The Myth and the Tragedy: The Greek Debt Crisis

A very interesting PhD Research Proposal by Jérôme E. Roos:

My research proposal for a PhD in Social and Political Science at the European University Institute, applying the ideas of Marx, Gramsci, Minsky and Keynes to the Greek debt crisis.

 

Working title

The Myth and the Tragedy: The Greek Debt Crisis in Comparative-Historical Perspective

Introduction

The Greek debt crisis of 2010 marked a watershed in both the fiscal and ideational development of the present capitalist crisis. As the EU and IMF reluctantly came to the rescue of the Greek government, the dominant neo-Keynesian and regulatory liberal narrative that had established itself so successfully in the wake of the financial meltdown of 2008 was rapidly swept aside by a renascent austerity narrative. Yet as any other idea, the idea of austerity was socially constructed. As such, it appears to hinge at least in part on a specific interpretation of the Greek debt crisis that squarely puts the blame on the Greeks themselves. This ‘narrative of blame’, however, may be obscuring some of the more systemic causes of the crisis.

As a result, the Greek case is not only the fundamental starting point of a broader inquiry into ideational change and the deep causes of the European sovereign debt crisis, but also the latest empirical case in a series of financial crises that have rocked emerging and peripheral markets since the late 1970s. The past three decades have witnessed the greatest frequency and severity of banking and currency crises in history, begging the question if more systemic or structural factors might be at play.

An inquiry into the deep causes of the Greek debt crisis and the way in which European leaders have sought to address it would make a significant contribution to the field of International Political Economy, not only by elucidating the importance of ideational change in determining policy responses to financial crisis, but also by broadening the empirical basis for a ‘social theory’ of global finance, while simultaneously helping to provide much-needed evidence for a more systemic or structural reading of the deep causes of financial crisis.

Research Questions

To this end, I have formulated three preliminary research questions:

1. How did the Greek crisis influence the development of the austerity narrative in Europe, and how did this narrative in turn influence the EU decision to opt for a classical IMF-style bailout?
2. Could the focus of this austerity narrative on the faults of ‘profligate’ Greeks have obscured some of the more systemic causes related to the crisis-prone nature of global capital markets? If so, what would a more structural reading look like and what is the empirical evidence for it?
3. If a more structural reading has any explanatory power, then how does the Greek debt crisis relate and compare to previous financial crises in emerging markets (e.g., Mexico, Argentina and Thailand), as well as the fiscal crises presently underway in other ‘peripheral’ markets (e.g., Ireland, Portugal, Spain and Italy?)

Literature Review

The three aforementioned questions each draw on their own particular literatures. The first engages with the literature on the social construction of crisis, and as such builds on the constructivist tradition in IPE. Constructivism has been making significant inroads into the field, with key publications by Ruggie (1998) and Finnemore and Sikkink (1998) signalling the increasing acceptation of constructivist ideas in mainstream IPE scholarship.

In recent years, constructivist scholars have begun to venture into the study of global finance and financial crisis (e.g., Abdelal, Blyth and Parsons 2010; Chwieroth 2010a, 2010b; Blyth 2008, 2002; Abdelal 2007; Blyth and Widmaier 2006; Hay 2002; Schmidt 2002). Andrew Gamble summarized the constructivist view on crisis when he observed that “a crisis is not a natural event, but a social event, and therefore is always socially constructed and highly political,” (Gamble 2009:38).

Such a ‘social theory’ approach to financial crisis refutes the established materialist dogma expounded by Gourevitch (1986) and others. The materialist approach to crisis runs into the well-known problem that it ignores “intersubjective understandings of agents’ interpretations of material incentives,” and that it “obscures the full scope of agency, … suggesting that agents rather automatically and unproblematically respond to materialist shifts in easily predictable ways,” (Widmaier, Blyth and Seabrooke 2007:748).

Clearly, none of the neoliberal economists and policymakers really predicted the Greek debt crisis, as was evidenced by the fact that it did not feature as an important issue during the 2010 World Economic Forum. Even fewer people would have predicted the radical comeback of neoliberal ideas in the form of the austerity narrative. This makes a constructivist reading of the Greek case not only a necessary endeavor for the field of IPE, but also a fruitful starting point for a more critical reading of the Greek debt crisis itself.

The second question introduces the possibility for such a critical reading by tackling the neoliberal ‘efficient-market hypothesis’ head on. Could it be true that, rather than merely being the result of profligacy and an overly generous welfare state, the Greek debt crisis was actually caused by the unfettered expansion of credit in the wake of Greece’s integration into the Eurozone and global financial markets? This is the point of view taken by a number of observers in the Keynesian (e.g., Bohle 2010; Stiglitz 2010a; Soros 2010) and Marxian (e.g., Žižek 2010; Bello 2010) traditions, who observe that the austerity imposed on the Greek people largely serves the interests of the French and German banks that so avidly bought up Greek bonds in the years leading up the crisis.

