‘The Greek saga: competing explanations of the Greek crisis – A Marxist alternative’ – The paper

This is the paper presented at the 1st World Keynes Conference, organized by the Izmir University of Economics (http://ekolider.ieu.edu.tr/keynes/)


1st World Keynes Conference

‘Attacking the Citadel: Making Economics Fit for Purpose’

Izmir University of Economics, Izmir/Turkey

26-29 June 2013



The Greek saga: competing explanations of the Greek crisis – A Marxist alternative[*]


Stavros D. Mavroudeas


Dept. of Economics

University of Macedonia

e-mail: smavro@uom.gr


Dimitris Paitaridis

Dept. of Public Administration

Panteion University

e-mail: paitird@yahoo.com

Preliminary Draft



This paper reviews the alternative explanations offered to explain the Greek crisis and checks there analytical and empirical validity. The first part focuses on the mainstream explanations. It distinguishes three main versions. The first, stemming mainly from the dominant EU circles, considers the Greek crisis as a historical accident; a case of policy-driven economic imprudence: it is a Greek ‘disease’ which contaminates – through contagion mechanisms – the rest of the EMU. Hence, it is not geared to any structural contradictions of the European integration project. The second version, having more Anglo-Saxon origins, recognizes certain structural causes of this crisis; namely the Eurozone being a non-optimal currency area. It argues that EMU’s fundamental flaws cannot be rectified and its collapse is on the table. The third version is a ‘middle-of-the-road’ blend: while the Greek crisis has national origins it abated existing flaws of the EMU. However, these flaws can be rectified. All these versions are criticized for failing to account for the economic crisis of 2007-8 and its effects on the whole European Union edifice. The second part reviews certain radical explanations offered and particularly those around the ‘financialization thesis’. These explanations are criticized for mimicking the mainstream approaches; particularly regarding the 2007-8 economic crisis. They are also criticized for failing to explain satisfactorily the Greek crisis in both analytical and empirical terms. The last part offers an alternative Marxist explanation of the Greek crisis. This explanation stresses two main aspects. First, it is argued that 2007-8 economic crisis is a crisis a-la-Marx (i.e. stemming from the tendency of the profit rate to fall) and not a primarily financial crisis and this represents the ‘internal’ cause of the Greek crisis. Second, it is shown that – apart from the ‘internal’ cause – there are also ‘external’ causes. These come from the relations of imperialist exploitation that exist within the EU and which relegate a host of countries to the dismal position of the euro-periphery.


I. Introduction

Today the Greek economy is in the spotlights of international attention as one (if not the major) epicenter of Eurozone’s crisis. It is considered one of the main (if not the main) sovereign debt crisis threatening the foundations of the ambitious european integration project as expressed by the European Union (EU) and particularly its European Monetary Union (EMU). The Greek economy is considered to suffer from the ‘twin deficit’ disease, i.e. to have an exorbitant fiscal deficit that ultimately led to an unsustainable foreign debt (expressed in a worsening current account deficit). The fiscal deficit is attributed to the profligate nature of the public sector. This was covered through external borrowing worsened the current account. In addition to that, a worsening competitiveness is diagnosed and attributed mainly to labor market rigidities and institutional unfriendliness to entrepreneurship. This worsened further the current account.

The whole affair began in the end of 2009. Previously, Greece had for quite lengthy periods high fiscal deficits and public debt but was able to finance them via either internal or/and external borrowing without serious problems. Greece’s accession to the EMU placed fiscal deficit and public debt under the constraints of the Maastricht treaty. However, these were violated not only by Greece but by almost every other EMU country since these constraints proved to be rather unsustainable. The Greek crisis erupted when the newly-elected PASOK government revised upwardly the estimates of the Greek fiscal deficit amid internal and external talks for ‘Greek statistics’ (i.e. manipulation of statistics by successive Greek governments)[2]. This ignited a crisis of confidence in international markets concerning Greece’s ability to meet its debt obligations which resulted in the widening of bond yield spreads (particularly the one related to the German bund) and the increase of the cost of risk insurance on credit default swaps (again compared particularly to that of Germany). This led, in April 2010, to the downgrading of Greek government debt to junk bond status by the international credit rating agencies[3] which signified that international private capital markets practically ceased to fund Greece’s sovereign debt. The Greek government requested EU assistance which took the form of two assistance programs (Economic Adjustment Programs) encapsulated in respective Memoranda of Understanding (MOU) signed between the Greek government and the so-called troika (i.e. EU, ECB and IMF since the latter, after much deliberation, took part in the programs). The second program was required because of the obvious failure of the first, despite its numerous revisions. However, the same fate seems to apply to the second program as well.

The first Greek MOU -signed in March 2010- entailed a €110 billion bailout loan for Greece given by the troika. It was tied to a Memorandum (MOU) dictating widespread austerity and privatization measures to restore fiscal balance. The loan (80 bn. € by the EU and 30 bn. € by the IMF) would be advanced during a 3-year period with a 5% interest rate. It aimed at cutting the fiscal deficit from 13.6 % of the GDP (2009) to below 3% by 2014. It envisaged a 4 or 5 year program during the first two years of which there would be a cumulative contraction of the GDP by 6.6% which would be recovered, to a great extent, during the next three years by a cumulative 5.3% growth.

Table 1. First Greek MOU’s projections







Real GDP growth (Percent change over the previous period)







General government balance (percent of GDP)







General government gross debt (percent of GDP)







Source: EC (2010, pp.12 – 13)

Moreover, the whole program was strongly frontloaded (EC (2010), p.42) aiming at a speedy return to private markets for long-term funding in early 2012. Although the program’s aims mentioned apart from fiscal consolidation the improvement of competitiveness as well, most of its measures concerned the public sector leaving the private sector mainly unaffected, at least directly (see EC (2010) table 1, p.51). The first MOU underwent several reviews (five in total) and respective recalibrations and changes both in required measures and aims. However, very soon it was obvious that the program was not working and needed radical overhauling. The main reason for its failure was the deeper than expected recession caused by the program. The inherently pro-cyclical character of the IMF programs was augmented by its frontload character (at the request of the EU), the lack of ameliorating mechanisms (e.g. currency devaluation) and the deterioration of the world economy (‘double dip’). The contraction of the GDP (as shown in Table 2) was 21.5% for the period 2009-12 and 8% (instead of the projected 6%) for the period 2009-10. This derailed the fiscal balance and the gross debt ratios. Consequently, it became obvious that (a) fiscal consolidation was not achievable at least within the scheduled time horizon and (b) in order to avoid default the Greek economy required further financial assistance.

Table 2. Actual GDP growth rates





Real GDP growth (Percent change over the previous period)





Source: EUROSTAT http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=tec00115

Thus, in February 2012, a second Economic Adjustment Program was initiated and a respective MOU signed between the same covenanters. This second bailout package worth €130 billion was accompanied by another harsh austerity program and a voluntary debt restructuring agreement with the private holders of Greek government bonds (banks, insurers and investment funds) called Private Sector Initiative (PSI). The PSI organized a 53.5% nominal write-off voluntary and a bond swap with short-term EFSF notes and new Greek bonds with lower interest rates and longer maturity (their initial maturity was prolonged to 11-30 years). This is the biggest debt restructuring ever done, affecting 206 bn € of Greek government bonds and leading to a 107 bn € write-off. This made again looking feasible the target of 120% outlined in the first MOU. However, the net debt reduction was only 16 bn € since the write-off was supplemented with the new loan. A new feature of the second MOU was its emphasis not only on fiscal consolidation (as in the first versions of the first MOU) but also on wider changes in the Greek economy in order to improve competitiveness. Thus, the private sector was also affected by a series of measures. This had only shyly been done by the first MOU. With the second MOU not only fiscal consolidation but also increased competitiveness became the standards of the adjustment program. On the other hand, building upon the measures dictated by the first MOU and its reviews, the new austerity package deepened even further the recession of the Greek economy leading to a dismal -6.4% for 2012 amid growing social and political unrest. The new pro-MOU government difficultly elected in June 2012 asked for a 2-year prolongation of the adjustment program (which would require an additional third bailout worth of 32.6 bn. €) which was denied by the troika. Thus, the new government legislated a new 18.8 bn. € austerity program including a vicious labor market deregulation. In return, the EU lowered interest rates, prolonged debt maturities and provided 10 bn. € for a debt-buy-back program.

However, doubts continue to linger about the feasibility of the adjustment programs. Growth rates continue to trail dismally behind their projections and this derails both the public debt to GDP and the fiscal deficit to GDP ratios. Additionally, public revenues from taxes and privatisations also continue to disappoint. Tax revenue is hit hard not only from tax evasion but also by the recession. Privatisations do not appear promising in a deteriorating national and international economic outlook. Therefore, the aim of a 120% public debt to GDP by 2020 and a speedy return to finance through private markets seems unachievable.

This paper reviews the various competing explanations of the Greek crisis. It categorizes them in two main categories (mainstream and radical) and then proposes an alternative Marxist explanation.

The mainstream explanations, which derive from either neo-classical or neo-Keynesian economics, are divided in three perspectives:

(a)   The first one considers the Greek crisis as a ‘Greek disease’ (i.e. caused by special policy errors and structural deficiencies). Therefore, it emphasizes mainly policy errors and recognizes structural deficiencies only as a consequence of these nationally-specific policy errors. This perspective is usually conferred by European pundits coming from the dominant EU circles.

(b)  The second perspective, usually stemming from Anglo-Saxon commentators, argues that whatever national ‘disease’ was aggravated by EMU’s structural deficiencies. That is, EMU is characterized as a non-Optimal Currency Area (OCA) which is prone to asymmetric shocks that exacerbate national ‘diseases’. Thus, this second perspective emphasizes the European structural dimension. It argues that EMU’s fundamental flaws cannot be rectified and its collapse is on the table.

(c)   The third version is a ‘middle-of-the-road’ blend: policy-driven (national disease) cum EMU’s rectifiable structural flaws. It is argued that while the Greek crisis has national origins it abated existing flaws of the EMU. However, these flaws can be rectified.

All these versions are criticized for either attributing the problem to policy errors or having a weak structural explanation. The first perspective, faithful to the typical neoclassical approach to economic crises, considers the Greek case a national specificity created by bad policies. The second perspective recognizes a rather weak structural cause. It concerns mainly the sphere of circulation (i.e. how the common currency is related to diverse national economies) and has not much to do with the sphere of production per se. Concomitantly, Greek and the Eurozone crises have to do mainly with the architecture of the European monetary system. The third perspective also attributes the structural problems to the sphere of circulation (with the additional argument that, contrary to the second perspective, these problems can be surpassed) and neglects the sphere of production. Thus, all three mainstream perspectives fail to appreciate the fundamental structural dimensions of the problem at hand. According to them the Greek crisis, the Eurozone sovereign debt crisis and moreover the 2007-8 global crisis have nothing to do with the sphere of production. The 2007-8 global crisis is considered solely a financial one, having nothing to do with real accumulation. A more robust account should refer to the deeper structural problems that arise from the sphere of production.

