The depression ravaging Greece is always framed as an issue of macroeconomics: fiscal policy was tightened too quickly; government debt is too high; the tools of currency devaluation and monetary expansion are not available inside the eurozone. But this is overly simplistic; local politics and microeconomic factors are just as important in explaining the depth of the crisis.
Greece has fared much worse than other eurozone countries that faced a sudden drop in foreign financing, and then enacted similar austerity programs. It lost 26 percent of its G.D.P. from the pre-crisis peak, while Portugal, Ireland and Spain lost no more than 7 percent each. Much of this difference is due to foreign trade.
In all four countries, when capital from abroad stopped flowing in, increasing exports became an urgent goal. The other three countries achieved this quickly. Greece did not. If it had boosted exports, its recession would have been much shallower; by one estimate, a 25 percent increase in exports could have limited the drop of gross domestic product to just 3 percent.
Why did Greece fail to adjust like other southern European countries? Wages have dropped far more in Greece since 2010 than in any other country, and the cost of labor is no longer a barrier to exports. Businesses have not taken advantage of this for three reasons: regulations, fear and size.
Regulatory barriers to starting or expanding a business in Greece used to be the worst in Europe, and they are still formidable. Since 2010 there has been some reform, demanded by the “troika” (the European Commission, European Central Bank, and the International Monetary Fund), but progress is slow. Hundreds of thousands of pages of small print need to be canceled, thousands of officials must lose their authority to block business decisions, and protected professions must be opened to competition from new business models. Politicians have not expended much political capital to push through these changes.
Fear also held back the economy. In other countries most parties reached a broad consensus over structural change. In Greece no political party had the courage to take ownership of any reforms, any cuts in expenditure or any new taxes, even though it was very clear that some such combination was inevitable. When in government, politicians blamed all measures on the troika; when in opposition, they declared all measures unnecessary and wrong and branded the government as traitors.
This polarization brought violence and threats. Tourism was hit for three years by pictures of arson and beatings in Athens, as well as by port blockades and taxi strikes. Foreign investors were put off by threats from the surging Syriza opposition that they would reverse all sales of state assets, and would restore a centralized wage system that enforces pay raises every year, regardless of productivity. Deposits flowed out of banks due to fear of a “Grexit” or on rumors of nationalization, leaving no funds to lend to export-oriented businesses.
Finally, the size of companies in Greece is a fundamental structural issue. Industrial capitalism was never strong in Greece, which is a society of small owners and of microbusinesses. Land and homes belong mostly to their occupants, free of mortgage, more so than in any Western country. Self-employment and companies of fewer than 10 employees are much more prevalent than in any other European nation. Only 5 percent of employment in the whole economy occurs in companies with more than 250 employees. Even the main export industry, tourism, consists mostly of medium and small businesses.
Over many decades, institutional factors have been blocking business growth and consolidation of industries. These range from uneven enforcement of tax and labor regulations in favor of the smallest, to a bankruptcy regime in which the state has first claim on all assets of insolvent companies.
Small businesses had trouble adapting to the shock of reduced domestic demand and lower labor costs. Companies can only adapt quickly if they have managers with some experience with exports, and factories in good shape where they can hire more workers. Small companies had neither. Only a handful of big and healthy firms grasped the opportunity.
Unfortunately, Greece’s new government does not seem to offer a solution to these structural problems. Indeed, it is unlikely that the radical left party, Syriza, will help export-led growth. In opposition, Syriza denounced all reforms that could boost competitiveness. Now, in government, they say they will focus on tax collection from the rich, on better social services for the poor, and on taking on the “oligarchs,” who dominate the media and public works. These are laudable aims, but they will do little to help the country’s trade.
Contrary to populist-received wisdom, Greek “oligarchs” have a very limited grip on the economy. They do not control mineral resources as in Russia; they do not move huge amounts of capital as on Wall Street; there are no large sweatshops as in China; they do not own great tracts of farmland as in earlier Latin America. They held some sway over the banks, but this has diminished greatly in the bailout. Oligarchs are not the key obstacle to growth.
What Greece needs is bigger businesses, more foreign investment, more experiments with new business models, and more innovation coming out of its universities. Syriza appears to be against all of that.
If so, it matters little what they manage to negotiate on debt and fiscal deficits. Unless Greece can export more, the country will fail to grow in the anti-austerity phase of this crisis, just as it failed under austerity.
Aristos Doxiadis is an economist and a venture capitalist.