:

(a)Persistent fiscal and external imbalances that led to a significant increase ingovernment and external debt

(b)Rigid product and labor marketsThese Greek vulnerabilities were exposed by the 2008-9 global crisis.

Subsequently - and while not at the origin of the problem - the banking sector was

affected by the economic and confidence crisis (p.7). The same verdict is professed,

in more damning terms, in the introduction to the second Greek MOU (EC (2012),

p.9). The origins of the Greek crisis are again attributed to:

(a)Unsustainable fiscal policies, partly hidden by unreliable statistics andtemporarily high revenues;

(b) Rigid labor and product markets;(c) Loss of competitiveness and rising external debt;

It is again reiterated that while not at the origin, the banking sector was

affected by the economic and confidence crisis. In a similar vein, Gibson, Hall &

Tavlas (2012, p.500-1) - the first and the third belonging to the Economic Studies

Directorate of the Bank of Greece - find the origins of the Greek crisis in the large

fiscal deficits and the falling competitiveness of the Greek economy:

Although entry into the euro area contributed to a period of prolonged and

robust growth, and low (by Greeces historical standards) inflation, two deep-

seated problems remained unaddressed; the country continued to run large


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fiscal imbalances and the countrys competitiveness already a problem upon

euro area entrycontinued to deteriorate.

It should be noted that in its 2010 version this explanation emphasized fiscal

and external imbalances with the emphasis on the former. The problem of

competitiveness is mentioned but in a somehow subdued manner. Moving to the

second MOU competitiveness is brought forward and emphasized4.

Finally, the same arguments are reiterated, in rather pedantic terms, by the

neoconservative Greek economists grouped in the greekeconomistsforreform.com

(e.g. Azariadis (2010), Dellas (2011), Ioannides (2012), Meghir, Vayanos & Vettas

(2010). Their arguments have nothing exceptional apart from some minor differences

between them (for example some prioritize the fall in competitiveness over the fiscal

deficits, e.g. Ioannides (2012)).

The Greek disease explanation suffered a hit when othercountries-members

(Ireland in the end of 2010, Portugal in the beginning of 2011) of the EMU faced

problems and entered also in bail-out programs through MOUs with the troika. What

was previously characterized as a special Greek disease was now discovered to be a

far wider problem. The initial reaction was to attribute the expansion of the problem

to contagion from Greece5. This, which is indeed a rather weak argument6, was

supplemented by collectively branding these countries (in fact all the PIGS

Portugal, Ireland, Greece and Spain) as EMUs outcasts: economies prone to fiscal

and banking profligacy: instead of a Greek a South disease was discovered. Thus,

beginning with non-other but the ECB (ECB (2012)), several economists (e.g. Kosters

(2009), Panetta (2011), Weidmann (2012)) identified fiscal profligacy as the root of

EMUs sovereign debt crisis.However, as the EUs crisis expanded beyond the PIGS

and started touching Italy and even euro-core countries (e.g. Belgium, Netherlands

and France) the popularity of the South disease explanation started receding.

In analytical terms, the Greek (or South) disease explanation hinges upon the

Twin Deficits Hypothesis which contends that there is a strong link between the

current account balance and the government budget balance. A twin deficit occurs

when an economy has a current account deficit plus a fiscal deficit with the causalityrunning from the latter to the former (see Appendix I). In the Greek case this

4The first MOU set as a short-term objective the fiscal consolidation and as a medium-term objective

the improvement of competitiveness and altering the economys structure towards a more investment-

and export-led growth model. However, in practical terms only the short-term objective was pursued.This was done by the PASOK government but in full knowledge of the troika (despite later bickering).5

A typical example is offered by Arghyrou & Kontonikas (2010) in a vehemently pro-MOU article:

the majority of EMU countries have experienced contagion from Greece, most prominently Portugal,

Ireland and Spain.6

It is a weak argument because, apart from expectations (and the mythical properties attributed to them

by mainstream economics), the only way that Greece could contaminate other EU members was

through its private creditors (banks and financial organizations). This channel, however important itmay have been it has, after the PSI, been checked as the great majority of Greek debt is in the hands of

official lenders (practically the troika).
http://en.wikipedia.org/wiki/Current_account_balancehttp://en.wikipedia.org/wiki/Government_budget_balancehttp://en.wikipedia.org/wiki/Government_budget_balancehttp://en.wikipedia.org/wiki/Current_account_balance


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argument is expressed as follows. An increasing fiscal deficit is caused by the

profligate and clientelist state (mainly because of exorbitant wage increases but also

because of widespread tax evasion). In order to finance this fiscal deficit the country

borrows heavily. This has increased public debt. Since, after the accession to the

EMU, external borrowing was cheap and indeed favored by the EMUs rules

7

then thepublic debt became external debt; thus deteriorating the already existing current

account deficit. At this point a supplementary argument is brought forward: the

current account worsened not only because of the fiscal deficit but also because of the

falling competitiveness of the whole economy. Therefore, it is argues that the Twin

Deficits Hypothesis is verified.

The applicability of the Twin Deficits Hypothesis for Greece is far from

unambiguous (see Appendix 1). Studies that tested it have produced mixed results.

Most interestingly, a recent study (Katrakilidis & Trachanas (2011)) has argued that

while the Twin Deficits Hypothesis is confirmed for the pre-accession to the EMUperiod (1960-80) it is rejected for the post-accession period (1981-2007). For the

latter period the opposite is confirmed: trade (and thus current account) deficit has

caused increasing budget deficit.