The category of the radical explanations is examined by focusing mainly on the more popular ‘financialization’ thesis; i.e. the argument that modern capitalism is radically different from classical capitalism since money capital has not only broken loose from productive capital but it is actually dominating the latter. The other radical stream, underconsumptionism (which is usually blended with the ‘financialization’ thesis) is neither particularly popular nor applicable regarding the Greek crisis. The ‘financialization’ perspective emphasizes the structural component but only regarding the sphere of circulation which is, implicitly or explicitly, assumed to dominate the sphere of production. Two versions of the ‘financialization’ argument are discerned regarding the Greek crisis:

(a)   The first version places ‘financialization’ in the context of the North – South divide. It attributes the imbalances that caused the Greek crisis predominantly to this divide as it is articulated in the EMU.

(b)    The second downplays the significance of the North – South divide as an erroneous dependency argument. Instead, it attributes the Greek crisis to mainly national elements and less to EU’s or EMU’s structure.

Both perspectives are being criticized for analytical and empirical deficiencies. More generally, they are too criticized for having a weak structural emphasis by not considering the problems in the sphere of production.

Finally, a Marxist explanation of the Greek crisis is proposed. This perspective offers a strong structural explanation by attributing the fundamental causes of the Greek crisis to problems grounded in the sphere of production. More specifically, it emphasises two structural components. First, it is argued that 2007-8 economic crisis is a crisis a-la-Marx (i.e. stemming from the tendency of the profit rate to fall – TRPF) and not a primarily financial crisis and this represents the ‘internal’ cause of the Greek crisis. Second, it is shown that – apart from the ‘internal’ cause – there are also ‘external’ causes. These come from the relations of imperialist exploitation (i.e. unequal exchange) that exist within the EU and which divide it between North (euro-core) and South (euro-periphery) economies. Greece obviously belongs to the second group.

The paper is structured as follows. The next part surveys the mainstream explanations. The third part analyses the radical explanations. The fourth part presents the Marxist explanation. Finally the last part concludes.


II. Mainstream explanations

As mainstream explanations of the Greek crisis are categorised those inspired from the neoclassical and/or neo-Keynesian perspectives[4]. Unsurprisingly, these explanations are offered not only from established academic voices but also from institutional centers of the politico-economic establishments both in Europe and elsewhere. As it has already been argued in the introduction, these mainstream explanations of the Greek crisis fall into three distinct perspectives.


II.1 A primarily Greek ‘disease’

The first version has now become a bit arcane. It was expressed vociferously during the beginning of the Greek crisis and before the eruption of the Eurozone crisis. In its initial version it centered mainly upon the public sector as this basically came under attack with the first MOU. Subsequently, after the first MOU’s reviews and as the private sector came also under attack, it was expanded to the whole Greek economy. In a nutshell, it identified the Greek ‘disease’ with two major deficiencies of the Greek economy: (a) large and persistent fiscal deficits financed through borrowing (which created large external debts) and (b) a falling competitivess. It argued that these deficiencies were caused by particular Greek national characteristics (special policy errors and structural deficiencies), i.e. it is a Greek ‘disease’. Therefore, it emphasizes mainly policy errors and recognizes structural deficiencies only as a consequence of these nationally-specific policy errors. Again unsurprisingly, this version was expressed predominantly by the EU, the ECB, commentators and think-tanks of the euro-core countries but also by the Greek governments that signed and support the troika MOUs. Of course it was echoed and popularized by Greek and international media in order to justify and legitimize the first MOU.

The gist of this version is that Greece is a special type of economy (and country) which is prone to fiscal profligacy. It is argued that it is characterized by large and persistent fiscal deficits and a falling competitiveness, characteristic of the ‘lazy’ European South as opposed to the prudent European North. More specifically, the mainstream mantra maintains that the Greek economy is characterized by low productivity, high wages and a big public sector. High wages are the product of the big public sector which is clientelist (thus voters are bought through provision of employment and wages). In addition, the public sector has low productivity and a falling ability to collect taxes (due to clientelism fomenting tax evasion). Consequently, fiscal deficits are accumulated. These are financed through loans resulting in a widening external debt (expressed in a deteriorating current account). Cheap borrowing was possible because since the entrance to EMU Greece benefited from low interest rates. In addition, Greece exploited EU’s benevolence by forfeiting statistical data and thus violated the provisions of the Maastricht Treaty (that founded the euro). With the advent of the 2007-8 crisis international financial markets started scrutinizing fiscal deficits and external debts. Consequently, the unsustainability of the Greek debt was discovered and the Greek crisis erupted. Thus, the deep fiscal cuts of the first MOU were justified. This was a political choice since the Greek and EU establishment aimed to pass piecemeal the MOU strategy. Therefore, it focused initially on the public sector and public employees by staging a truly defamation campaign aiming at creating a rift between public and private sector employees. The slant of the ‘lazy and corrupt public employees’ is the trademark of this first version.

However, as soon as the first MOU program started failing austerity had to be expanded to the private sector. In order to justify this expansion the problem of competitiveness was surfaced. It was argued that not only the public but also the private sector is characterized by low productivity, high wages and rigid labor market regulation culminating in a falling competitiveness. Consequently, the current account worsened not only because of public borrowing but also because of diminishing exports and increasing imports. High wages fueled consumption which was directed towards imports, since domestically produced goods were uncompetitive. The trademark of this new propagandistic campaign was that Greek workers collectively (private and public sector) are overpaid and inefficiently working.

Typical examples of this perspective are offered by papers from the governing EU and ECB bodies and from the Bank of Greece. For example, in the beginning of the first Greek MOU (EC (2010), p.6) the origins of the Greek crisis are defined as:

(a)   Persistent fiscal and external imbalances that led to a significant increase in government and external debt

(b)  Rigid product and labor markets

These Greek vulnerabilities were exposed by the 2008-9 global crisis. Subsequently – and while not at the origin of the problem – the banking sector was affected by the economic and confidence crisis (p.7). The same verdict is professed, in more damning terms, in the introduction to the second Greek MOU (EC (2012), p.9). The origins of the Greek crisis are again attributed to:

(a)   Unsustainable fiscal policies, partly hidden by unreliable statistics and temporarily high revenues;

(b)   Rigid labor and product markets;

(c)    Loss of competitiveness and rising external debt;

It is again reiterated that ‘while not at the origin, the banking sector was affected by the economic and confidence crisis’. In a similar vein, Gibson, Hall & Tavlas (2012, p.500-1) – the first and the third belonging to the Economic Studies Directorate of the Bank of Greece – find the origins of the Greek crisis in the large fiscal deficits and the falling competitiveness of the Greek economy:

‘Although entry into the euro area contributed to a period of prolonged and robust growth, and low (by Greece’s historical standards) inflation, two deep-seated problems remained unaddressed; the country continued to run large fiscal imbalances and the country’s competitiveness – already a problem upon euro area entry – continued to deteriorate.’

It should be noted that in its 2010 version this explanation emphasized fiscal and external imbalances with the emphasis on the former. The problem of competitiveness is mentioned but in a somehow subdued manner. Moving to the second MOU competitiveness is brought forward and emphasized[5].

Finally, the same arguments are reiterated, in rather pedantic terms, by the neoconservative Greek economists grouped in the greekeconomistsforreform.com (e.g. Azariadis (2010), Dellas (2011), Ioannides (2012), Meghir, Vayanos & Vettas (2010). Their arguments have nothing exceptional apart from some minor differences between them (for example some prioritize the fall in competitiveness over the fiscal deficits, e.g. Ioannides (2012)).

The Greek ‘disease’ explanation suffered a hit when other countries-members (Ireland in the end of 2010, Portugal in the beginning of 2011) of the EMU faced problems and entered also in bail-out programs through MOUs with the troika. What was previously characterized as a special Greek ‘disease’ was now discovered to be a far wider problem. The initial reaction was to attribute the expansion of the problem to contagion from Greece[6]. This, which is indeed a rather weak argument[7], was supplemented by collectively branding these countries (in fact all the PIGS – Portugal, Ireland, Greece and Spain) as EMU’s outcasts: economies prone to fiscal and banking profligacy: instead of a Greek a South ‘disease’ was discovered. Thus, beginning with non-other but the ECB (ECB (2012)), several economists (e.g. Kosters (2009), Panetta (2011), Weidmann (2012)) identified fiscal profligacy as the root of EMU’s sovereign debt crisis. However, as the EU’s crisis expanded beyond the PIGS and started touching Italy and even euro-core countries (e.g. Belgium, Netherlands and France) the popularity of the South ‘disease’ explanation started receding.

In analytical terms, the Greek (or South) ‘disease’ explanation hinges upon the Twin Deficits Hypothesis which contends that there is a strong link between the current account balance and the government budget balance. A twin deficit occurs when an economy has a current account deficit plus a fiscal deficit with the causality running from the latter to the former (see Appendix I). In the Greek case this argument is expressed as follows. An increasing fiscal deficit is caused by the profligate and clientelist state (mainly because of exorbitant wage increases but also because of widespread tax evasion). In order to finance this fiscal deficit the country borrows heavily. This has increased public debt. Since, after the accession to the EMU, external borrowing was cheap and indeed favored by the EMU’s rules[8] then the public debt became external debt; thus deteriorating the already existing current account deficit. At this point a supplementary argument is brought forward: the current account worsened not only because of the fiscal deficit but also because of the falling competitiveness of the whole economy. Therefore, it is argues that the Twin Deficits Hypothesis is verified.

The applicability of the Twin Deficits Hypothesis for Greece is far from unambiguous (see Appendix 1). Studies that tested it have produced mixed results. Most interestingly, a recent study (Katrakilidis & Trachanas (2011)) has argued that while the Twin Deficits Hypothesis is confirmed for the pre-accession to the EMU period (1960-80) it is rejected for the post-accession period (1981-2007). For the latter period the opposite is confirmed: trade (and thus current account) deficit has caused increasing budget deficit.


II.2 EMU is not (and cannot, at least easily, become) an OCA

The second perspective argues that, whatever national Greek ‘disease’ exists, it is aggravated by EMU’s structural deficiencies. That is, EMU is characterized as a non-Optimal Currency Area (OCA) which is prone to asymmetric shocks that exacerbate national ‘diseases’. Thus, this second perspective emphasizes the European structural dimension. It argues that EMU’s fundamental flaws cannot be rectified (i.e. EU cannot become something similar to the US) and its collapse is on the table. This view centers only passingly on the Greek case per se. It takes it, as well as those of the other PIGS, as a springboard to spearhead its main criticism: EMU is inherently faulty. This perspective is expressed mainly by Anglo-Saxon commentators either neoliberal (e.g. Feldstein (2010a)) or neo-Keynesian (e.g. Krugman (2012a)).

Characteristically, Feldstein (2010a) argues that:

‘The European economic and monetary union is doubly flawed. First, it forces diverse countries to live with a single interest rate and exchange rate that cannot be appropriate for all members. Second, combining a single currency with independent national budget policies encourages fiscal profligacy. The Greek situation is a manifestation of these flaws’.

