Greece, Part II: A different economic model

By Mike Andrew

Last month in Part I of this article, we saw that the economic “reforms” forced on Greece by the EU harmed the country’s working families and caused its economy to contract.

In this article, we’ll look at an alternative economic model actually implemented in Greece by the socialist PASOK party in the 1980s.

Since modern Greece was recognized as an independent country in 1832, it has had to contend with very weak growth in its domestic economy.

This in turn led to twin economic problems.

First, there were more Greek workers than the job market could accommodate, and some way had to be found to cope with the large number of unemployed workers.

Second, the country was particularly vulnerable to global economic trends, to penetration by foreign capital, and to political control by richer countries.

The military dictatorship that ruled Greece from 1967 to 1974 was the last gasp of the old system of political intervention by ambitious army officers.

It was also the first gasp of a new neo-liberal approach to economic growth.

The dictatorship promoted foreign investments in Greece, especially in the tourism industry, borrowed heavily from foreign banks to finance public-private construction projects, and cracked down brutally on Greece’s labor unions.

When Andreas Papandreou – the father of the present prime minister – became prime minister in 1981, he adopted measures to stimulate internal markets.

A socialist and an economist of international standing, one-time chair of the Economics Department at UC Berkeley, Andreas scorned the supply-side economics promoted by Ronald Reagan and Margaret Thatcher.

Instead, he believed that demand for Greek products, and therefore Greek labor, inside Greece itself would be the driver for economic growth and national prosperity.

Andreas raised wages for public employees and also raised pensions for retirees, and he introduced COLAs for both wage-earners and pensioners, giving Greeks more money to spend.

By lowering the retirement age, he also made room for younger workers to enter the job market.

And he substantially increased spending in the public sector with a variety of construction projects, including restoration of the Parthenon and other historical sites.

Andreas financed this economic stimulus program not mainly by borrowing and not mainly by raising taxes, although he did both, but by increasing the money supply – “printing more money” as conservative economists put it.

This policy was inflationary, and required a devaluation of the drachma, Greece’s national currency at the time, in October 1985, but it produced a period of economic prosperity unparalleled in modern Greek history.

Inflation harms banks, which lend money at fixed interest rates, and it harms people with substantial cash assets in the bank, who see the value of their deposits erode.

On the other hand, inflation doesn’t necessarily harm wage-earners or pensioners who live pay check to pay check, as long as they get COLAs that help keep income ahead of the rate of inflation.

Greeks saw their real incomes, adjusted for inflation, rise by 26% during Andreas’s first two terms as prime minister in 1981-1989.

To give an idea how significant this is, let’s look at US incomes. The median household income in the US in 2009 was $50,221. A 26% increase would bring that household’s income to $62,776.25.

Would that extra $12,555.25 make a difference to a working family? You bet it would!

Andreas’s economic policies were not completely successful, however.

Unemployment went up during his administration, in part because increased social benefits and general economic prosperity made unemployed Greeks want to stay at home rather than emigrate.

Andreas also believed that his go-it-alone foreign policy – which included withdrawing Greek troops from NATO command – required continued high military spending, which led to borrowing to finance weapons purchases, and ultimately increased indebtedness to US and European banks.

The devaluation of the drachma stimulated growth in the tourist industry, which meant that Greece continued to be vulnerable to global economic trends.

Nevertheless, when Andreas Papandreou retired in 1996 and died soon after, Greece was in the best economic position it had ever been in its modern history.