II.2 EMU is not (and cannot, at least easily, become) an OCA

The second perspective argues that, whatever national Greek disease exists,

it is aggravated by EMUs structural deficiencies. That is, EMU is characterized as a

non-Optimal Currency Area (OCA) which is prone to asymmetric shocks that

exacerbate national diseases. Thus, this second perspective emphasizes the

European structural dimension. It argues that EMUs fundamental flaws cannot be

rectified (i.e. EU cannot become something similar to the US) and its collapse is on

the table. This view centers only passingly on the Greek case per se. It takes it, as well

as those of the other PIGS, as a springboard to spearhead its main criticism: EMU is

inherently faulty. This perspective is expressed mainly by Anglo-Saxon commentators

either neoliberal (e.g. Feldstein (2010a)) or neo-Keynesian (e.g. Krugman (2012a)).

Characteristically, Feldstein (2010a) argues that:

The European economic and monetary union is doubly flawed. First, it

forces diverse countries to live with a single interest rate and exchange

7For example, the Greek state could not resort to direct - and more or less obligatory - internal

borrowing as it used to do before entering the EMU. It has to borrow through open market transactions;that is find a group of underwriting banks (usually five big banks from Germany, France, US, Greece

and some other EU country) to act as intermediators. This group of underwriters found creditors

usually in international markets. The problem with this process is that internal borrowing can be far

more easily manipulated in case of sovereign debt problems whereas external borrowing (especiallywhen governed by English law) is far less malleable.


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rate that cannot be appropriate for all members. Second, combining a

single currency with independent national budget policies encourages

fiscal profligacy. The Greek situation is a manifestation of these flaws.

And elsewhere, Feldstein (2010b) maintains that:

The crisis in Greece and the debt problems in Spain and Portugal have

exposed the euros inherent flaws.

Feldsteins position is reiterated by the Thatcherite Institute for Economic

Affairs (IEA). In a 216-page study, edited by Ph.Booth (Booth (2013)) it gives a

characteristically damning account of the EMU from a neo-liberal perspective. The

central conclusion is that the EMU is inherently flawedby not being an OCAand

that it should be either broken up in an orderly way or radically reorganized along

even more neoliberal lines.

The same line is towed by The Economist (2010):

The Greek crisis only confirms the folly of binding a group of

disparate countries together in a currency zone with no mechanism,

such as a central fiscal authority, to address its internal imbalances. The

north-south divide in the euro area looks more marked than ever. The

north, exemplified by Germany, relies on exports to power its growth,

saves hard and runs trade surpluses. The southern economies, such as

Greece, have leant too heavily on consumer spending, have weak public

finances and rely on foreign capital to supplement their low savings.

But also, from the neo-Keynesian side of the fence, Krugman echoes the same

argument. In a series of works he forcefully supports the OCA theory (e.g. Krugman

(2012b)) and he argues that the existing crisis is nothing but the consequence of the

Eurozones difficulties dealing with asymmetric shocks (Krugman 2012a).

To be more accurate, these predominantly Anglo-Saxon accounts do not

absolve Greece from being responsible for the problem. On the contrary, they usually- particularly the neoliberal accounts - press forcefully the Greek profligacy argument.

But, as said before, the crux of their argument is against the EMU. This emphasis has

a twofold explanation.

The first explanation is geopolitical or has to do, in Marxist terminology, with

the intra-imperialist contradictions. The euro is one of the main instruments through

which European capitals (and the EU as their expression) strive for world supremacy

against the US. As such it attracted US antipathy from its very beginning. Even in

academic accounts this reason cannot be fully disguised. Again Feldstein (1997),

commenting about the upcoming EMU, expressed it in almost explicit terms: the

adverse economic effects of a single currency on unemployment and inflation would


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outweigh any gains from facilitating trade and capital flows and that, while

conceived of as a way of reducing the risk of another intra-European war, it was

more likely to have the opposite effect and lead to increased conflicts within

Europe and between Europe and the United States.

The second explanation is academic and has to do with the theory of Optimal

Currency Area (OCA - McKinnon (1963), Mundell (1961)). According to this theory

in order for a currency union (that unites several diverse in character and structure

economies) to be such an area it has to fulfill several crucial requirements. These are

the following:

(a) It must have high productive factors mobility. This implies not only highcapital but also high labor mobility.

(b)It must generate a viable process of structural economic convergence. Thisparticularly implies similar business cycles and trade patterns.

(a) It must have a fiscal mechanism (i.e. some degree of fiscal integration) sothat transfers could be made to countries hit by asymmetric economic

shocks.

The majority of the US (and to a great degree Anglo-Saxon) views opined that

EMU is far from being such a currency area. The first feature (particularly regarding

labor) is notoriously missing8. The second feature is also very erratic in the sense that

periods of economic convergence are succeeded by periods of even greater

divergence. Finally, the last feature is simply negligible9. Instead of it there were the

inadequate Maastricht Treaty criteria and then (with the onset of the 2007-8 crisis) the

equally inadequate and hastily conceived Stability and Growth Pact criteria.

On the basis of the academic arguments of OCA theory the US academic

antipathy towards the EMU took flesh and bones. The stance of the majority of US

economists towards the euro was nicely summarized by Dornbusch (2001) in his

famous expression: It cant happen, its a bad idea, and it cant last. Jonung & Drea

(2009) offer an excellent but partisan (trying to vindicate the EMU) survey of US

economists opinions. They meticulously plot both the different stances (e.g. OCA

theory prone academics versus the practically oriented FED economists) and theevolution of the US debate. The general conclusion is that the US debate underwent

significant changes, continuously evolving in response to actual events, starting in the

early 1990s from a rather skeptical view of the EMU as being unlikely to happen, or

at least not according to schedule, to an acceptance of the euro in the late 1990s,

sometimes combined with the prediction that it would not last very long. But as soon

8Labor mobility within the EU is relatively low. According to an ECB report, in 2000 only 0.1% of the

total EU-15 population (or 225,000 people) changed official residence between two member countries

(Heinz & Ward-Warmedinge (2006)). Additionally, most of this labor mobility reflected the influx of

Eastern European migrants. In a marking contrast, labor migration between US states was 5.9 % of itstotal population in 2000 (Heinz & Ward-Warmedinge (2006)).9Only 1.24 % of EUs total GDP is being used for fiscal transfers (McDougall 1992).