And elsewhere, Feldstein (2010b) maintains that:

‘The crisis in Greece and the debt problems in Spain and Portugal have exposed the euro’s inherent flaws’.

Feldstein’s position is reiterated by the Thatcherite Institute for Economic Affairs (IEA). In a 216-page study, edited by Ph.Booth (Booth (2013)) it gives a characteristically damning account of the EMU from a neo-liberal perspective. The central conclusion is that the EMU is inherently flawed – by not being an OCA – and that it should be either broken up in an orderly way or radically reorganized along even more neoliberal lines.

The same line is towed by The Economist (2010):

‘The Greek crisis only confirms the folly of binding a group of disparate countries together in a currency zone with no mechanism, such as a central fiscal authority, to address its internal imbalances. The north-south divide in the euro area looks more marked than ever. The north, exemplified by Germany, relies on exports to power its growth, saves hard and runs trade surpluses. The southern economies, such as Greece, have leant too heavily on consumer spending, have weak public finances and rely on foreign capital to supplement their low savings.’

But also, from the neo-Keynesian side of the fence, Krugman echoes the same argument. In a series of works he forcefully supports the OCA theory (e.g. Krugman (2012b)) and he argues that the existing crisis is nothing but the consequence of the Eurozone’s difficulties dealing with asymmetric shocks (Krugman 2012a).

To be more accurate, these predominantly Anglo-Saxon accounts do not absolve Greece from being responsible for the problem. On the contrary, they usually – particularly the neoliberal accounts – press forcefully the Greek profligacy argument. But, as said before, the crux of their argument is against the EMU. This emphasis has a twofold explanation.

The first explanation is geopolitical or has to do, in Marxist terminology, with the intra-imperialist contradictions. The euro is one of the main instruments through which European capitals (and the EU as their expression) strive for world supremacy against the US. As such it attracted US antipathy from its very beginning. Even in academic accounts this reason cannot be fully disguised. Again Feldstein (1997), commenting about the upcoming EMU, expressed it in almost explicit terms: ‘the adverse economic effects of a single currency on unemployment and inflation would outweigh any gains from facilitating trade and capital flows’ and that, while ‘conceived of as a way of reducing the risk of another intra-European war’, it was ‘more likely to have the opposite effect’ and ‘lead to increased conflicts within Europe and between Europe and the United States’.

The second explanation is academic and has to do with the theory of Optimal Currency Area (OCA – McKinnon (1963), Mundell (1961)). According to this theory in order for a currency union (that unites several diverse in character and structure economies) to be such an area it has to fulfill several crucial requirements. These are the following:

(a)   It must have high productive factors mobility. This implies not only high capital but also high labor mobility.

(b)  It must generate a viable process of structural economic convergence. This particularly implies similar business cycles and trade patterns.

(a)   It must have a fiscal mechanism (i.e. some degree of fiscal integration) so that transfers could be made to countries hit by ‘asymmetric economic shocks’.

The majority of the US (and to a great degree Anglo-Saxon) views opined that EMU is far from being such a currency area. The first feature (particularly regarding labor) is notoriously missing[9]. The second feature is also very erratic in the sense that periods of economic convergence are succeeded by periods of even greater divergence. Finally, the last feature is simply negligible[10]. Instead of it there were the inadequate Maastricht Treaty criteria and then (with the onset of the 2007-8 crisis) the equally inadequate and hastily conceived Stability and Growth Pact criteria.

On the basis of the academic arguments of OCA theory the US academic antipathy towards the EMU took flesh and bones. The stance of the majority of US economists towards the euro was nicely summarized by Dornbusch (2001) in his famous expression: ‘It can’t happen, it’s a bad idea, and it can’t last’. Jonung & Drea (2009) offer an excellent but partisan (trying to vindicate the EMU) survey of US economists’ opinions. They meticulously plot both the different stances (e.g. OCA theory prone academics versus the practically oriented FED economists) and the evolution of the US debate. The general conclusion is that the US debate underwent significant changes, continuously evolving in response to actual events, starting in the early 1990s from a rather skeptical view of the EMU as being unlikely to happen, or at least not according to schedule, to an acceptance of the euro in the late 1990s, sometimes combined with the prediction that it would not last very long. But as soon as Jonung & Drea were ready to declare the victory of European political will over US skepticism[11] the eruption of the European sovereign debt crisis put a sudden brake. As already shown, US criticisms returned with vengeance (accompanied with the increasing conflicts between the US and the EU[12]).

Actually, the OCA theory is the closer thing mainstream economics have to the Marxist disproportionality (or uneven development) thesis. The latter argues that capitalism is characterized by the uneven development of either the regions within a single economy or between different countries. As such it is the exact opposite of the convergence thesis that is derived by definition from the neoclassical growth model[13]. Marxist Political Economy argues that convergence is a utopia and capitalism is inherently prone to uneven development. This unevenness refers primarily to the production sphere and is then expressed in the sphere of circulation. Mainstream economics cannot have this production-centered emphasis as they are by construction economics of the exchange sphere. The OCA theory is the closest possible notion to the disproportionality argument. It essentially states that unless there is a production-based convergence then any circulation-based unification is futile. And as such it has been vindicated regarding the EMU. The European integration project, particularly regarding its monetary unification, has proceeded from failure to failure through acute political voluntarism. Each previous monetary unification project ended in failure; beginning with the Werner plan, following with the ‘snake in the tunnel’, the European Monetary System and the Ecu. Each failure was responded with an even more ambitious leap forward. The EMU and the euro are by far the most ambitious leap. However, it is faced with far more serious problems from its predecessors (which unlike it had provisions for an organized dissolution mechanism in case of failure) and the prospects of an ever more disastrous failure. The gist of its problems is capitalism’s inherently uneven development and the concomitant inability to create a unified state behind the economic integration.

Concluding, this mainly Anglo-Saxon explanation of the Greek crisis while sharing the fiscal profligacy argument of the first explanation recognizes a rather weak structural cause. It concerns mainly the sphere of circulation (i.e. how the common currency is related to diverse national economies) and has not much to do with the sphere of production per se. Concomitantly, Greek and the Eurozone crises have to do mainly with the architecture of the European monetary system.


II.3 The Greek problem has national origins exacerbated by errors in EMU’s structure

The third mainstream explanation of the Greek crisis is a ‘middle-of-the-road’ blend. It can be branded as policy-driven (national disease) cum EMU’s rectifiable structural flaws. It is arguing that while the Greek crisis has been caused by a combination of national policy errors (high fiscal deficits and debt) coupled with problems created by the incomplete economic unification of the EMU. Consequently, it is argued that a deepening of the economic and political unification of the EU will solve these problems. Essentially, this explanation comes from mainly European analysts that are in favor of European unification but have ideological or practical reservations regarding the actual process of this unification. To a great extent these views have Keynesian (or even post-Keynesian) origins.

De Grauwe features prominently among this stream. In De Grauwe (2010a, p.1) he argues that the major responsibility for the Greek crisis ‘rests with the Greek authorities who mismanaged their economy and deceived everybody about the true nature of their budgetary problems’. Then he adds that:

‘The crisis has exposed a structural problem of the Eurozone that has been analyzed by many economists in the past. This is the imbalance between full centralization of monetary policy and the maintenance of almost all economic policy instruments (budgetary policies, wage policies, etc.) at the national level. Put differently the structural problem in the Eurozone is created by the fact that the monetary union is not embedded in a political union.’ (De Grauwe 2010a, p.4)

In another paper he explicitly rejects the fiscal profligacy argument for Spain and Ireland (but not for Greece):

‘Are such difficulties due to irresponsible fiscal policies? This could be the case for Greece, but not for Spain and Ireland, so fiscal profligacy cannot be identified as the in-depth source of eurozone problems.’ (De Grauwe 2010b)

The same argument is voiced by Lane (2012): ‘Although Greece (and Italy) has a debt profligacy record (opp.51), ‘the origin and propagation of the European sovereign debt crisis can be attributed to the flawed original design of the euro’ (opp.65). Thus, ‘the main flaw is that the monetary union was not accompanied by a banking and fiscal union’ (opp.49).

Similar concerns are being advanced by explicitly post-Keynesian economists. Botta (2012 p.3) argues that ‘Actually, the current eurozone crisis seems to have been decisively aided by the original institutional setup of the eurozone and its incomplete nature with respect to a fully developed federal union’.

Again from the post-Keynesian camp, Hein, Truger & van Treek (2011) emphasize the existence imbalances in the Euro area as the root cause of the euro crisis. They explicitly reject the first mainstream explanation:

‘The current euro crisis is considered by many observers – above all by the dominating economic policy makers and advisors in Germany and also in the European Commission – as a crisis of government deficits and debt.’ (Hein, Truger & van Treek (2011), p.3)

‘The current euro crisis can better be interpreted as the consequence of preceding private debt and current account imbalances and not as a result of excessive public deficits. In the four countries outlined above, the private sector obviously tended to spend more than its income. This was associated with government surpluses (Ireland, Spain) or amplified by government deficits (Portugal, Greece), which led to very high and rising current account deficits in the four countries.’(Hein, Truger & van Treek (2011), p.9)

This post-Keynesian emphasis on EMU’s imbalances and particularly those associated with the balance of payments (hence the current account) is quite interesting. As such it points out to a structural characteristic of the EMU which sometimes it has been branded as neo-mercantilism: the Eurozone is structured in such a manner as to merit the trade surpluses of the Northern countries against the trade deficits of the Southern countries. This argument can be found also, as we will explain later, in the more radical post-Keynesian ‘financialization’ explanations of the crisis. Tellingly, several of the post-Keynesians belonging to this third middle-of-the-road explanation of the Greek crisis they participate also to the radical ‘financialization’ thesis (e.g. E.Hein). On the other hand, the current account imbalances argument has been taken up by more conservative theorists that do not ascribe to the ‘financialization’ thesis but aim for a more unified European integration (e.g. Merler & Pisani-Ferry (2012)).

There are a number of problems with this third mainstream (and quasi-mainstream in its post-Keynesian variant) perspective. The first has already been mentioned. It offers a structural explanation but this is a weak one. It attributes the structural problems to the sphere of circulation and neglects the sphere of production. It agrees with the second mainstream explanations with regard to EMU’s problems pointed out by the OCA theory. But it believes that a more unified economically and politically EU can overcome these problems. In this belief it departs from the harder versions of the second explanation which believe that an economic and political unification of the EU similar to that of the US is impossible. This is the second major problem of this perspective. Its political and economic voluntarism goes against historical wisdom. Europe has been the main ground where capitalism was born on the basis of the nation-state and the national economy. Almost every inch of the borders of each state have been soaked in blood in wars against its neighbors. Hence national political and economic identities are deeply entrenched. Moreover, the current Eurozone crisis has already torn apart whatever feeble pretext existed of a ‘common European identity’ and a European solidarity. In stark contrast, national interests have resurfaced with vengeance. This makes this aim of a politically and economically unified Europe a utopia unless a major European power (or a bloc of them) achieves overpowering dominance over the other members of the EU. But, whatever the power of Germany and its allies is, there is a long and precarious road to go till it succeeds in this endeavor.


