Part of Foreign Affairs Report: The Future of the Eurozone

The Origins of the Greek Financial Crisis

Letter from Thessaloniki

Before the modern Greek state assumed its present day contours in the aftermath of the first world war, communities in the trading cities of Alexandria, Odessa, Salonika, Smyrna, and Trieste, already had a long history of running their own school systems, hospitals, and orphanages. This was partly a legacy of Ottoman rule. With the exception of political stability, the Ottomans were not in the habit of providing public goods so, when it came to public health and economic development, citizens had to fend for themselves. That system worked. Through local and communal organization, by the mid to late nineteenth century, the Greeks were one of the most prosperous and dynamic groups in Southeast Europe.

Once the Greek state was fully formed, however, a central administrative structure took over communal institutions. Powerful new national party machines displaced the local elites who'd successfully served as administrators. In Greece's second largest city, Salonika, this process took a bit more than a decade. Between 1912, when the city was integrated into the Greek Kingdom, and 1925, Salonika's schools, hospitals, and other institutions were nationalized and its local trustees were replaced by centrally appointed bureaucrats. Likewise, the responsibility for funding these institutions passed to the central government. To grasp how dramatic the change was, imagine that Washington nationalized all colleges and universities in the state of Massachusetts, Harvard included, and then ran them through political appointees.

So, as the Greek state expanded territorially it also expanded its responsibilities, undercutting old traditions of localism and community action. Herein lies the root of the country's current crisis. Long-established, autonomous local elites were displaced in the 1920s, their place taken by a new group of people adept at managing a rent-seeking relationship with the state. The new local leaders joined national parties and then worked to build up party machines by distributing state largesse. Not a single region or city of note mobilized its resources in pursuit of economic success, based on international competitiveness. Instead all major localities channeled central government resources into patronage. The central government, which was dominated by the same parties, was an energetic accomplice.

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