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as Jonung & Drea were ready to declare the victory of European political will over

US skepticism10 the eruption of the European sovereign debt crisis put a sudden

brake. As already shown, US criticisms returned with vengeance (accompanied with

the increasing conflicts between the US and the EU11).

Actually, the OCA theory is the closer thing mainstream economics have to

the Marxist disproportionality (or uneven development) thesis. The latter argues that

capitalism is characterized by the uneven development of either the regions within a

single economy or between different countries. As such it is the exact opposite of the

convergence thesis that is derived by definition from the neoclassical growth model12.

Marxist Political Economy argues that convergence is a utopia and capitalism is

inherently prone to uneven development. This unevenness refers primarily to the

production sphere and is then expressed in the sphere of circulation. Mainstream

economics cannot have this production-centered emphasis as they are by construction

economics of the exchange sphere. The OCA theory is the closest possible notion tothe disproportionality argument. It essentially states that unless there is a production-

based convergence then any circulation-based unification is futile. And as such it has

been vindicated regarding the EMU. The European integration project, particularly

regarding its monetary unification, has proceeded from failure to failure through acute

political voluntarism. Each previous monetary unification project ended in failure;

beginning with the Werner plan, following with the snake in the tunnel, the

European Monetary System and the Ecu. Each failure was responded with an even

more ambitious leap forward. The EMU and the euro are by far the most ambitious

leap. However, it is faced with far more serious problems from its predecessors(which unlike it had provisions for an organized dissolution mechanism in case of

failure) and the prospects of an ever more disastrous failure. The gist of its problems

is capitalisms inherently uneven development and the concomitant inability to create

a unified state behind the economic integration.

Concluding, this mainly Anglo-Saxon explanation of the Greek crisis while

sharing the fiscal profligacy argument of the first explanation recognizes a rather

weak structural cause. It concerns mainly the sphere of circulation (i.e. how the

common currency is related to diverse national economies) and has not much to do

with the sphere of production per se. Concomitantly, Greek and the Eurozone crises

have to do mainly with the architecture of the European monetary system.

10In a similar vein, De Grauwe (2003, p.58), while accepting the OCA theory and pointing out himself

to certain EMU deficiencies, he rejects US skepticism: The traditional theory of optimal currency

areas tends to be rather pessimistic about the possibility for countries to join a monetary union at low

cost.11

For an analysis of the intra-imperialist contradictions between the US and the EU see Mavroudeas(2010a, 2010b, 2012).12

For a review of the convergence thesis see Mavroudeas & Siriopoulos (1998).


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II.3 The Greek problem has national origins exacerbated by errors in EMUs

structure

The third mainstream explanation of the Greek crisis is a middle-of-the-road

blend. It can be branded as policy-driven (national disease) cum EMUs rectifiable

structural flaws. It is arguing that while the Greek crisis has been caused by a

combination of national policy errors (high fiscal deficits and debt) coupled with

problems created by the incomplete economic unification of the EMU. Consequently,

it is argued that a deepening of the economic and political unification of the EU will

solve these problems. Essentially, this explanation comes from mainly European

analysts that are in favor of European unification but have ideological or practical

reservations regarding the actual process of this unification. To a great extent these

views have Keynesian (or even post-Keynesian) origins.

De Grauwe features prominently among this stream. In De Grauwe (2010a,p.1) he argues that the major responsibility for the Greekcrisis rests with the Greek

authorities who mismanaged their economy and deceived everybody about the true

nature of their budgetary problems. Then he adds that:

The crisis has exposed a structural problem of the Eurozone that has

been analyzed by many economists in the past. This is the imbalance

between full centralization of monetary policy and the maintenance of

almost all economic policy instruments (budgetary policies, wage

policies, etc.) at the national level. Put differently the structural problem

in the Eurozone is created by the fact that the monetary union is not

embedded in a political union. (De Grauwe 2010a, p.4)

In another paper he explicitly rejects the fiscal profligacy argument for Spain

and Ireland (but not for Greece):

Are such difficulties due to irresponsible fiscal policies? This could be

the case for Greece, but not for Spain and Ireland, so fiscal profligacy

cannot be identified as the in-depth source of eurozone problems. (De

Grauwe 2010b)

The same argument is voiced by Lane (2012): Although Greece (and Italy)

has a debt profligacy record (opp.51), the origin and propagation of the European

sovereign debt crisis can be attributed to the flawed original design of the euro

(opp.65). Thus, the main flaw is that the monetary union was not accompanied by a

banking and fiscal union (opp.49).

Similar concerns are being advanced by explicitly post-Keynesian economists.

Botta (2012p.3) argues that Actually, the current eurozone crisis seems to have been


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decisively aided by the original institutional setup of the eurozone and its incomplete

nature with respect to a fully developed federal union.