II.4 Mainstream explanations: A Critique

Over time mainstream explanations of the Greek crisis evolved from monistic explanations to a more eclectic mix. The more articulate of them usually attribute its origins at two sets of causes (e.g. Nelson, Belkin & Mix (2011)):

(a) internal causes: exorbitant public expenditure, weak tax collecting mechanism, corruption and clientelism (even sometimes cronyism), over-regulated labor and product markets, high wages, an non-market friendly institutional environment, deteriorating competitiveness etc.

(b) external causes: EMU’s deficiencies, the repercussions of the 2007-8 crisis etc.

Notwithstanding, this eclecticism hides behind it versions (or combinations) of the three previously delineated explanations. Moreover, the great majority of mainstream explanations, irrespective of their differences, ultimately understand the internal causes of the Greek crisis through the lenses of the Twin Deficits Hypothesis[14]. This is their hardcore analytical device since all of them identify the Greek crisis as simply a (fiscal) debt crisis which evolved in an external debt crisis (i.e. in toto as simply a debt crisis). The adoption of this analytical argument by even vehement neoliberals is quite interesting given its Keynesian origins. Of course, some explanations may add a bit of salt here and there; especially by stressing the importance of clientelism and the institutional framework. Some might even extent clientelism not only to the working class and the middle strata (which is the typical argument) but also to Greek capital. These accounts add to (popular) clientelism the upper-class cronyism of Greek capitalism; i.e. the close crony relations existing between the systemic political parties and Greek capitalists (especially the private media and the banking sector). Cronyism is accused of falsifying free competition and thus hinders growth by receiving rents. Notwithstanding, the gist of mainstream explanations rests upon the Twin Deficits Hypothesis.

Then wages are posited as the factor triggering both the fiscal and the current account deficits (and even irrespectively of the controversy between the Twin Deficits and the Ricardian Equivalence Hypotheses). The typical argument is that Greek (nominal) unit labor costs increased faster than those of the other European countries. Thus they worsened both the budget deficit and the current account deficit. To be frank they could be other analytical choices. For example, as some radical (e.g. Stathakis (2010)) but also Marxist explanations (Mavroudeas (2010a) argue that the deterioration of the fiscal deficit can be rightfully attributed to upper-class’ notorious tax evasion and cronyism. The former depresses public revenues and the latter augments public expenditure; thus, in conjunction, derailing the fiscal deficit. However, the mainstream explanations stick, for obvious reasons to the supposedly high wages as the main cause of the big and persistent fiscal deficits. There is a wealth of evidence proving this point. Starting from the high bodies of the EU and the Greek government and moving to the groups of neoconservative economists this argument is reiterated almost verbatim. For example, the first MOU states that:

‘Real wage growth consistently outpaced productivity gains over the past decade, in part reflecting spillovers from very high public wage increases. The resulting increase in ULC (unit labour costs) eroded external competitiveness, not least with respect to the rest of the euro area.’ (EC (2010), p.3)

Even those emphasizing the deterioration of competitiveness over the worsening of fiscal deficits put the blame on the wages. For example, Ioannides (2012) argues that the basic cause of the Greek crisis has been the deterioration of its competitiveness, mainly due to the rise of unit labor costs, but also due to the existing non-market friendly regulatory framework[15].

There are a number of well-known problems with this argument.

(1) There is an extensive literature disputing whether (nominal) unit labor costs are a convincing measure of competitiveness.

(2) The famous Kaldor paradox argues that competitiveness is not an exclusive virtue of low wages; on the contrary. A crucial corollary of the Kaldor paradox is that competitiveness depends not only on costs and especially wage costs (costs competitiveness) but also on qualitative factors (structural competitiveness).

(3) Contrary to the assertions of the EU and the Greek government, Greek wages have been constantly lagging behind productivity increases. Furthermore, Greek productivity increases have been much better that, for example, those of Germany. Thus, the Greek real unit labor costs (i.e. the wage share in the product) have been falling continuously for several decades.

(4) A decrease in wages aiming to restore competitiveness presupposes that rival economies will maintain their wages stable or, at least, will reduce them less. However, the universal trend is a downward push on the level of the real wages. This can take place by two ways: a) directly through legal acts including the MOUs and, b) indirectly by the increase[16] of the reserve army of employees due to depression, political turbulence and war conflicts.

Some of these arguments have been voiced, rather shyly, even in the ECB bulletin before the onset of the crisis. Thus it has been convincingly argued that the data on labor compensation and productivity suggest that the weakness of the external accounts of several EMU countries comes from the international specialization of their economy, rather than from the ‘faulty management’ of the labor market. The ECB (2008, p.92) confirms this when it claims that in the first 10 years of the EMU the member economies with an overweight in labor-intensive sectors lost positions in favor of emerging economies with a relative comparative advantage, whereas member economies specialized in the higher-price and higher-quality segments of mature industries and products even gained market shares. This implies that the loss of competitiveness of some EMU economies was caused by structural deficiencies and not by wage increases.

But the mainstream explanations of the Greek crisis have also wider problems.

First, they totally underestimate the role of the 2007-8 capitalist crisis. This, as said before, is unanimously considered as a mere financial crisis without origins and causes in the sphere of real accumulation. However, if this crisis is so significant and lengthy as it appears to be, it must surely have some basis on the main sphere of economic activities (the sphere of production).

Second, they consider the Greek crisis as independent of the 2007-8 crisis. This is a point on which both international and Greek pundits agree. Most international reports (those of the EU, ECB and IMF included), before the onset of the Greek crisis, maintained that the Greek economy was insulated from the 2007-8 crisis and that, once the crisis erupted, it was left unattached. Indicatively, in a pre-election debate in 2009 both G.Alogoskoufis and N.Christodulakis[17] agreed that the Greek economy is insulated from the crisis because its banking sector is better capitalized than those of the West. The 2007-8 crisis has only an exogenous impact on the Greek economy by worsening the international economic environment and setting off grey expectations about sovereign debts.

Last and compounding all the previous problems, all three mainstream perspectives fail to appreciate the fundamental structural dimensions of the problem at hand and instead relegate it either to policy errors and/or to weak structural origins. The first perspective, faithful to the typical neoclassical approach to economic crises, considers the Greek case a national specificity created by bad policies. The second perspective recognizes a rather weak structural cause. It concerns mainly the sphere of circulation (i.e. how the common currency is related to diverse national economies) and has not much to do with the sphere of production per se. Concomitantly, Greek and the Eurozone crises have to do mainly with the architecture of the European monetary system. The third perspective also attributes the structural problems to the sphere of circulation (with the additional argument that, contrary to the second perspective, these problems can be surpassed) and neglects the sphere of production.


III. Radical ‘financialization’ explanations

Several radical explanations[18] of the Greek crisis have been advanced. The main points that differentiate them (apart from the methodology and the analytical tools) from the mainstream explanations are the following:

(a)   They emphasize the crisis-prone nature of capitalism. Consequently, more emphasis is placed on the structure of world capitalism and on the 2007-8 crisis.

(b)  They are critical of the neoliberal dominance of economic theory and policy over the last three or four decades and put the blame for the problems that arise to neoliberalism.

(c)   They criticize the neoliberal architecture of the EMU and argue either for its dissolution or for its radical overhauling.

Overall, radical explanations are shy of recognizing the general deficiencies of the capitalist system; although several of them do mention them but in a rather implicit of disguised manner (e.g. Polychroniou (2013)). However, they do not think that the immediate problem is capitalism as such but rather its forms of management. Therefore, they strive for an end to neoliberalism and a return to more humane form of capitalism (or variety of capitalism, for those ascribing to the varieties of capitalism approach – VoC). The more politically radical versions consider this step a move towards a long but unspecified march to socialism. Several of these more politically radical approaches have a relation to Marxism and some even ascribe to Marxism as such. However, in this work we will treat them as separate from Marxism per se. This does not reflect a sectarian view but crucial analytical and political considerations. The gist of these considerations is twofold:

First, the rate of profit – i.e. the crucial Marxist variable for understanding capitalism and especially its crises – is absent from their analyses. Instead some form of Keynesian lack of effective demand or neo-mercantilism argument is employed.

Second, even the more radical versions that refer to socialist transition cannot – and in fact are unwilling to – define the exact process through which the overturn of the capitalist assault is a link in the transitional socialist program.

The focus of this chapter would be on the ‘financialization’ versions of the radical explanations. This does not imply that other versions do not exist. For example, there is another radical version that recognizes the Greek crisis as a mainly fiscal crisis but attributes it to the tax-evading and crony nature of Greek capitalists (e.g. Stathakis (2010)). Others (e.g. Laskos & Tsakalotos (2012)) add to this the argument about the trade imbalances existing within the EMU that we have seen in the third middle-of-the-road variant of the mainstream explanations. The more traditional underconsumptionist explanations of crises (either of the Marxist Monthly Review (MR) or the Keynesian variant) are not popular regarding the Greek crisis. The main reason is that they do not fit to empirical data as the period preceding the onset of the crisis was characterized by a spectacular growth of consumption. Thus, underconsumptionist views usually hide behind the ‘financialization’ thesis. The latter is by far the more popular radical explanation of the Greek crisis.

The ‘financialization’ thesis argues that in modern capitalism finance (i.e. the operation of money capital) assumes an increasing primacy in relation to other capitalist activities[19]. With regard to Marxism the origins of this thesis go back to Hilferding’s (1910 (1981)) seminal work and his implicit notion (never explicitly stated) that in modern capitalism finance takes a dominant position. It was somehow reiterated by Sweezy (1942). However, neither of them broke the classical Marxist relationship between surplus-value and interest. The former is extracted[20] by ‘productive’ capital at the sphere of production and then it is redistributed between profits (accruing to ‘productive’ capital), interest (accruing to ‘non-productive’ finance capital) and commercial profits (accruing to ‘non-productive’ commercial capital).

A major change took place in the end of the 20th century. The predominance of neo-conservatism and the structural transformations of particularly the Western economies dictated by it led to widespread empirical beliefs (or stylized facts) that a new era of capitalism has come: finance has broken lose from the grips of ‘productive’ capital and has established it dominance on the former. Several neo-Marxist (but with a growing distancing from Marxism) and Institutionalist currents (e.g. the Regulation Approach) have already been signaling this conclusion. This led to the formation of the ‘financialization’ thesis. Thus, in the beginning of the 21st century the term as such was coined by radical approaches belonging to the Keynesian and Marxist approach (particularly their ambiguous merge in the Monthly Review tradition). It was actually launched through a series of papers (by Kippner, Crotty etc.) in an influential collective volume edited by Epstein (2005).

It was energetically adopted by post-Keynesianism who developed the concept and its analyses (e.g. Stockhammer (2004)) and sometimes treated the term as their exclusive property (e.g. Treeck (2008)). Seldom post-Keynesians posit ‘financialization’ within stages of capitalism theory arguing that a new stage of capitalism has emerged by the end of the 20th century. This new stage is characterized as ‘finance-dominated capitalism’ (Hein (2013)) or ‘finance-dominated regime of accumulation’ (Stockhammer (2009)); the latter borrowing the terminology of the Regulation Approach. The post-Keynesian launch of the term ‘financialization was based on the Keynesian notion of the rentier; i.e. an ‘unproductive’ stratum collecting various rents which are being subtracted from profits available for productive investment. Thus, the rentier is a drag on capital accumulation.