Exploring the more systemic causes of the crisis and suggesting a more structural reading, this second section will thus have to provide a thorough overview of both Marxian and (post-)Keynesian theories of crisis. David Harvey (2010) and Andrew Gamble (2009) have both provided important works emphasizing the relevance of Marx’s theory of capital flow (Marx 1859) to the study of the present crisis. Important contributions by Ingham (2008) and Kindleberger and Aliber (2005) have emphasized the relevance of Keynes’s (1936), Schumpeter’s (1942) and Minsky’s (1974) theories of credit expansion in crisis formation, while Skidelsky (2009) and Kalecski (1974) have helped to disseminate important post-Keynesian themes on the dynamics of capitalist crisis.

Clearly, vast differences exist between these various thinkers and theories of crisis, but the one thing they all have in common is the recognition that “periodic deep crisis is fundamental to capitalism,” (Marquand 2009). Taking this as our point of departure, we may begin to investigate what the deep drivers of crisis are in the Marxian and (post-)Keynesian traditions, and if either of the two has any explanatory power for our Greek case study. The long-standing debate between Keynesians and Marxists, recently addressed by Skidelsky (2010), will have to be further expanded upon here. In addition, this section will have to deal with the structural role played by the financial sector (most notably Goldman Sachs) in embezzling and expanding Greece’s debt levels to unsustainable levels.

Finally, the third section places the findings of the previous two sections in a comparative-historical perspective. If a more systemic or structural reading of the Greek crisis has any explanatory power, then there must be similarities between Greece and other emerging and peripheral markets that have been struck by crisis in the past decades. Here, there is plentiful literature on the Asian crisis of 1997-’98 and the Argentine crisis of 1999-2002 that may elucidate a number of common themes, both in terms of the deep drivers of crisis, as well as on the ideological and discursive responses of governments, investors and international financial institutions.

Robert Wade, under whom I studied at the LSE, has written extensively on the Asian crisis (e.g., 2000; 1998), detailing the failure of neoliberal economists to make a clear distinction between the proximate causes (e.g., corruption, bad governance) and the ultimate causes of the Asian crisis. Weisbrot and Montecino (2010) have written in a very similar fashion about Argentina, while Krugman (2008), Desai (2003) and Stiglitz (2002) have provided sweeping accounts of the credit-debt dynamic at work in the various crises that affected the developing world in the late 1990s and early 2000s. A new volume edited by Underhill et al. (2010) also provides a wealth of information and analysis on the multiple financial crises of the past three decades.

Further comparisons that could be of interest here are the crises presently underway in other peripheral markets in Europe, most importantly Ireland, Portugal, Spain and Italy, but also Latvia and Iceland (e.g., Wade and Siggurgeirsdottir 2010). What is needed is thus a global perspective of the first-world debt crisis that can account for Greece’s unexpected collapse amidst the vicissitudes of global capital markets (Wade 2008). The coming year is likely to yield significant new literature for this last set of comparisons.

Data, Methodology and Hypotheses

Each of the three questions addressed in this research project will depend on its own particular data, methodology and hypotheses. The first question will be addressed through a discourse analysis of the period spanning from the formation of the Papandreou government in October 2009 and the announcement of the actual Greek debt figures in November until the agreement on the EU-IMF bailout in May 2010. Focusing on the role of the international media, investors, policymakers, EU officials, the ECB and the IMF, I will analyze how the ‘blame narrative’ and the related ideas of profligacy and austerity impacted the way in which the EU eventually chose to address the crisis.

I hypothesize that the European media, in particular the popular press in Germany, played a crucial role in spreading the idea of Greek laziness, corruption and extravagance. This in turn pressured the German government to delay action until after the local elections. When the urgency of the situation finally dawned on Merkel’s government, the rescue package was made conditional upon punitive austerity measures in order to legitimate the Greek bailout domestically and prevent future ‘moral hazard’, while distracting attention away from the role played by German and French banks in buying up Greek debt and thereby contributing to the build-up of the country’s unsustainable debt levels.

Addressing the second question will require an extensive literature review of more systemic theories of financial crisis. Recently, the work of Marx, Schumpeter and Minsky on systemic risk has regained its relevance in academic circles. While their ideologies were very different, all three held that in order to grasp the true roots of crisis, we will need to understand both its proximate causes – which may be any seemingly insignificant shock – as well as its ultimate cause, which is always the expansion of credit (Kindleberger and Aliber 2005), or what David Harvey has called the ‘capital surplus absorption problem’ (Harvey 2010).