Again from the post-Keynesian camp, Hein, Truger & van Treek (2011)

emphasize the existence imbalances in the Euro area as the root cause of the euro

crisis. They explicitly reject the first mainstream explanation:

The current euro crisis is considered by many observers above all by

the dominating economic policy makers and advisors in Germany and

also in the European Commissionas a crisis of government deficits and

debt. (Hein, Truger & van Treek (2011), p.3)

The current euro crisis can better be interpreted as the consequence of

preceding private debt and current account imbalances and not as a result of

excessive public deficits. In the four countries outlined above, the privatesector obviously tended to spend more than its income. This was associated

with government surpluses (Ireland, Spain) or amplified by government

deficits (Portugal, Greece), which led to very high and rising current account

deficits in the four countries.(Hein, Truger & van Treek (2011), p.9)

This post-Keynesian emphasis on EMUs imbalances and particularly those

associated with the balance of payments (hence the current account) is quite

interesting. As such it points out to a structural characteristic of the EMU which

sometimes it has been branded as neo-mercantilism: the Eurozone is structured in

such a manner as to merit the trade surpluses of the Northern countries against the

trade deficits of the Southern countries. This argument can be found also, as we will

explain later, in the more radical post-Keynesian financialization explanations of the

crisis. Tellingly, several of the post-Keynesians belonging to this third middle-of-the-

road explanation of the Greek crisis they participate also to the radical

financialization thesis (e.g. E.Hein). On the other hand, the current account

imbalances argument has been taken up by more conservative theorists that do not

ascribe to the financialization thesis but aim for a more unified European integration

(e.g. Merler & Pisani-Ferry (2012)).

There are a number of problems with this third mainstream (and quasi-

mainstream in its post-Keynesian variant) perspective. The first has already been

mentioned. It offers a structural explanation but this is a weak one. It attributes the

structural problems to the sphere of circulation and neglects the sphere of production.

It agrees with the second mainstream explanations with regard to EMUs problems

pointed out by the OCA theory. But it believes that a more unified economically and

politically EU can overcome these problems. In this belief it departs from the harder

versions of the second explanation which believe that an economic and political

unification of the EU similar to that of the US is impossible. This is the second major

problem of this perspective. Its political and economic voluntarism goes against


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historical wisdom. Europe has been the main ground where capitalism was born on

the basis of the nation-state and the national economy. Almost every inch of the

borders of each state have been soaked in blood in wars against its neighbors. Hence

national political and economic identities are deeply entrenched. Moreover, the

current Eurozone crisis has already torn apart whatever feeble pretext existed of acommon European identity and a European solidarity. In stark contrast, national

interests have resurfaced with vengeance. This makes this aim of a politically and

economically unified Europe a utopia unless a major European power (or a bloc of

them) achieves overpowering dominance over the other members of the EU. But,

whatever the power of Germany and its allies is, there is a long and precarious road to

go till it succeeds in this endeavor.

II.4 Mainstream explanations: A Critique

Over time mainstream explanations of the Greek crisis evolved from monistic

explanations to a more eclectic mix. The more articulate of them usually attribute its

origins at two sets of causes (e.g. Nelson, Belkin & Mix (2011)):

(a) internal causes: exorbitant public expenditure, weak tax collecting

mechanism, corruption and clientelism (even sometimes cronyism), over-regulated

labor and product markets, high wages, an non-market friendly institutional

environment, deteriorating competitiveness etc.

(b) external causes: EMUs deficiencies, the repercussions of the 2007-8

crisis etc.

Notwithstanding, this eclecticism hides behind it versions (or combinations) of

the three previously delineated explanations. Moreover, the great majority of

mainstream explanations, irrespective of their differences, ultimately understand the

internal causes of the Greek crisis through the lenses of the Twin Deficits

Hypothesis13. This is their hardcore analytical device since all of them identify the

Greek crisis as simply a (fiscal) debt crisis which evolved in an external debt crisis(i.e. in toto as simply a debt crisis). The adoption of this analytical argument by even

vehement neoliberals is quite interesting given its Keynesian origins. Of course, some

explanations may add a bit of salt here and there; especially by stressing the

importance of clientelism and the institutional framework. Some might even extent

clientelism not only to the working class and the middle strata (which is the typical

argument) but also to Greek capital. These accounts add to (popular) clientelism the

upper-class cronyism of Greek capitalism; i.e. the close crony relations existing

13Only the post-Keynesian variant of the third explanation might differ with regard to the Twin

Deficits Hypothesis by stressing the current account imbalances as an independent factor causing theGreek problem.


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between the systemic political parties and Greek capitalists (especially the private

media and the banking sector). Cronyism is accused of falsifying free competition and

thus hinders growth by receiving rents. Notwithstanding, the gist of mainstream

explanations rests upon the Twin Deficits Hypothesis.

Then wages are posited as the factor triggering both the fiscal and the current

account deficits (and even irrespectively of the controversy between the Twin Deficits

and the Ricardian Equivalence Hypotheses). The typical argument is that Greek

(nominal) unit labor costs increased faster than those of the other European countries.

Thus they worsened both the budget deficit and the current account deficit. To be

frank they could be other analytical choices. For example, as some radical (e.g.

Stathakis (2010)) but also Marxist explanations (Mavroudeas (2010a) argue that the

deterioration of the fiscal deficit can be rightfully attributed to upper-class notorious

tax evasion and cronyism. The former depresses public revenues and the latter

augments public expenditure; thus, in conjunction, derailing the fiscal deficit.However, the mainstream explanations stick, for obvious reasons to the supposedly

high wages as the main cause of the big and persistent fiscal deficits. There is a

wealth of evidence proving this point. Starting from the high bodies of the EU and the

Greek government and moving to the groups of neoconservative economists this

argument is reiterated almost verbatim. For example, the first MOU states that:

Real wage growth consistently outpaced productivity gains over the past

decade, in part reflecting spillovers from very high public wage

increases. The resulting increase in ULC (unit labour costs) erodedexternal competitiveness, not least with respect to the rest of the euro

area. (EC (2010), p.3)

Even those emphasizing the deterioration of competitiveness over the

worsening of fiscal deficits put the blame on the wages. For example, Ioannides

(2012) argues that the basic cause of the Greek crisis has been the deterioration of its

competitiveness, mainly due to the rise of unit labor costs, but also due to the existing

non-market friendly regulatory framework14.