The incorporation of the term in Marxist analyses followed a bit letter. The Monthly Review (MR) school has used similar terms long ago (e.g. Sweezy (1994), Editors (2008)) but not actually coined the term. Thus it adopted it rather lately in order to explain the 2007-8 crisis since pure underconsumptionism had serious explanatory difficulties (e.g. Foster (2010)). Coming from a different perspective from that of the MR, Lapavitsas (2008) adopted the notion of ‘financialization’ and gave it a strange twist. He argued that ‘financialization’ is a new stage of capitalism. Till now his argument had nothing original comparing to its previous definitions. What gave it its special flavor is the thesis that in this new stage of capitalism finance capital[21] not only dominates ‘productive’ capital but it also exploits directly the working class through usurious activities (through the provision of loans). Thus the term financial exploitation was initially coined. After a series of criticisms (e.g. Fine (2009)[22]) for confusing capitalist exploitation with pre-capitalist usurious exploitation it was cosmetically changed to financial expropriation. However, the essential meaning of the term remained the same.

This paper rejects the ‘financialization’ thesis on both analytical and empirical grounds (as it will be shown in the next chapter). For reasons of brevity this critique can be summarized as follows[23]. The basis of this rejection is that in analytical terms ‘financialization’ theories argue that capitalism has somehow returned to a pre-capitalist stage: the period when capitalist relations were not yet born but the pre-capitalist figures of the merchant and the banker – as they operated within feudalism – prepared the ground for capitalism’s birth. The crucial point of the operation of merchants and bankers in feudalism was unequal exchange and usury as a rule in contrast to equivalent exchange as a rule in capitalism. This functioning on the basis of unequal exchange was able because of the monopolistic and heavily regulated rules of the feudal system. Once however the primary accumulation of capital took place and capitalism established the monopolistic feudal rules were abolished and capitalist competition ruled. Then the operation of money capital took its characteristically capitalist modus operandi. The ‘financialization’ thesis argues that this is liquidated and that there is a return to the pre-capitalist modes of operation. In other words, ‘financialization’ theories maintain that interest ceases to be a part of surplus-value and that it acquires an independent existence. Concomitantly, money capital is not only autonomised from ‘productive’ capital but also dominates the latter. But, if the latter is the ultimate source of wealth, this domination would necessary entail – and this is actually a conclusion of ‘financialization’ theories – a stifling of productive investment and thus of the accumulation of capital. The obvious question is how is it possible in the long-run such a deformed capitalism to exist. Additionally, regarding the 2007-8 crisis, ‘financialization’ theories argue that it is not an a-la-Marx crisis (i.e. rooted in the sphere of production) but a financial crisis (a crisis of financialised capitalism). In this they agree with mainstream theories. An obvious question is that if the current crisis is so deep and prolonged as the ‘financialization’ theories accept then how it cannot be based on the fundamental economic sphere (the sphere of production).

Two versions of the ‘financialization’ thesis can be discerned with regard to the Greek crisis. The first one is by Lapavitsas and of course it ascribes to his notion of ‘financialization’. The second one is expressed by Milios & Sotiropoulos and has affinities with the post-Keynesian notion of ‘financialization’. Notwithstanding, their main differences have to do with two more practical issues: (a) the North – South divide in the EU and (b) whether Greece should remain in or leave the EMU.

Lapavitsas et al. (2010a, 2010b) argue that the Greek is a debt crisis. In this they agree with the mainstream explanations. But they add that it ‘is symptomatic of a wider malaise’ (2010a, p.11). Its roots lay in (a) financialized capitalism and (b) the EMU. Financialized capitalism caused the 2007-8 crisis which is not an a-la-Marx crisis but simply a financial crisis. The rate of profit has not role in it. In Lapavitsas’ own words (and without any attempt to substantiate it) ‘it did not fall but also it did not grow’. The crisis was caused by financial leverage that created unsustainable bubbles. The crisis affected the fragile foundations of the EMU. The latter is not an OCA which, according to Lapavitsas et al., is based on three pillars:

(a) the independent ECB which commands monetary policy

(b) fiscal stringency

(c) relentless pressure on wages in order to ensure competitiveness

Lapavitsas accurately points out that ECB’s monetary policy follows the needs of the euro-core countries (the North). However, the third point agrees with the mainstream arguments on competitiveness. Then Lapavitsas et al. argue that the North (and especially Germany) was more competent in pressurizing wages and thus acquired a permanent competitive advantage against the South (the euro-periphery). This is again the mainstream argument in reverse: it is not the lazy Southerners but the over-prudent Northerners that caused the problem.

Thus, the Eurozone was polarized in a North with trade surpluses and a South with debts: the North gave loans to the South in order for the latter to buy its products. The eruption of the 2007-8 crisis disrupted this structure as international financial markets questioned the creditworthiness of South’s sovereign debts. Thus, the Eurozone’s crisis began. According to Lapavitsas et al. the EMU transmitted the world crisis in Europe because of the imbalances that were latent within it. Again, till this point Lapavitsas et al. analysis does not differ essentially from post-Keynesian analyses which accept a North – South divide argument[24].

The final conclusion of Lapavitsas’ analysis is that the EMU cannot be rectified; although he sometimes refers to a European Marshall scheme as a solution only to immediately discard it as implausible. Thus, he concludes that the only solution for Greece (and indeed the rest of the euro-periphery) is to exit the EMU. Regarding the relationship with the EU (i.e. in economic terms basically the Common Market) he remains agnostic.

Lapavitsas’ explanation suffers from the general weaknesses of the ‘financialization’ thesis. He neglects any reference to the production structure of the Greek and the other EMU economies (for example differences in technological structure and productivity as expressed in their Organic Compositions of Capital (OCC)) or qualitative issues (productive specializations). Thus he is unable to see the existence of relations of economic (imperialist) exploitation between the North and the South (or else relations of ‘broad’ unequal exchange[25]) and he understands only a reversed and problematic version of the ‘narrow’ unequal exchange. Moreover, he accepts uncritically the mainstream arguments about Greek relatively high wages being the cause of Greece’s deteriorating competitiveness (for example he accepts uncritically the high (nominal) unit labor costs argument).

His analysis suffers also on the ‘financialization’ plain. The Greek financial system was significantly less leveraged than the Western ones. Additionally, Greek workers’ private debts are a relatively new phenomenon (they began with the introduction of the euro) and they are smaller than their Western counterparts. Therefore, ‘financialization’ cannot be discovered in Greece and has to be imported from outside. Thus, in Lapavitsas’ analysis ‘financialization’ is imported through public (and not private) external debt.

The last error of Lapavitsas’ analysis concerns his policy suggestions. If the Greek crisis is simply a debt crisis then there may be solved not by exiting the EMU but by reforming it towards a full OCA (i.e. by unifying it fiscally and politically). If the crisis is something more profound and has to do with the sphere of production and relations of unequal exchange stemming from it then exiting the EMU and remaining within the Common Market want suffice. A full exit from the EU is required. But Lapavitsas shies away from this conclusion.

Milios & Sotiropoulos (2010) ‘financialization’ explanation of the Greek crisis is different. Contrary to the conclusions reached by Lapavitsas et al., Milios & Sotiropoulos (2010) argue that it was not the loss of competitiveness that gave rise to high indebtedness, but the other way around. More specifically, EMU by bringing together countries with very different rates of growth and profitability, gives rise to high levels of borrowing for the euro-periphery countries. That is because euro-periphery countries have higher profit rates which attract capital from the euro-core. This trend was augmented since euro’s adoption because EMU allowed euro-periphery countries to borrow at low interest rates. Foreign loans boosted euro-periphery’s domestic demand, therefore giving rise to increasing inflation and the deterioration of competitiveness. Milios and Sotiropoulos essentially reject the North – South divide as an expression of the problematic dependency theory. For them foreign loans were not a trick to rob Greece but a perfectly natural phenomenon that helped boost growth. On this point they totally agree with the mainstream arguments in Greece that the EU helped Greece’s development. Indeed, the pre-crisis mainstream argument was that current account deficits were good imbalances because euro-periphery countries with relatively low levels of real GDP per capita were catching up with richer north European economies. Greater growth opportunities and expectations of faster productivity growth justified elevated levels of fixed investment relative to the pool of domestic savings, hence the need for a current account deficit. The reality is different. Sustained current account deficits were by and large not used to finance investment in productive assets but to buy euro-core’s imported goods. Thus, Greece’s productive structure instead of being developed it was actually eroded. Because of this error Milios & Sotiropoulos implicitly accept the mainstream convergence thesis which has been fully disproved (as it has been shown in previous chapter).

Till this point Milios & Sotiropoulos’ analysis replicates much of the idyllic success story (‘the strong Greece’) presented before the crisis by the mainstream academic and official circles. Then they add the ‘financialization’ thesis. Modern capitalism is a financialised one leading to extreme leveraging and financial bubbles. When the 2007-8 crisis (which they too understand as a mere financial one) erupted the till then malevolent euro-periphery’s CA deficits were blown apart. In order to sustain them fiscal deficits were augmented and this led to the euro-periphery’s collapse.

The EMU played only a peripheral role in this affair. Milios & Sotiropoulos accept that EMU is not an OCA. Furthermore, they argue that EMU is a neoliberal project that imposes austerity on the workers by exposing them to international competition. The eruption of the crisis exposed EMU’s weaknesses (because of the asymmetric shocks that cannot be contained within it) and its class nature (as the great burden of the MOUs was placed on the working people). However, the solution is not the exit from the EMU but the progressive restructuring of the EU.

Milios & Sotiropoulos ‘financialization’ explanation suffers from the general deficiencies of this approach already mentioned above. They share also the particular errors characterizing Lapavitsas’ analysis and criticized above. On the points that they differ they err on the other side. For example, instead of Lapavitsas’ reversed version of ‘narrow’ unequal exchange they throw out any theory of unequal exchange. Finally, their analysis of the EMU and the EU is simplistic and cannot see the relations of economic (imperialist) exploitation that exist within them. The same holds about their policy proposals.

In toto, the ‘financialization’ explanations of the Greek crisis have a weak structural emphasis by not considering the problems in the sphere of production. For this reason they fail to account adequately for the Greek case.


IV. A Marxist structural explanation

All the above explanations attempt to shed light on the causes that led to current economic depression. Despite of their different viewpoint and the political implications that arise from them, they share a crucial common analytical feature. Neither of these explanations attributes the depression to the internal logic of the system that creates economic crisis as an iterative process. They either attribute the depression to policy errors or to weak structural factors pertaining mainly to the sphere of exchange.

