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Redefining markets in a democracy

George Papandreou
Leader of PASOK and President of the Socialist International

In the aftermath of the global economic crisis that began in 2008, Greece found itself at the centre of a sovereign debt crisis in Europe. This latest crisis has highlighted systemic flaws that are shaking the fundamentals of the European Union. These developments have had implications for the whole world.

First of all, these developments demonstrate how right we were when we called for decisive action to be taken by the governments of Europe and globally to curb the inordinate power of the financial sector back in 2008.

Although Greece maintains a huge problem of deficit and debt, which our government inherited from the conservative party, we realized from the beginning that our problem was not simply a Greek phenomenon. This was a wider problem about how the markets reacted to rising sovereign debt after the financial meltdown of 2008. Governments in the developed world that had saved the banks from a disaster were now being punished for the debt they had accrued with unsustainably high interest rates.

This was compounded by the fact that the developed world has found itself in a position of relative weakness because of a lack of competitiveness. Therefore growth in many parts of the developed world has been stymied.

Our problem in Greece was further linked to the collective political will in the Eurozone – and whether our collective decisions would be sufficient to calm the markets.

Two years ago, the Panhellenic Socialist Movement (PASOK) achieved a major victory over the conservative New Democracy (ND) party. I assumed the responsibility of forming a government that had to tackle cumulative problems of the previous five and half years of conservative policies.

When I became Prime Minister my first task was to make major changes in governance, transparency, meritocracy, equality and rule of law. These were long overdue reforms. Greece was not a poor country; it was a badly managed one. Waste in the public sector, poor use of resources that reduced our competitiveness, and clientelism that created social inequalities were at the core of our economic problems. Addressing these issues were my priorities.

However, the true state of our fiscal situation was radically different than what we had expected. In 2009, before the elections, the conservative government stated that the Greek deficit was 4%. The European Commission predicted that it may reach 6%. In reality, the deficit was 16% of GDP. At the same time, our debt had almost doubled during the five years of conservative government.

Once we acknowledged the true extent of our fiscal problems, Greece became an easy target for risk-averse markets. We faced a series of coordinated attacks by speculators and rating agencies. We also faced the further challenge: a Eurozone with a common currency but without an accompanying common economic policy. Without the necessary common financial instruments to complete a fiscal union.

In the past, in a different global economic environment, Greece could borrow at very low rates (which allowed the previous government to spend indiscriminately), while today many countries in the Eurozone can only borrow at very high rates – creating a vicious circle that locks them into a downward spiral.

All the above opened up the way for the currency speculation of the past to become a sovereign debt speculation of the present. Speculation in an atmosphere of insecurity has become the dominant mode of thinking even for the healthier, stability driven investors in the markets.

Despite our best efforts and intentions, the situation continued to worsen, not only for Greece but for the whole of the Eurozone. Our debt problem was deepening due to the implications of the global crisis.

To stabilise the rapidly deteriorating economic situation in Greece, we made an agreement with the EU and the IMF to secure necessary funding. The conditions of these loans were to implement an ambitious fiscal consolidation programme that entailed deep sacrifices by the Greek people.

This effort has been painful but largely successful. During the past two years, we achieved the largest deficit reduction ever within the Eurozone. We reduced the deficit from 36,6 billion euro in 2009 to 18,1 billion today.

Our 2012 budget, which will be voted in the coming weeks in the Parliament, reinforces a difficult effort of fiscal adjustment that will reduce a primary deficit of 24 billion euro in 2009 to a primary surplus of 3,2 billion euro in 2012.

Ireland and Portugal are now under a similar program of fiscal discipline.

At the same time, Europe has taken a series of decisions over the past two years which could open the way to create the necessary instruments to fend off market fears and bring fiscal stabilization to a number of countries.

The EU has a complex institutional framework of decision-making. Yet we have been able to take important decisions concerning fiscal cooperation and coordination, which would have been unheard of two years ago.

Even so, the markets are much quicker to react. They pre-empt political decisions and override democratic institutions. Although this is a major question for our democracies today, the fact remains that Europe has been doing too little too late to tackle the crisis.

On October 26, 2011 Greece reached a new agreement with the EU and the IMF. This agreement has been hailed as a major step towards a solution to our ongoing problems. These decisions will lighten the burden of Greece’s privately owned debt by 50%, breathe life into our banking system and guarantee our financing for the next few years. During this period, we will have the opportunity to continue the necessary reforms to make our economy more viable and just.

However, even though these decisions were of utmost importance to Greece’s future, our citizens were frustrated after two years of sacrifices. They felt the heavy burden of painful fiscal measures, but also felt that the burden was distributed unevenly. This is because we had to take measures immediately even before we could establish a more just society.

The sluggishness of European decision-making, as well as the difficulties in implementing major reforms in such short time, have taken their toll. The Greek people have sacrificed much and are still feeling the consequences of a precarious economic environment.

We progressives have long insisted that it is counterproductive to aim to achieve fiscal consolidation without parallel measures that promote growth and address the social dimension of policies. We had predicted that such a path would create a tense social climate.

This volatile climate was compounded by the fact that most of the Greek opposition parties and the Greek media were undermining our reform efforts. In highly populist terms, they were encouraging citizens to react and resist in the most negative and violent way. Undermining our democratic institutions and the success of our program. Those at the forefront of this opposition often belonged to an established elite who did not want reform as they feared for their privileges.

Faced with a resistant political establishment and European leadership that seemed inadequate to deal with the root causes of the crisis, disenchanted citizens started to feel more and more estranged from politics. They felt a deepening gap between what they had voted and hoped for and what was happening.

As a result, our parliamentary majority started to erode, jeopardizing the ratification and implementation of the October 26 European Summit decisions.

I decided to take an initiative that would give power back to the citizens. I decided it was better to trust the people, their critical capacity, their sense of patriotism, their sense of responsibility in order to bypass a politico-economic establishment that wanted failure at all costs. This initiative would also be a clear answer to all those in Europe who doubted our resolve to change Greece for the better.

A referendum would give the people of Greece the chance to decide about their future. To take matters into their own hands. To decide for themselves what was best for the country. This would also have given our policies direct democratic legitimacy, an essential prerequisite to proceed with major reforms and break down the resistance of vested interests.

My proposal created a heated debate in all Greek public spheres. For the first time, politicians, opinion leaders and citizens came face to face with the real challenges, the real dilemma at hand.

While part of the political establishment in Europe also reacted negatively, I was adamant in my position. We could not implement the agreement without a broader national consensus.

The referendum proposal created a new momentum and changed the public debate. For the first time, we saw a window of opportunity for a broader national consensus. For the first time, parties that had vehemently objected to any fiscal or structural changes spoke out in favour of the 26 October agreement.

I used this window of opportunity to invite all political parties to negotiate a national unity government. After intense negotiations, we formed an interim government tasked with implementing the 26 October decisions. The new transitional government under Lucas Papademos recently received a resounding confidence vote in the Greek Parliament.

As the global crisis continues to spiral towards new depths, it is more important than ever that we address the challenges that lie ahead in Europe, and globally, about how we want our economies and our democracies to function in order to serve people’s interests.

It is even more urgent for us progressives to propose new tools to redesign financial institutions and guarantee good democratic governance. Policies that guarantee greater transparency and equity, redefine the role of markets, speculation and derivatives, rating agencies and tax havens. We shall continue to make our voice heard by promoting policies for social and environmental justice, and by securing the necessary development funds for the most vulnerable regions of the world.


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