I therefore hypothesize that a more historicist empirical investigation focusing on the rapid expansion of credit following Greece’s integration into the Eurozone and into a highly financialized global economy has significant explanatory power in unearthing the ultimate, more systemic causes of the Greek debt crisis. Expanding on this, we may even hypothesize that the problem of credit expansion or capital surplus absorption was triggered by a Marxian/Keynesian crisis of underconsumption and overproduction in the surplus countries (i.e., Germany and China), giving rise to the Chinese and German ‘savings gluts’ and the global and European imbalances that are at the heart of the fragility of the financial system.

The third section, finally, builds on a comparative-historical analysis of the Greek case. The point here is to critically address the contention that the Greek crisis was an isolated event divorced from the wider global financial crisis. Analyzing the extent to which the Greek debt crisis can be compared to previous crises in emerging economies and to ongoing crises in other ‘peripheral’ markets, this section hopes to elucidate the variety of ways in which the structural dynamics of global capital markets play out in specific geographic, economic, cultural and institutional contexts. Specific cases for the comparison are to be selected in the initial stages of the project, as their respective relevance still has to be determined through preliminary research.

Here, I hypothesize that the Greek crisis was not an isolated occurrence but is in fact a recurrence of an historical pattern whose roots go back to the emergence of capitalism. This pattern has intensified over the past three decades following capital account liberalization, financial deregulation, and the consequent financialization of the world economy (Underhill et al. 2010; Epstein 2006). In this respect, the Greek crisis differs from other crises only in its proximate causes; the ultimate cause underlying all of them is the unfettered expansion of credit (free capital flows) due to artificially low interest rates and financial innovation (e.g., Goldman’s cross-currency swaps). In other words, “details proliferate, structure abides,” (Kindleberger & Aliber 2005).

In summary, throughout these three sections, I will combine post-structural discourse analysis, drawing extensively on the critical theories of Foucault (1969), the Frankfurt School (e.g., Habermas 1985) and the constructivist tradition in IPE, with comparative-historical analysis (Mahoney and Rueschemeyer 2003) rooted in Marxian and post-Keynesian political economy. In the field of International Political Economy, this integrative approach most closely resembles that of the neo-Gramscian school of thought (e.g., Cox 1983; Gill 2000; Overbeek 2000, under whom I studied at Utrecht), which seeks to integrate a structural analysis of the material ‘base’ of global capitalism with a post-structural or constructivist investigation into the ideational forces and narratives that underpin the hegemonic ideological ‘superstructure’ of neoliberal globalization and European economic integration.

A number of potential data sources may already be identified:

1. The discourse analysis will rely mostly on primary sources, in the form of media archives, press releases, government reports, and formal statements by relevant institutions, like the Commission, ECB and IMF (most sources will be available on-line);
2. The literature review of Marxian and post-Keynsian systemic risk theory will build and expand on the aforementioned publications;
3. The comparative-historical analysis will mostly rely on secondary sources, in the form of publications by experts on the financial crises ultimately chosen to be addressed in the analysis (examples included in the bibliography).

Proposed Analyses

This project will be qualitative in nature and will draw on two basic paradigms of qualitative research techniques, namely the interpretative/constructivist paradigm and the critical theory paradigm (Guba and Lincoln 2005). While following Horkheimer and Adorno (1947) in rejecting the positivist notion of the disinterested and purely objective social scientist, both paradigms still acknowledge that there are a number of useful research techniques that can be used in order to meet Guba and Lincoln’s four criteria for establishing trustworthiness:

1. Credibility: peer debriefing by primary and secondary supervisor as well as other disinterested experts (serves the purpose of uncovering any taken-for-granted biases, perspectives and assumptions, testing emergent hypotheses and finding out if they are plausible to the disinterested observer, as well as providing an opportunity for catharsis);
2. Transferability: thick description (describing the phenomena under research in sufficient detail to achieve external validity, while evaluating the extent to which the conclusions are applicable to other historical, geographical, political, economic and cultural settings);
3. Dependability: external audit (requesting a non-affiliated researcher to examine the process and product of the research project, with the goal of evaluating the accuracy of the data and the validity of the findings, interpretations and conclusions);
4. Confirmability: reflexivity (attending systematically to the context of knowledge construction by developing a reflexive research journal recording the logistics of the study and motivations for methodological decisions with the goal of reporting any potential biases, preconceptions, beliefs, values, assumptions and positions in the final manuscript).

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Source: http://roarmag.org/2011/04/myth-tragedy-greek-debt-crisis-marx-keynes/