In contrast to the previous explanations Marxist Political Economy offers a strong structural explanation of the Greek crisis by attributing its fundamental causes to problems grounded in the sphere of production. More specifically, it emphasises two structural components. First, it is argued that 2007-8 economic crisis is a crisis a-la-Marx (i.e. stemming from the tendency of the profit rate to fall – TRPF) and not a primarily financial crisis and this represents the ‘internal’ cause of the Greek crisis. Second, it is shown that – apart from the ‘internal’ cause – there are also ‘external’ causes. These come from the relations of imperialist exploitation (i.e. unequal exchange) that exist within the EU and which divide it between North (euro-core) and South (euro-periphery) economies. Greece obviously belongs to the second group.

Thus, this part of the article is further divided in two sub-sections. The first sub-section offers a detailed analysis of the ‘internal’ cause which is identified with the TRPF. The second sub-section is still under research but offers a rudimentary justification of the argument that Greece suffers from imperialist (economic) exploitation from the more developed euro-core economies. This economic drain worsens the condition of the Greek economy.


IV.1 The ‘internal’ cause: a falling rate of profit

According to Marxian analysis, deep crises are not the outcome of accidental events neither the outcome of some mistaken policies. Such economic crises come from a breakdown to the accumulation process due to the lack of alternative profitable opportunities. This is the main mechanism that causes crisis erupting in capitalism. In Political Economy literature there are various works that attribute the current crisis to the falling rate of profit (e.g. Brenner (2006), Shaikh (2011), Smith & Butovsky (2012)).

Mavroudeas (2013) has presented a detailed analysis of the Greek economy, its transformations and the economic policies and capitalist restructurings that took place after the 2nd W.W. This analysis is based on the significance of the profit motive for capitalism (the differentiae specificae of the Marxist theory vis-à-vis other economic analyses). Moreover, it offers a detailed exposition of the historical evolution of post-war Greek capitalism and the eruption of its current crisis. In this sub-section we test empirically this perspective. In order to test the Marxist falling profitability hypothesis regarding the postwar Greek economy, we had to reformulate the official national accounts in a fashion that reflects Marxian theory of production which is based on the distinction between productive and unproductive labor[26]. So, we used the method that was exposed by the pioneering work of Shaikh & Tonak (1994). This research has inspired many other studies in a number of countries, for example Mohun (2003) for Australia; Yu & Feng (2007) for China; Tsaliki & Tsoulfidis (1989) and Maniatis & Passas (2013) for Greece; Marina & Moseley (2000) for Mexico; Seongjin (2007) for S. Korea; Cokshott, et al. (1995) for the UK; Cronin (2001) for New Zealand and Paitaridis & Tsoulfidis for the USA (2012). For the purposes of our analysis we used data from the National Accounts of Greece and other official publications such as Labor Force Survey, and also from the EU KLEMS[27] database, Annual macro-economic database (AMECO) and International Labor Organization database (Laborsta).

Our research quite resembles to that of Maniatis & Passas (2013) with two differences. The first difference is that we include the agricultural sector in our estimations. It is true that this particular sector has a non-typical (by Western standards) course in the history of Greek capitalism. It consisted till recently of small family farms with limited purely capitalist (wage labour) relations. On the other hand, till the 20th century ‘Golden Age’ of Greek capitalism, it was the latter’s bigger sector. On the other hand, it was closely linked with purely capitalist relations and operated as a functional appendage and support for them. This situation lasted till the first postwar decades and pre-capitalist or proto-capitalist relations of production (poor capital – labor ratio, household exploitations etc.) predominated. However, during the last two decades two significant transformations took place. First, the agricultural sector proceeded from a functional support of capitalist relations to a thorough introduction of capitalist relations of production. Thus, during the recent two decades the capitalisation of production, the concentration of cultivated land and the increase of waged labour transformed agriculture to a typical capitalist sector. Therefore, we finally decided to include this sector in our estimations. The second difference with Maniatis & Passas is that we include in Marxian value added the consumption of fixed capital of the unproductive trade and royalties sectors, and the intermediate inputs of royalties sector as long as their value flows from the sphere of production. The final classification between productive and unproductive activities is presented at the Appendix II. So, the Marxian Value Added (MVA) is defined as the sum of a) the net value added in the production sectors (NVAPrd) b) the total gross output in the trade sectors (GOTrd) c) the total gross output in the royalties sector (GORy) and d) the net indirect business tax (NIBT) which is estimated as the difference between business taxes and subsidies. We exclude from the estimation of MVA, the Public Administration and Defense sector and the Private Househods with Employed Persons sector as well, because the wages paid to these sectors are financed by taxes and personal incomes which have already been considered in the value added of the rest of the sectors. We also exclude the rent paid[28] by home – owners because it is a totally imputed measure and does not contribute to the new value produced.

MVA = NVAPrd + GOTrd + GORy + NIBT = S + V                    (1)

As we can see in relation (1), Marxian value added also consists of two parts. The first one is the surplus value (S) that comprises the net profits of the productive sector, the gross output of both unproductive sectors and the net taxes paid to the government. The second one is the variable capital (V) which is total wages paid to the productive workers[29]. Furthermore, in the estimation of variable capital we include the wage equivalent of the self employed at the productive sectors[30]. In the next figure we display the total surplus value produced and its most crucial component, that is net operating surplus, which is the share of surplus value that can be spent productively and enhance the growth potential of the economy. The rest of the surplus value consists of the unproductive wages, depreciation and intermediate inputs of the unproductive activities and the net indirect business taxes. From an inspection of the graph we can observe a constant rise of the unproductive activities over the whole period. This result keeps pace with Marx’s expectations that, with the passage of time, unproductive activities would expand (Capital, v. I, p. 487). Indeed, the share of unproductive labour to total labour in the private sector (except household personnel) is increased from 16,9 % in 1960 to 36,5% in 2009.

Figure 1. Surplus value, net operating surplus, and unproductive activities


Such an expansion is possible only if productivity increases at a rate high enough to more than fully compensate the growth of unproductive activities and putting aside a part of the surplus as investment. In the next figure we display such estimates. Following Paitaridis & Tsoulfidis (2012) from the so estimated MVA, we subtract variable capital, that is, the wages of the productive workers. The difference is the total surplus value (S) which, divided by the variable capital (V), gives the rate of surplus value (RSV). The latter can be expressed as the ratio between productivity (y) and the real wage of productive workers (wp). The MVA is deflated by the GDP deflator (PGDP), while the variable capital by the consumers’ price deflator[31] (PCPI). Formally, wemay write:




From figure 2 we can see[32] that productivity exhibits for the period 1960 – 1973, a substantial growth. It is the ‘Golden Age’ of capitalism which is labeled by a high productivity and a vigorous accumulation of capital. After 1973, the growth of productivity retards whilst during the decade of 1980s remains stagnant. In the beginning of the 1990s productivity rises again till the middle of 2000s when starts to decline bearing similarities with that of the mid 1970s and in our view it points out a phase change to a period of crisis.

Figure 2. Productivity and Wage


Turning now to the other component of surplus value which is the real wage, we can observe that for the whole period it follows productivity but it never gets higher. Furthermore, the deviation between productivity and real wage increases during the 1990s because of the weakening of the labour movement, deindustrialization, growth of unproductive activities and the implementation of neoliberal policies. The combination of a vigorous growth of productivity and an anemic growth of real wage resulted to an increase in the rate of surplus value during the period 1960 – 2009. But, this increase wasn’t without ups and downs. Particularly, during the 1960s the rate of surplus value increases. At the beginning of 1970s till the early 1980s declines and then it is upturned. Finally, at the middle of the 2000s, the rate of surplus value reaches its highest peak and then it sharply drops indicating the predicament of capitalists to extract more surplus value due to decreasing productivity.

Figure 5 depicts the evolution of the value composition of capital (C/V) as this is captured by the ratio of net fixed capital stock[33] (C) to variable capital (V). Looking at the graph we can see that the value composition of capital steadily increases for almost the whole period. But at the beginning of the 2000s it stagnates; which can possibly be attributed to the deindustrialization of the Greek economy with the massive escape of Greek manufacturing enterprises to the East. The slowdown of the composition of capital was the main reason for the decline of productivity and consequently of the rate of surplus value.

Figure 3. The rate of surplus value



The value composition of capital shows the degree of mechanization and the state of technology in an economy, while the rate of surplus value shows the distribution of income and at the same time the part of production that is directed to the unproductive activities. Dividing the rate of surplus value by the value composition of capital we derive the General Rate of Profit which amounts to the ratio between surplus value and fixed capital (S/C). The evolution of the general rate of profit is portrayed in Figure 5 and from its trajectory we can discriminate three phases before the onset of current crisis. The first one is the period 1960 – 1973 where the general rate of profit is at a high level though with a small decline. The second one is the period of crisis (1973 – 1990) when the general rate of profit falls dramatically. This fall is ascribed to the combination of a falling rate of surplus value and an increase in the value composition of capital. The third period is that of neoliberalism (1985 – 2009) when the general rate of profit displays a slight recover and then remains stagnant. This is ascribed to the ongoing increase in the value composition of capital which counterbalanced the proportional increase in surplus value. The fact that the value composition of capital was never devaluated (in contrast with the US, see Paitaridis & Tsoulfidis (2012)) contributed to an anemic recovery of the general rate of profit. This picture discloses the chronic structural problems of the Greek economy which never succeeded to have an adequate recovery of its general rate of profit, foreshadowing an upcoming deep crisis. Finally, at the last years of our analysis the general rate of profit starts to decline and the Greek economy enters into a new phase.

Figure 4. The value composition of capital



In figure 6 we portray the net rate of profit which is the ratio of operating surplus to gross fixed capital. The net rate of profit is the variable one that determines profitability of enterprises and consequently investments and growth. Similarly with the trajectory of the general rate of profit we can discriminate three phases. The first one[34] is during the ‘Golden Age’ which is described by a high level of the net rate of profit. The second one is the period of crisis when the net rate of profit declines sharply and the third period is the one of neoliberalism which presents an anemic recovery of the net rate of profit. This recovery is mainly attributed to the implementation of neoliberal policies which were introduced by reforms on the labor market. In a similar way with Passas & Maniatis, we estimate a ‘counterfactual’ rate of profit that would be derived in the case that the real unit wage cost had remained at its value in 1985. The difference is that due to the diminution of the real wage cost, the net rate of profit managed to have an anemic recovery or elsewhere the sharp decline that started at the 1970s would persist. The above argument becomes more eloquent in figure 7 where we present the real GDP and the real unit wage cost. Without a doubt from the early 1990s, GDP exhibits a positive growth whilst the real unit wage cost declines.

Figure 5. The general rate of profit



Figure 6. Net Rate of Profit



According to Paitaridis & Tsoulfidis (2012, p.246) the net rate of profit in and itself is not enough to determine the investment behaviour of capitalists since a huge (low) stock of capital could give higher (lower) profits. Furthermore, investment behaviour is determined not only by the (falling) net rate of profit but from various factors among which expectations. In Marx, expectations are not subjective, as in the Keynesian analysis, but rather derived by the movement of the general rate of profit which signifies the health of the system. Indeed[35], we can see from figure 8 and table 3 that, despite the low net rate of profit, net investment measured at 2005 prices reveals a considerable growth at the mid of 90s’reaching its highest peak[36] at 2007. At the same time an analogous growth is exhibited by the net operating surplus measured at 2005 prices. Eventually, net investment falls in 2007 and it is associated with the stagnation on the mass of profits. Concluding, a fall in the net rate of profit is not enough to cause crisis but it must be combined with a falling general rate of profit.