There are a number of well-known problems with this argument.

(1) There is an extensive literature disputing whether (nominal) unit labor

costs are a convincing measure of competitiveness.

(2) The famous Kaldor paradox argues that competitiveness is not an

exclusive virtue of low wages; on the contrary. A crucial corollary of the Kaldor

14There are some dissenters on this point. For example Hardouvelis (2010) - who had influential

governmental advisory positions during several Greek administrations and Malliaropoulos (2010) donot appear to agree, at least wholeheartedly, that increased wages are the main cause of the

deterioration of competitiveness.


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paradox is that competitiveness depends not only on costs and especially wage costs

(costs competitiveness) but also on qualitative factors (structural competitiveness).

(3) Contrary to the assertions of the EU and the Greek government, Greek

wages have been constantly lagging behind productivity increases. Furthermore,

Greek productivity increases have been much better that, for example, those of

Germany. Thus, the Greek real unit labor costs (i.e. the wage share in the product)

have been falling continuously for several decades.

(4) A decrease in wages aiming to restore competitiveness presupposes that

rival economies will maintain their wages stable or, at least, will reduce them less.

However, the universal trend is a downward push on the level of the real wages. This

can take place by two ways: a) directly through legal acts including the MOUs and, b)

indirectly by the increase15 of the reserve army of employees due to depression,

political turbulence and war conflicts.

Some of these arguments have been voiced, rather shyly, even in the ECB

bulletin before the onset of the crisis. Thus it has been convincingly argued that the

data on labor compensation and productivity suggest that the weakness of the external

accounts of several EMU countries comes from the international specialization of

their economy, rather than from the faulty management of the labor market. The

ECB (2008, p.92) confirms this when it claims that in the first 10 years of the EMU

the member economies with an overweight in labor-intensive sectors lost positions in

favor of emerging economies with a relative comparative advantage, whereas member

economies specialized in the higher-price and higher-quality segments of mature

industries and products even gained market shares. This implies that the loss of

competitiveness of some EMU economies was caused by structural deficiencies and

not by wage increases.

But the mainstream explanations of the Greek crisis have also wider problems.

First, they totally underestimate the role of the 2007-8 capitalist crisis. This, as

said before, is unanimously considered as a mere financial crisis without origins and

causes in the sphere of real accumulation. However, if this crisis is so significant andlengthy as it appears to be, it must surely have some basis on the main sphere of

economic activities (the sphere of production).

Second, they consider the Greek crisis as independent of the 2007-8 crisis.

This is a point on which both international and Greek pundits agree. Most

international reports (those of the EU, ECB and IMF included), before the onset of the

Greek crisis, maintained that the Greek economy was insulated from the 2007-8 crisis

and that, once the crisis erupted, it was left unattached. Indicatively, in a pre-election

15Richard M. Goodwin (1967) has ingeniously described the relationship between the level of the

reserve army of employees and accumulation of capital, as a unified and cyclical process.


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debate in 2009 both G.Alogoskoufis and N.Christodulakis 16 agreed that the Greek

economy is insulated from the crisis because its banking sector is better capitalized

than those of the West. The 2007-8 crisis has only an exogenous impact on the Greek

economy by worsening the international economic environment and setting off grey

expectations about sovereign debts.

Last and compounding all the previous problems, all three mainstream

perspectives fail to appreciate the fundamental structural dimensions of the

problem at hand and instead relegate it either to policy errors and/or to weak structural

origins. The first perspective, faithful to the typical neoclassical approach to economic

crises, considers the Greek case a national specificity created by bad policies. The

second perspective recognizes a rather weak structural cause. It concerns mainly the

sphere of circulation (i.e. how the common currency is related to diverse national

economies) and has not much to do with the sphere of production per se.

Concomitantly, Greek and the Eurozone crises have to do mainly with the architectureof the European monetary system. The third perspective also attributes the structural

problems to the sphere of circulation (with the additional argument that, contrary to

the second perspective, these problems can be surpassed) and neglects the sphere of

production.

III. Radical financialization explanations

Several radical explanations17 of the Greek crisis have been advanced. The

main points that differentiate them (apart from the methodology and the analytical

tools) from the mainstream explanations are the following:

(a)They emphasize the crisis-prone nature of capitalism. Consequently, moreemphasis is placed on the structure of world capitalism and on the 2007-8

crisis.

(b)They are critical of the neoliberal dominance of economic theory andpolicy over the last three or four decades and put the blame for the

problems that arise to neoliberalism.(c)They criticize the neoliberal architecture of the EMU and argue either for

its dissolution or for its radical overhauling.

Overall, radical explanations are shy of recognizing the general deficiencies of

the capitalist system; although several of them do mention them but in a rather

16They are both academic economists which have served as finance ministers the former of ND and the

latter of PASOK.

17

The term radical is used here to denote approaches belonging to heterodox economics. That meansperspectives belonging to the radical post-Keynesian, institutionalism, Radical Political Economy etc.


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implicit of disguised manner (e.g. Polychroniou (2013)). However, they do not think

that the immediate problem is capitalism as such but rather its forms of management.

Therefore, they strive for an end to neoliberalism and a return to more humane form

of capitalism (or variety of capitalism, for those ascribing to the varieties of capitalism

approach - VoC). The more politically radical versions consider this step a movetowards a long but unspecified march to socialism. Several of these more politically

radical approaches have a relation to Marxism and some even ascribe to Marxism as

such. However, in this work we will treat them as separate from Marxism per se. This

does not reflect a sectarian view but crucial analytical and political considerations.

