Courtesy Reuters

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.

By the late 1980s, the interaction between local and national elites had already produced a highly dysfunctional system. Appointments to key institutions -- hospitals, museums, universities, and port authorities -- were not meritocratic. To become president of a university, one would need to buy off the student unions, which could deliver the votes needed to win an election. To run a hospital, one would had to have put in the time as a hanger-on of one of Greece's major national parties.

Unconditional European Union funding in the 1980s and early 1990s, and easy international borrowing in the 2000s helped both the left and right finance unsustainable patronage politics. According to Eurostat, the EU's statistical agency, public payroll expenses (salaries and pensions of civil servants) rose in Greece from 38 percent of state revenue in 2000 to 55 percent in 2009. Compounding this trend, local elites became hostile to any coherent national reform effort, precisely to preserve the system that now privileged them. For example, in the mid-2000s a local alliance in Salonica successfully resisted the granting of a concession to a major international port operator, in order to retain management of it themselves.

As long as the Greek central government was solvent, or could borrow massively, the system worked. The effort to join the eurozone in 2001 brought real benefits to the Greek economy, of course. Thanks to EU-mandated reforms, the country improved its public finances and modernized the telecom and banking sectors. Joining the eurozone also accelerated the repatriation of the globally competitive Greek shipping community and provided funding for the expansion of Greek corporations into the Balkans. Once in the eurozone, however, Greek elites were quick to revert to their former ways.

But now that the nation has gone bankrupt, it is impossible to sustain the economy through central government expenditure. This means that the local leadership has no choice but to back nationwide reform efforts that could enhance their localities' capacity for market-generated wealth creation.

The opportunities for them to do so are numerous. Take just two sectors of the Greek economy -- the higher education system and the tourism industry. A reform to abolish the participation of student unions in the election of university authorities and allow the creation of privately funded chairs already passed into law this September. The successful implementation of this reform would start to create a knowledge-based, internationally competitive Greek economy. Now local communities need to take the baton from the Ministry of Education and argue vocally for excellence and transparency in appointments to the higher education institutions they host; to actively manage the relationship between the university and the business community, emphasizing initiatives and R&D that benefits the local economy; and to activate their own networks in the diaspora to fundraise for these institutions.

At the local level, citizens also have every reason to advance reform of the critical tourist industry -- which is riddled with inefficiencies. Those in coastal cities that depend on the cruise ship industry, for example, can push for the lifting of cabotage, a regulation that prohibits cruise ships that are not crewed by Greek seamen from accessing Greek ports. Greeks in cities that host state museums can also promote reforms to facilitate private donations, which would re-introduce, through distinguished architecture and curatorial direction, their cultural legacy to an international audience. Finally, all Greek localities can push the Greek Ministry of Foreign Affairs to accelerate travel visa issuance, especially in such key markets as Turkey and Russia, where Greek consular capacity is well below demand.

The specific reforms are not as important as local stakeholders shifting decisively in favor of market generated wealth creation, as opposed to rent seeking from the state. To do this, they should take a page from their ancestors' books. Local leaders should recognize that if they do not take responsibility for the success and prosperity of their communities, noone else. Local electorates, in turn, should reward those leaders that are willing to act upon this understanding.

For its part, the Greek central government should confer broader jurisdiction on local governments -- from health and education to urban planning. It should also task them with raising the revenue necessary to exercise their new authority. In particular, local government in Greece should assume major tax raising powers, as well as many of the responsibilities that go with them. Athens must be prepared for local failures, too, otherwise it would create a moral hazard that would corrode the solidarity and self-reliance that local communities need to embrace. By decentralizing, the Athens will both revive the nation's distinguished legacy of local autonomy and move the country closer to the European norm in terms of delegation of power and authority.

Finally, key local institutions, and in particular universities and hospitals, should be pushed into the non-profit sector. They could be governed by a board of trustees and be open to donations from private individuals and organizations. The tax regime should accommodate such a governance structure granting deductions for donations. This structure would marshal additional resources and know-how from the Greek diaspora.

A majority of Greeks today cannot see a way out of the pit their country is in. But they need only look to their grandparents to find a way out.

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