Figure 7. Real GDP (2005) and real unit labor cost




Figure 8. Net operating surplus and net investment at 2005 prices



To sum up, the results are consistent with the Marxian thesis that the outbreak of the crisis is a result of a long and lasting fall of the general rate of profit which in turn shapes the net rate of profit and thus investment behaviour. The fact that the general rate of profit never really recovered from the previous crisis through the normal process of capital devaluation, soon led to a state of over-accumulation which is characterized by the lack[37] of alternative profitable opportunities. This situation was temporarily overcome by the expansion of credit which offered a way out to the over – accumulated capitals and at the same time preserved economic growth. Once this solution reached to an end, due to the contraction of the global finance system, the ‘actual mechanism’ behind current crisis was revealed and it was the structural weakness of the real economy. Consequently, the implementation of MOU policies aim to (a) a rapid and vicious devaluation of capital and (b) creating new profitable opportunities for capital (through extensive privatizations and dissolution of the remnants of the welfare social state). But for workers which have lost the social safety net of the past, the consequences of such ‘solutions’ are more than dramatic.

Table 3. Average annual growth rates

Golden Age

(1960 – 1973)


(1973 – 1985)


(1985 – 2009)

























GDP (real)




UWC (Real)




NOS (real)




INV (Real)






IV.2 Imperialist exploitation and the trade performance of the Greek economy

The ‘internal’ crisis of Greek capitalism (caused by the falling profitability and the resulting overaccumulation) was aggravated by the imperialist exploitation from the more developed Western euro-core countries. A preliminary investigation shows that the entrance of the country in the European Economic Community (EEC) and afterwards in the European Union (EU) has deteriorated competitiveness. This loss of competitiveness had both policy and structural causes. By ceding the control of the monetary and fiscal instruments of economic policy to Brussels Greek capitalism lost critical means for supporting its competitiveness. This was aggravated further by the fact that it had to compete with more developed capitalisms (i.e. with higher capital – labour ratio). When more developed capitals compete unhindered with less developed ones (lower capital – labour ratio) the former are able to reap off extra profits by the latter. Therefore, this combination has resulted in relations of imperialist exploitation (i.e. unequal exchange) that exist within the EU and which divide it between North (euro-core) and South (euro-periphery) economies.

In order to ascertain the performance of the Greek export sector we estimate the intra EU15 terms of trade[38]. At the same time we compare the performance of Greece with that of Sweden and Austria. We opted for these countries for the following reasons:

(a) Sweden is a member of the EU but in contrast with the other two remained outside EMU. So, we believe that it is interesting to see how that decision contributed to the intra EU15 trade performance.

(b) Netherlands is a member both of EU and EMU and at the same time belongs to the euro-core.

(c) Greece, Sweden and Austria have approximately the same population.

In figure 9 we display the evolution of the intra EU15 terms of trade for these countries. Examining the performance of Greece we can see that its terms of trade fall short against those of Sweden and Austria. However from 1963 till 1981, when Greece becomes a full member of the EEC, the terms of trade exhibit an annual growth of 2,1% and manage to converge with the other two countries, and especially with Austria. From 1981 to 2002, when the EMU is officially established, the terms of trade decline annually by 0,06% which reveals a loss[39] of competitiveness in relation with the rest of the EU15 countries. Finally, from 2002 to 2009, the terms of trade remain stable which means that the entrance in the eurozone didn’t play any significant role to the competitiveness of Greek economy. So for Greece, the exposition to the common market and the gradual loss of monetary and fiscal instruments it seems that resulted to a decline in the terms of trade. Turning now to the other two countries, Sweden exhibits an annual increase of 0,5% till the 1995, when it becomes a full member of the EU. From 1995 to 2009 the terms of trade exhibit an annual decline by 0,1% whilst the decision of not entering in the EMU did not actually change the trend. Finally, Austria exhibits an increase in the terms of trade till the entrance in EU at 1995, by 0,1% per year. From 1995 to 2009 the Austrian economy exhibits an annual increase by 1,1%, whilst the decision of entering in the EMU did not either changed the trend.

Figure 9. Intra EU15 terms of trade


From the above figure we can conclude that the entrance of Greece first in the EEC and afterwards in the EU and eurozone has resulted to the deterioration in the terms of trade. It seems that the same stands for Sweden[40] whilst, Austria which belongs to the euro-core economies seems to take advantage from the entrance in the EU15. Finally, the above analysis is totally descriptive and further research is requisite.


V. Conclusions

This paper is a work in progress. Therefore, its conclusions are preliminary as additional research is necessary. The main conclusion is that. in order to explain such a deep and protracted crisis as the Greek one, an explanation founded on the deep economic structure of Greece and EU should be sought for. Explanations based on policy or second-class structural issues do not appear to have the explanatory power required for this task. Therefore, both mainstream and radical explanations fail to explain satisfactorily the Greek crisis. Their failure is not independent from the economic, social, political and geopolitical motivations that lay behind these explanations. On the contrary, the Marxist approach exhibits a far better ability to account for the Greek crisis. Its main thrust is that it seeks a deep structural explanation founded in the sphere of production. However, more work is required in order to verify particularly the ‘external’ aspect of the Marxist explanation.


Appendix I: The timeline of Greek MOUs and their reviews

(1) March 2, 2010: 1st bailout and MOU (110bn euros in bilateral (80bn) and IMF (30bn) loans paid in tranches during a 3year period, 5.5% interest rate, aim a Budget Deficit less than 3% of GDP in 2014

August 06, 2010Greece — Letter of Intent, Memorandum of Economic and Financial Policies , Technical Memorandum of Understanding, and Memorandum of Understanding on Specific Economic Policy Conditionality (European Commission and European Central Bank), August 06, 2010


(2) Aug. 2010: 1st Review

September 14, 2010Greece: First Review Under the Stand-By Arrangement


(3) Nov. 2010: 2nd Review

December 17, 2010Greece: Second Review Under the Stand-By Arrangement – Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece.


(4) March 2011: 3rd Review

March 16, 2011Greece: Third Review Under the Stand-By Arrangement–Staff Report; Informational Annex; Press Release on the Executive Board Discussion; Statement by the Staff Representative on Greece; and Statement by the Executive Director for Greece.


(5) July 2011: 2nd bailout and MOU: (109bn euros by the EFSF and IMF

March 9, 2012: Private Sector Initiative (PSI) haircut of private loans by approximately …

February 2012: 130bn aim in 2020 120.5% of GDP

July 04, 2011Greece — Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, July 04, 2011


(6) July 2011: 4th Review

July 13, 2011Greece: Fourth Review Under the Stand-By Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria


(7) October 2011: 5th Review


(8) February 28, 2011: MOUGreece — Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, February 28, 2011


(9) March 2011: 3rd Review

March 16, 2011Greece: Third Review Under the Stand-By Arrangement–Staff Report; Informational Annex; Press Release on the Executive Board Discussion; Statement by the Staff Representative on Greece; and Statement by the Executive Director for Greece.



May 31, 2013IMF Completes Third Review Under Extended Fund Facility Arrangement for Greece, Concludes 2013 Article IV Consultation


January 18, 2013Greece: First and Second Reviews Under the Extended Arrangement Under the Extended Fund Facility, Request for Waiver of Applicability, Modification of Performance Criteria, and Rephasing of Access–Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece.


December 21, 2012Greece — Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, December 21, 2012


March 09, 2012Greece — Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, March 09, 2012

December 05, 2011Press Release: IMF Executive Board Completes Fifth Review Under Stand-By Arrangement for Greece and Approves €2.2 Billion Disbursement

November 30, 2011Greece — Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, November 30, 2011


July 13, 2011Greece: Fourth Review Under the Stand-By Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria

July 04, 2011Greece — Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, July 04, 2011


March 16, 2011Greece: Third Review Under the Stand-By Arrangement–Staff Report; Informational Annex; Press Release on the Executive Board Discussion; Statement by the Staff Representative on Greece; and Statement by the Executive Director for Greece.


February 28, 2011Greece — Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, February 28, 2011


December 17, 2010Greece: Second Review Under the Stand-By Arrangement – Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Greece.


September 14, 2010Greece: First Review Under the Stand-By Arrangement


August 06, 2010Greece — Letter of Intent, Memorandum of Economic and Financial Policies , Technical Memorandum of Understanding, and Memorandum of Understanding on Specific Economic Policy Conditionality (European Commission and European Central Bank), August 06, 2010

Appendix II: The Twin Deficits Hypothesis and Greece

The Twin Deficits Hypothesis is essentially a Keynesian proposition, as opposed to the neoclassical Ricardian Equivalence Hypothesis. It states that there is a positive relation between a budget deficit and a current account deficit. On the contrary, the Ricardian Equivalence Hypothesis states that there is no link between these two deficits.

Let us assume an open economy.

Total national income (or GDP) is given by the main national accounts identity:

Y = C + I + G+ (X – M + N)               (1)


Y: national income

C: private consumption

I: real investment

G: government expenditure

X: exports

M: imports

N: net income and transfer flows

The Current account (CA) is defined as

CA = X – M + N                     (2)

The alternative expression of total national income (given by eq. (1)) is:

Y = C + S + T             (3)


T: taxes

S: savings

From eq. (3) we get savings as:

S = Y – C – T              (3a)

By substituting (1) to (3) we derive Savings as:

S = C + I + G + CA – C – T = G – T + CA + I = BD + CA + I (4)

Where BD = G – T: budget deficit

Rearranging eq. (4) we get:

CA = S – I – BD          (5)

From eq. (5), two extreme cases are possible:

(a)   If the difference between savings and investment (S – I) is stable over time, then BD’s fluctuations will be fully reflected in CA. In this case a fiscal deficit leads to a current account deficit, i.e. the Twin Deficit Hypothesis holds.

(b)  If BD’s fluctuations are fully offset by changes in S then the Ricardian Equivalence Hypothesis holds.

A number of studies have tested the Twin Deficits Hypothesis for Greece with mixed results. For example, Vamvoukas (1997) argues that this hypothesis is verified in the short and in the long run. On the other hand, Katrakilidis & Trachanas (2011) find that the Twin Deficits Hypothesis is confirmed for the pre-accession to the EMU period (1960-80) with the causality running from budget deficit to trade deficit. However, very interestingly, for the post-accession period (1981-2007), the above relationship is reversed, rejecting the Twin Deficits Hypothesis, with causality running from trade deficit to budget deficit.


Appendix III: The Classification of Sectors


Productive Activities

Unproductive activities

Trade Sectors Royalties Sectors
1. Agriculture, Hunting, Forestry and Fishing 13. Sale, Maintenance and Repair of Motor Vehicles 16. Financial Intermediation
2. Mining and Quarrying 14. Wholesale Trade and Commission Trade 17. Real Estate Activities
3. Manufacturing 15. Retail Trade 18. Renting of Machinery and Equipment
4. Electricity, Gas and Water Supply 19. Other Business Activities
5. Construction
6. Hotels and Restaurants
7. Transport, Storage and Communication
8. Computer and Related Activities
9. Research and Development
10. Education
11. Health and Social Work
12. Other Community, Social and Personal Services




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[*] We are indebted to Costas Passas for constructive comments.