The gist of these considerations is twofold:

First, the rate of profit i.e. the crucial Marxist variable for understanding

capitalism and especially its crisesis absent from their analyses. Instead some form

of Keynesian lack of effective demand or neo-mercantilism argument is employed.

Second, even the more radical versions that refer to socialist transition cannot

and in fact are unwilling todefine the exact process through which the overturn of

the capitalist assault is a link in the transitional socialist program.

The focus of this chapter would be on the financialization versions of the

radical explanations. This does not imply that other versions do not exist. For

example, there is another radical version that recognizes the Greek crisis as a mainly

fiscal crisis but attributes it to the tax-evading and crony nature of Greek capitalists

(e.g. Stathakis (2010)). Others (e.g. Laskos & Tsakalotos (2012)) add to this the

argument about the trade imbalances existing within the EMU that we have seen in

the third middle-of-the-road variant of the mainstream explanations. The more

traditional underconsumptionist explanations of crises (either of the Marxist Monthly

Review (MR) or the Keynesian variant) are not popular regarding the Greek crisis.

The main reason is that they do not fit to empirical data as the period preceding the

onset of the crisis was characterized by a spectacular growth of consumption. Thus,

underconsumptionist views usually hide behind the financialization thesis. The latter

is by far the more popular radical explanation of the Greek crisis.

The financialization thesis argues that in modern capitalism finance (i.e. theoperation of money capital) assumes an increasing primacy in relation to other

capitalist activities18. With regard to Marxism the origins of this thesis go back to

Hilferdings (1910 (1981)) seminal work and his implicit notion (never explicitly

stated) that in modern capitalism finance takes a dominant position. It was somehow

reiterated by Sweezy (1942). However, neither of them broke the classical Marxist

18In fact the notion of financialization covers a wide range of phenomena: the deregulation of the

financial sector and international capital flows, the proliferation of new financial instruments, the shift

to market-based financial systems, the emergence of institutional investors as major players onfinancial markets etc. However, the definition adopted in this paper focuses on the politico-economic

(and thus macroeconomic) aspect of the term.


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relationship between surplus-value and interest. The former is extracted 19 by

productive capital at the sphere of production and then it is redistributed between

profits (accruing to productive capital), interest (accruing to non-productive

finance capital) and commercial profits (accruing to non-productive commercial

capital).

A major change took place in the end of the 20th century. The predominance of

neo-conservatism and the structural transformations of particularly the Western

economies dictated by it led to widespread empirical beliefs (or stylized facts) that a

new era of capitalism has come: finance has broken lose from the grips of

productive capital and has established it dominance on the former. Several neo-

Marxist (but with a growing distancing from Marxism) and Institutionalist currents

(e.g. the Regulation Approach) have already been signaling this conclusion. This led

to the formation of the financialization thesis. Thus, in the beginning of the 21st

century the term as such was coined by radical approaches belonging to theKeynesian and Marxist approach (particularly their ambiguous merge in the Monthly

Review tradition). It was actually launched through a series of papers (by Kippner,

Crotty etc.) in an influential collective volume edited by Epstein (2005).

It was energetically adopted by post-Keynesianism who developed the concept

and its analyses (e.g. Stockhammer (2004)) and sometimes treated the term as their

exclusive property (e.g. Treeck (2008)). Seldom post-Keynesians posit

financialization within stages of capitalism theory arguing that a new stage of

capitalism has emerged by the end of the 20

th

century. This new stage is characterizedas finance-dominated capitalism (Hein (2013)) or finance-dominated regime of

accumulation (Stockhammer (2009)); the latter borrowing the terminology of the

Regulation Approach. The post-Keynesian launch of the term financialization was

based on the Keynesian notion of the rentier;i.e. an unproductive stratum collecting

various rents which are being subtracted from profits available for productive

investment. Thus, the rentier is a drag on capital accumulation.

The incorporation of the term in Marxist analyses followed a bit letter. The

Monthly Review (MR) school has used similar terms long ago (e.g. Sweezy (1994),

Editors (2008)) but not actually coined the term. Thus it adopted it rather lately in

order to explain the 2007-8 crisis since pure underconsumptionism had serious

explanatory difficulties (e.g. Foster (2010)). Coming from a different perspective

from that of the MR, Lapavitsas (2008) adopted the notion of financialization and

gave it a strange twist. He argued that financialization is a new stage of capitalism.

Till now his argument had nothing original comparing to its previous definitions.

What gave it its special flavor is the thesis that in this new stage of capitalism finance

19For an empirical interpretation of this scheme, see section IV.


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capital 20 not only dominates productive capital but it also exploits directly the

working class through usurious activities (through the provision of loans). Thus the

term financial exploitation was initially coined. After a series of criticisms (e.g. Fine

(2009)21) for confusing capitalist exploitation with pre-capitalist usurious exploitation

it was cosmetically changed to financial expropriation. However, the essentialmeaning of the term remained the same.

