The euro saga continues with every week a new and unexpected twist. If Finland is not causing trouble, it is Slovakia; if Slovakia is not causing trouble, it is Greece. Everywhere governments are uneasy: they know the people do not agree with the policies devised at the European Union level in Brussels.
The one thing EU elites absolutely wish to avoid is allowing the people a direct say over their own affairs. Any participation from the public, including referendums, is the great European taboo. Consequently, all hell broke loose when Greek Prime Minister George Papandreou proposed to hold a referendum about the austerity measures that Brussels wants to impose on the Greeks in return for a new bailout of the nearly bankrupt country. Papandreou was forced to cancel his plans, and subsequently resign, under the threat that if he refused Greece would not receive the next installment of the bailout which was agreed last year. Without this installment Greece will default by early December.
A referendum, however, could have led to a badly needed catharsis. The Greeks could either have voted against the austerity programs, with the inevitable result that the EU would force them to leave the eurozone and return to the drachma. Or they could have voted in favor of retaining the euro as their currency and accepting the austerity programs imposed by Brussels. Either way, the Greeks would have to start dismantling the Greek welfare state.
The crux of the problem is that Greece, like the other Eurozone nations, can no longer sustain its huge welfare system. All the eurozone countries have amassed large government debts. During the past decades, rather than cutting back on welfare, they kept borrowing money to keep the system going. The 2008 Lehman crisis has led to a capital dearth which makes it impossible to borrow sufficient funds to continue living beyond one's means.
The bell is tolling for all Europe's welfare states, but Greece is the first to feel it because it has one of Europe's weakest economies. On its own, Greece would never even have been able to expand its welfare state to its present level. Greece's admission to the European Community (EC, the precursor of the EU) in 1981, and its admission to the eurozone in 2002, made it easier for Athens to borrow on the capital markets. The Greeks used this opportunity to establish a welfare system modeled on that of the northern European countries.
It is ironic that Prime Minister George Papandreou has to pick up the bill. He is the son of former Prime Minister Andreas Papandreou, the architect of the present Greek welfare state whose dismantling he now has to supervise. The sin of the father is being visited upon the son.
Andreas Papandreou, himself the son of a leftist former Greek Prime Minister, had to flee his country in the late 1930s because of Trotskyite sympathies. He went to the United States, where he lived for 20 years and became an American citizen, although he remained a fierce critic of America. After his return to Greece, he founded the socialist PASOK party, ranting about American "imperialism," and blaming capitalism as the cause of Greece's poverty. Since the Soviet Union is not a capitalist country "one cannot label it an imperialist power," Papandreou was quoted as saying in the Winter 1984/85 issue of Foreign Affairs. On the contrary, "the Soviet Union represents a factor that restricts the expansion of capitalism and its imperialistic aims."
As Prime Minister of Greece from 1981 to 1989 and 1993 to 1996, Andreas Papandreou handily used Greece's EC membership to secure monetary aid for Greece. This allowed him to introduce an array of generous welfare programs which bought public support PASOK but which his country could not afford. He vastly expanded the public sector, raised pensions and wages, expanded health coverage, social welfare and social insurance. Greece's welfare system even provided state-subsidized tourism for lower-income groups.
By 1990, the budget deficit reached 15.7% of GDP while public debt spiraled out of control. In following four years, with PASOK in opposition, the deficit declined, but when Andreas Papandreou came back to power in the mid 1990s, it rose again to 10.2% in 1995.
This should have raised concern in Brussels, but, instead of issuing warnings, the EU authorities actually encouraged the Greeks. The fact that the Greeks were introducing a vast welfare system was seen as proof of the fact that it was aligning itself with the rest of Western Europe. Even international credit rating agencies rerated Greece upwards in the 1980s and 1990s. By 1997, Greece had amassed a public debt of over 110% of GDP. In spite of this, the EU allowed it to join the eurozone, without meeting the EU criteria which set the deficit at a maximum of 3% and the debt at a maximum of 60% of GDP.
Andreas Papandreou's economic policy crippled Greece. In the 1960s Greece was among the fastest growing OECD economies; in the 1980s it was ranked last among the EU economies. Despite the fast expansion of the public sector, the unemployment rate increased from 2.2% in the 1971-1980 period to 7.1% in the 1981-1990 period and to 10.6% in 1995.
Greece also saw a decline of per capita GDP. In 1995, Greek GDP per capita was equal to 45.4% of the EU average, compared to 52.8% in 1981. The average annual growth rate of industrial production fell from 6.9% in the 1970s, to 1.0% in the 1980s and became negative in the 1990s.
EU membership did not improve Greece's economic performance; it only made it easier for Greece to borrow money and expand the welfare system and public sector. This resulted in personal incomes growing by 26% in real terms during the course of the 1980s and a rapid increase of imports. Export performance, however, was sluggish. The value of Greece's 1995 exports to the EU equaled only 41.4% of the value of its imports – a figure well below the 55.6% figure of 1987.
It should have been clear to all that Greece was heading for disaster. However, the EU ostriches in Brussels continued to bury their heads in the sand.
Andreas Papandreou died in June 1996. His son, George, born in Saint Paul, Minnesota, in 1951, currently leads PASOK. He is also the leader of the Socialist International, the international organization of social-democrat parties. When the younger Papandreou was elected Greek Prime Minister in October 2009, his supporters chanted "Andreas, you are still alive! You are leading us!"
Andreas Papandreou, however, is dead. And so is his political legacy. Greece currently has a public debt of over 160% of GDP (almost €360 billion), a budget deficit of almost 9%, an unemployment rate of 18%, and an economy that is contracting by 5.5% per year. Its eurozone partners are unable to help it out because they, too, have financial problems and are barely able to keep their welfare systems going.
The son's political duty now is to bury his father's legacy. It is a Greek tragedy in every respect. But what is happening in Greece – the collapse of a country under the weight of its welfare system – will soon occur elsewhere in Europe. Welfare systems built on borrowed money cannot survive: children still have to foot the bill for the foolishness and irresponsibility of parents who live beyond their means.