[2] On 20 of October in 2009, PASOK’s finance minister, G.Papakonstantinou, stated that the fiscal deficit’s estimates (6.7% of the GDP) presented by the previous ND government were ‘massaged’ and that the accurate estimate is 12.8% of Costas Karamanlis (New Democracy) had been showing were misstated. He announced that the Deficit is 12.8%. Then he further upgraded the rate to 13.6% on 22nd April 2010. This caused a lively debate in Greece since PASOK’s increase of the fiscal deficit was disputed by both the Right and the Left as ‘engineered’ and inflated. Three were the main arguments against the increase of the estimates. First, that ELSTAT (the Greek Statistical Service under its new PASOK-appointed director) used a new EUROSTAT methodology (which includes in fiscal deficits those of the wider public sector) which was not used by the other EU members (since it was left to their discretion its application). Second, that the 2009 Greek deficit (measured with the new more strict methodology) was compared with the 2008 deficits of the other EU countries. Third, there was a significant underestimation of the GDP (which inflated the deficit/GDP ratio). Quite tellingly, these arguments have been advanced even by other PASOK-appointed members of ELSTAT’s governing council) and the whole affair is currently under penal and parliamentary investigation of G.Papakonstantinou and the A.Georgiou (ELSTAT’s head).

[3] Fitch downgraded Greece to A- , in October 2009, and further degraded to BBB+ by the end of December 2009. Standards & Poor’s and Moody also followed suit. However, it should be noted that much can be said regarding the destabilizing role of the rating agencies. In particular, it has been argued convincingly that ex ante they tend to underestimate fragilities and they tend to overestimate problems ex post (when fragilities have caused them); for a review of the relevant literature and a study of the problem see Gärtner et al. (2011).

[4] The term mainstream economics is used in its broadest meaning. It signifies the dominant tradition of economics. This was initially expressed by the neoclassical economics and the post-Keynesian neoclassical synthesis (which merged neoclassical methods and Keynesian approach macroeconomics). After the neo-liberal onslaught of the end of the 20th century (as expressed by monetarism initially and the rational expectations theory subsequently) mainstream economics became even more conservative. The majority of the Keynesian theory followed suit by adopting significant parts of the neoconservative agenda. This realignment was expressed in the New Keynesians or New Consensus Macroeconomics.

[5]The first MOU set as a short-term objective the fiscal consolidation and as a medium-term objective the improvement of competitiveness and altering the economy’s structure towards a more investment- and export-led growth model. However, in practical terms only the short-term objective was pursued. This was done by the PASOK government but in full knowledge of the troika (despite later bickering).

[6] A typical example is offered by Arghyrou & Kontonikas (2010) in a vehemently pro-MOU article: ‘the majority of EMU countries have experienced contagion from Greece, most prominently Portugal, Ireland and Spain’.

[7] It is a weak argument because, apart from expectations (and the mythical properties attributed to them by mainstream economics), the only way that Greece could contaminate other EU members was through its private creditors (banks and financial organizations). This channel, however important it may have been it has, after the PSI, been checked as the great majority of Greek debt is in the hands of official lenders (practically the troika).

[8] For example, the Greek state could not resort to direct – and more or less obligatory – internal borrowing as it used to do before entering the EMU. It has to borrow through open market transactions; that is find a group of underwriting banks (usually five big banks from Germany, France, US, Greece and some other EU country) to act as intermediators. This group of underwriters found creditors usually in international markets. The problem with this process is that internal borrowing can be far more easily manipulated in case of sovereign debt problems whereas external borrowing (especially when governed by English law) is far less malleable.

[9] Labor mobility within the EU is relatively low. According to an ECB report, in 2000 only 0.1% of the total EU-15 population (or 225,000 people) changed official residence between two member countries (Heinz & Ward-Warmedinge (2006)). Additionally, most of this labor mobility reflected the influx of Eastern European migrants. In a marking contrast, labor migration between US states was 5.9 % of its total population in 2000 (Heinz & Ward-Warmedinge (2006)).

[10] Only 1.24 % of EU’s total GDP is being used for fiscal transfers (McDougall 1992).

[11] In a similar vein, De Grauwe (2003, p.58), while accepting the OCA theory and pointing out himself to certain EMU deficiencies, he rejects US skepticism: ‘The traditional theory of optimal currency areas tends to be rather pessimistic about the possibility for countries to join a monetary union at low cost’.

[12] For an analysis of the intra-imperialist contradictions between the US and the EU see Mavroudeas (2010a, 2010b, 2012).

[13] For a review of the convergence thesis see Mavroudeas & Siriopoulos (1998).

[14] Only the post-Keynesian variant of the third explanation might differ with regard to the Twin Deficits Hypothesis by stressing the current account imbalances as an independent factor causing the Greek problem.

[15] There are some dissenters on this point. For example Hardouvelis (2010) – who had influential governmental advisory positions during several Greek administrations – and Malliaropoulos (2010) do not appear to agree, at least wholeheartedly, that increased wages are the main cause of the deterioration of competitiveness.

[16] Richard M. Goodwin (1967) has ingeniously described the relationship between the level of the reserve army of employees and accumulation of capital, as a unified and cyclical process.

[17] They are both academic economists which have served as finance ministers the former of ND and the latter of PASOK.

[18] The term ‘radical’ is used here to denote approaches belonging to heterodox economics. That means perspectives belonging to the radical post-Keynesian, institutionalism, Radical Political Economy etc.

[19] In fact the notion of ‘financialization’ covers a wide range of phenomena: the deregulation of the financial sector and international capital flows, the proliferation of new financial instruments, the shift to market-based financial systems, the emergence of institutional investors as major players on financial markets etc. However, the definition adopted in this paper focuses on the politico-economic (and thus macroeconomic) aspect of the term.

[20] For an empirical interpretation of this scheme, see section IV.

[21] The term ‘finance capital’ is not identical to Hilferding’s concept (which denotes the fusion of ‘productive’ with banking capital under the dominance of the latter). It refers to capital operating in the financial system (i.e. money and capital markets).

[22] Fine (2009) uses also the notion of ‘financialization’ but in a different sense from that of the approaches mentioned before. For him it does not constitute a new stage of capitalism and of course finance capital cannot acquire an autonomous means of exploiting the working class (it will always be dependent upon the extraction of surplus-value by ‘productive’ capital). Thus, ‘financialization’ is a special phase of neoliberalism. New forms of operation of money capital and novel institutional arrangements are policies that are used by capital in order to surpass its problems and contradictions.

[23] Tomé (2011) offers an interesting critique of ‘financialization’ theories which concludes by showing that they ultimately ascribe to a Keynesian possibility theory of the crisis.

[24] For example Stockhammer (2011, p.90) argues that ‘this was not primarily a Greek crisis but a Euro system crisis’. ‘The Euro has long been a political project based on dubious economics’ (opp.94). EMU is part of the global neoliberal pattern which began with the deregulation of finance (the neoliberal mode of regulation) and gave rise to a finance-dominated accumulation regime. This polarized EU in two groups: a Northern one following export-led growth and a Southern one following credit-led growth (opp.86).

[25] Emmanouel (1972) distinguishes two categories of unequal exchange in international trade:


(a) ‘Broad’ unequal exchange: it is derived from differences in the OCC, i.e. a more developed country (with higher OCC) exploits a less developed country (with lower OCC).


(b) ‘Narrow’ unequal exchange: it is derived from differences in the wage rate and the rate of exploitation, i.e. a higher wages country is exploiting a lower wages country.

[26] A theoretical treatment of the distinction is out of the scope of the paper. However, Karl Marx discusses the distinction in the first two volumes of ‘Capital’ and mainly in the ‘Theories of Surplus Value’. Briefly, for Marx the only worker who is productive is one who produces surplus-value for the capitalist, or in other words contributes towards the self-valorization of capital (Capital, v. I, p. 644). Respectively, the labor power that is employed in the circulation of commodities, money and titles is considered as unproductive which its output is extracted from the surplus value created by the productive worker. For a theoretical treatment of the distinction; see also Gough (1972) and Sungur and Tonak (1999).

[27] EU KLEMS stands for EU level analysis of capital (K), labor (L), energy (E), materials (M) and service (S) inputs.

[28] The imputed rent consists a significant part of total GDP which for 1960 it was estimated as 11,4% of GDP whilst for 2009 it was estimated about 9,7%. We believe that the estimation of imputed measures reflects the neoclassical utilitarianism which states that, whatever is useful it finally contributes to production.

[29] Productive workers are defined as those employed at the productive sectors except for managers, lawyers, clerks and sellers since this kind of workers are employed at the circulation of products rather production.

[30] Compared to other advanced economies, Greece presents a significant share of self – employment to total employment at the first postwar decades due to the lag behind capitalistic completion. However, this share declines from 61,4 % in 1960 to 34,0 % in 2009 (AMECO database) because of the expansion of capitalistic relations of production.

[31] The GDP and the consumers’ price deflator were derived by the AMECO database.

[32] The growth rates of the rate of productivity as well as the other variables for selective time periods are displayed in Table 3 below. For the estimation of the average annual rate of growth of a variable X, we use the ratio ln(Xt+1/Xt)/Δt, where ‘ln’ is the natural logarithm and ‘Δt’ is the time distance between t+1 and t.

[33] The data on fixed capital come from unpublished series of the ELSTAT and Skountzos & Matthaios (1992) and refer to the nonresidential gross fixed capital. The only exception is the last year of our analysis where we made extrapolation with data from AMECO.

[34] The sharp rise from 1960 to 1961 is attributed to a 26,9% increase in the net value added of the agricultural sector compared to a 5% increase in the wages of the sector.

[35] This was the case with the period 1960 – 1973 when the net rate of profit exhibited an average reduction of 0,32 % and, at the same time, the general rate of profit was increasing annually by 2,31% resulting to an unprecedented increase in the net operating surplus and investments.

[36] However, measuring investment as a share of GDP did not succeed to reach its previous peak in 1973.

[37] Shaikh (1992) explicitly recognizes the systematic relationship between the net profit rate (r), the mass of real net profits (π), and the manifestation of crisis.

[38] Terms of trade is estimated as the ratio between exports of goods (fob) to imports of goods (cif).

[39] The same stands for Spain which exhibits an annual rise of 4% for the period 1963 to 1985 (is the year that Spain becomes a full member of EEC) whilst for the period 1985 to 2009 exhibits a significant decline of 1,0% per year.

[40] Sweden is a different case from Greece because the export sector of the specific economy preserves a high extra EU15 ratio.




One response to “‘The Greek saga: competing explanations of the Greek crisis – A Marxist alternative’ – The paper

  1. Παράθεμα: Looking Back: The Greek Debt Crisis – sabrinaspeakethblog


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