This paper rejects the financialization thesis on both analytical and empirical

grounds (as it will be shown in the next chapter). For reasons of brevity this critique

can be summarized as follows22. The basis of this rejection is that in analytical terms

financialization theories argue that capitalism has somehow returned to a pre-

capitalist stage: the period when capitalist relations were not yet born but the pre-

capitalist figures of the merchant and the bankeras they operated within feudalism

prepared the ground for capitalisms birth. The crucial point of the operation of

merchants and bankers in feudalism was unequal exchange and usury as a rule incontrast to equivalent exchange as a rule in capitalism. This functioning on the basis

of unequal exchange was able because of the monopolistic and heavily regulated rules

of the feudal system. Once however the primary accumulation of capital took place

and capitalism established the monopolistic feudal rules were abolished and capitalist

competition ruled. Then the operation of money capital took its characteristically

capitalist modus operandi. The financialization thesis argues that this is liquidated

and that there is a return to the pre-capitalist modes of operation. In other words,

financialization theories maintain that interest ceases to be a part of surplus-value

and that it acquires an independent existence. Concomitantly, money capital is notonly autonomised from productive capital but also dominates the latter. But, if the

latter is the ultimate source of wealth, this domination would necessary entail - and

this is actually a conclusion of financialization theories - a stifling of productive

investment and thus of the accumulation of capital. The obvious question is how is it

possible in the long-run such a deformed capitalism to exist. Additionally, regarding

the 2007-8 crisis, financialization theories argue that it is not an a-la-Marx crisis (i.e.

rooted in the sphere of production) but a financial crisis (a crisis of financialised

capitalism). In this they agree with mainstream theories. An obvious question is that if

the current crisis is so deep and prolonged as the financialization theories accept

then how it cannot be based on the fundamental economic sphere (the sphere of

production).

20The term finance capital is not identical to Hilferdings concept (which denotes the fusion of

productive with banking capital under the dominance of the latter). It refers to capital operating in thefinancial system (i.e. money and capital markets).21

Fine (2009) uses also the notion of financialization but in a different sense from that of the

approaches mentioned before. For him it does not constitute a new stage of capitalism and of course

finance capital cannot acquire an autonomous means of exploiting the working class (it will always be

dependent upon the extraction of surplus-value by productive capital). Thus, financialization is a

special phase of neoliberalism. New forms of operation of money capital and novel institutional

arrangements are policies that are used by capital in order to surpass its problems and contradictions.22Tom (2011) offers an interesting critique of financialization theories which concludes by showing

that they ultimately ascribe to a Keynesianpossibility theory of the crisis.


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Two versions of the financialization thesis can be discerned with regard to

the Greek crisis. The first one is by Lapavitsas and of course it ascribes to his notion

of financialization. The second one is expressed by Milios & Sotiropoulos and has

affinities with the post-Keynesian notion of financialization. Notwithstanding, their

main differences have to do with two more practical issues: (a) the North Southdivide in the EU and (b) whether Greece should remain in or leave the EMU.

Lapavitsas et al. (2010a, 2010b) argue that the Greek is a debt crisis. In this

they agree with the mainstream explanations. But they add that it is symptomatic of a

wider malaise (2010a, p.11). Its roots lay in (a) financialized capitalism and (b) the

EMU. Financialized capitalism caused the 2007-8 crisis which is not an a-la-Marx

crisis but simply a financial crisis. The rate of profit has not role in it. In Lapavitsas

own words (and without any attempt to substantiate it) it did not fall but also it did

not grow. The crisis was caused by financial leverage that created unsustainable

bubbles. The crisis affected the fragile foundations of the EMU. The latter is not anOCA which, according to Lapavitsas et al., is based on three pillars:

(a) the independent ECB which commands monetary policy

(b) fiscal stringency

(c) relentless pressure on wages in order to ensure competitiveness

Lapavitsas accurately points out that ECBs monetary policy follows the needs

of the euro-core countries (the North). However, the third point agrees with the

mainstream arguments on competitiveness. Then Lapavitsas et al. argue that the North

(and especially Germany) was more competent in pressurizing wages and thus

acquired a permanent competitive advantage against the South (the euro-periphery).

This is again the mainstream argument in reverse: it is not the lazy Southerners but

the over-prudent Northerners that caused the problem.

Thus, the Eurozone was polarized in a North with trade surpluses and a South

with debts: the North gave loans to the South in order for the latter to buy its products.

The eruption of the 2007-8 crisis disrupted this structure as international financialmarkets questioned the creditworthiness of Souths sovereign debts. Thus, the

Eurozones crisis began. According to Lapavitsas et al. the EMU transmitted the

world crisis in Europe because of the imbalances that were latent within it. Again, till

this point Lapavitsas et al. analysis does not differ essentially from post-Keynesian

analyses which accept a NorthSouth divide argument23.

23For example Stockhammer (2011, p.90) argues that this was not primarily a Greek crisis but a Euro

system crisis. The Euro has long been a political project based on dubious economics (opp.94). EMUis part of the global neoliberal pattern which began with the deregulation of finance (the neoliberal

mode of regulation) and gave rise to a finance-dominated accumulation regime. This polarized EU in


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The final conclusion of Lapavitsas analysis is that the EMU cannot be

rectified; although he sometimes refers to a European Marshall scheme as a solution

only to immediately discard it as implausible. Thus, he concludes that the only

solution for Greece (and indeed the rest of the euro-periphery) is to exit the EMU.

Regarding the relationship with the EU (i.e. in economic terms basically the CommonMarket) he remains agnostic.

Lapavitsas explanation suffers from the general weaknesses of the

financialization thesis. He neglects any reference to the production structure of the

Greek and the other EMU economies (for example differences in technological

structure and productivity as expressed in their Organic Compositions of Capital

(OCC)) or qualitative issues (productive specializations). Thus he is unable to see the

existence of relations of economic (imperialist) exploitation between the North and

the South (or else relations of broad unequal exchange24) and he understands only a

reversed and problematic version of the narrow unequal exchange. Moreover, heaccepts uncritically the mainstream arguments about Greek relatively high wages

being the cause of Greeces deteriorating competitiveness (for example he accepts

uncritically the high (nominal) unit labor costs argument).

His analysis suffers also on the financialization plain. The Greek financial

system was significantly less leveraged than the Western ones. Additionally, Greek

workers private debts are a relatively new phenomenon (they began with the

introduction of the euro) and they are smaller than their Western counterparts.

Therefore, financialization cannot be discovered in Greece and has to be importedfrom outside. Thus, in Lapavitsas analysis financialization is imported through

public (and not private) external debt.

The last error of Lapavitsas analysis concerns his policy suggestions. If the

Greek crisis is simply a debt crisis then there may be solved not by exiting the EMU

but by reforming it towards a full OCA (i.e. by unifying it fiscally and politically). If

the crisis is something more profound and has to do with the sphere of production and

relations of unequal exchange stemming from it then exiting the EMU and remaining

within the Common Market want suffice. A full exit from the EU is required. But

Lapavitsas shies away from this conclusion.

Milios & Sotiropoulos (2010) financialization explanation of the Greek crisis

is different. Contrary to the conclusions reached by Lapavitsas et al., Milios &

two groups: a Northern one following export-led growth and a Southern one following credit-led

growth (opp.86).24

Emmanouel (1972) distinguishes two categories of unequal exchange in international trade:

(a) Broad unequal exchange: it is derived from differences in the OCC, i.e. a more developed

country (with higher OCC) exploits a less developed country (with lower OCC).

(b) Narrow unequal exchange: it is derived from differences in the wage rate and the rate of

exploitation, i.e. a higher wages country is exploiting a lower wages country.


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Sotiropoulos (2010) argue that it was not the loss of competitiveness that gave rise to

high indebtedness, but the other way around. More specifically, EMU by bringing

together countries with very different rates of growth and profitability, gives rise to

high levels of borrowing for the euro-periphery countries. That is because euro-

periphery countries have higher profit rates which attract capital from the euro-core.This trend was augmented since euros adoption because EMU allowed euro-

periphery countries to borrow at low interest rates. Foreign loans boosted euro-

peripherys domestic demand, therefore giving rise to increasing inflation and the

deterioration of competitiveness. Milios and Sotiropoulos essentially reject the North

- South divide as an expression of the problematic dependency theory. For them

foreign loans were not a trick to rob Greece but a perfectly natural phenomenon that

helped boost growth. On this point they totally agree with the mainstream arguments

in Greece that the EU helped Greeces development. Indeed, the pre-crisis

mainstream argument was that current account deficits were good imbalances because

euro-periphery countries with relatively low levels of real GDP per capita were

catching up with richer north European economies. Greater growth opportunities and

expectations of faster productivity growth justified elevated levels of fixed investment

relative to the pool of domestic savings, hence the need for a current account deficit.

The reality is different. Sustained current account deficits were by and large not used

to finance investment in productive assets but to buy euro-cores imported goods.

Thus, Greeces productive structure instead of being developed it was actually eroded.

Because of this error Milios & Sotiropoulos implicitly accept the mainstream

convergence thesis which has been fully disproved (as it has been shown in previous

chapter).

Till this point Milios & Sotiropoulos analysis replicates much of the idyllic

success story (the strong Greece) presented before the crisis by the mainstream

academic and official circles. Then they add the financialization thesis. Modern

capitalism is a financialised one leading to extreme leveraging and financial bubbles.

When the 2007-8 crisis (which they too understand as a mere financial one) erupted

the till then malevolent euro-peripherys CA deficits were blown apart. In order to

sustain them fiscal deficits were augmented and this led to the euro-peripherys

collapse.

The EMU played only a peripheral role in this affair. Milios & Sotiropoulos

accept that EMU is not an OCA. Furthermore, they argue that EMU is a neoliberal

project that imposes austerity on the workers by exposing them to international

competition. The eruption of the crisis exposed EMUs weaknesses (because of the

asymmetric shocks that cannot be contained within it) and its class nature (as the great

burden of the MOUs was placed on the working people). However, the solution is not

the exit from the EMU but the progressive restructuring of the EU.

Milios & Sotiropoulos financialization explanation suffers from the generaldeficiencies of this approach already mentioned above. They share also the particular


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errors characterizing Lapavitsas analysis and criticized above. On the points that they

differ they err on the other side. For example, instead of Lapavitsas reversed version

of narrow unequal exchange they throw out any theory of unequal exchange.

Finally, their analysis of the EMU and the EU is simplistic and cannot see the

relations of economic (imperialist) exploitation that exist within them. The same holdsabout their policy proposals.

In toto, the financialization explanations of the Greek crisis have a weak

structural emphasis by not considering the problems in the sphere of production. For

this reason they fail to account adequately for the Greek case.

IV. A Marxist structural explanation

All the above explanations attempt to shed light on the causes that led to

current economic depression. Despite of their different viewpoint and the political

implications that arise from them, they share a crucial common analytical feature.

Neither of these explanations attributes the depression to the internal logic of the

system that creates economic crisis as an iterative process. They either attribute the

depression to policy errors or to weak structural factors pertaining mainly to the

sphere of exchange.

In contrast to the previous explanations Marxist Political Economy offers a

strong structural explanation of the Greek crisis by attributing its fundamental

causes to problems grounded in the sphere of production. More specifically, it

emphasises two structural components. First, it is argued that 2007-8 economic crisis

is a crisis a-la-Marx (i.e. stemming from the tendency of the profit rate to fall - TRPF)

and not a primarily financial crisis and this represents the internal cause of the

Greek crisis. Second, it is shown thatapart from the internal cause there are also

external causes. These come from the relations of imperialist exploitation (i.e.

unequal exchange) that exist within the EU and which divide it between North (euro-

core) and South (euro-periphery) economies. Greece obviously belongs to the second

group.

Thus, this part of the article is further divided in two sub-sections. The first

sub-section offe

the greek saga: competing explanations of the greek crisis - a marxist alternative', 1st world...

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