But it also shows that external pressure is crucial in unlocking the reform potential, writes Matthias Mory

Morys, Matthias

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5/18/2016History shows that Greece is able to implement meaningfulreformblogs.lse.ac.uk /businessreview/2016/05/18/history-shows-that-greece-is-able-to-implement-meaningful-reform/Greece is heading for another showdown with its creditors. With a major bond payment due in early July, expectanother round of arguments on the need for structural reforms from the one side and the necessity of debt relief fromthe other; and rest assured that the creditors’ preferred background tune “Grexit” will also be playing this summer,though less loudly than on previous occasions given Europe’s need to co-operate with the country over the refugeecrisis.Greece’s fundamental problem with monetary unions: past and present          What makes euro membership so difficult for Greece? Studying the first century of modern Greek monetary historyfrom the foundation of the National Bank of Greece in 1841 to World War II shows striking parallels to the present:repeated cycles of entry into and exit from monetary unions (mainly the gold standard, the euro of its day),government debt build-up and default, and financial supervision by West European countries. The main problemwas, not unlike today, balancing the budget. Rather than reforming taxation, persistent budget deficits were eithermonetised (“printing press”) or financed through international bond markets. Both strategies came at a price. Strongreliance on the printing press made Greece’s currency depreciate vis-à-vis the currencies of countries with balancedbudgets, ending its coveted monetary union membership. Financing deficits through bonds also had its pitfalls: highlevels of foreign debt eventually resulted in financial supervision, by which creditors took control of the country’sfinances, either following default (1898) or “pre-emptively” (1928: League of Nations loan-cum-conditionalityagreement).The role of foreign countries in making monetary union membership workFinancial supervision was not more popular at the time than it is today. Yet ironically, it was precisely the strongforeign involvement which cured the old diseases: budget surpluses began to emerge, the central bank becamemore independent and eventually the country was able to join the gold standard (in 1910 and 1928, respectively).Greece’s economic policies were systematically different under financial supervision: simply put, “prudent” under1/3supervision and “lax” otherwise. Financial oversight was a blessing in disguise as it enabled the country to achieveits long-standing objective of exchange-rate stabilisation. The 1898-1914 experience is particularly instructive:Greece began collecting existing taxes more efficiently and introducing new ones that were standard practiceelsewhere. For instance, it introduced inheritance tax and income tax, following decades of futile purely domesticreform attempts before.Is the loss of sovereignty a price worth paying for monetary union membership? There are no clear answers, but thepast entails important lessons for today. Most contemporaries would have answered “yes”: gold standardmembership was sought for a combination of economic and political factors, with political considerationssubstantially more important than for other European countries. Membership of the gold club before World War I wasseen as an important pillar of a much larger modernisation programme; eventually achieving this status in 1910 wascelebrated as evidence of how much Greece had matured politically since independence (1832) and how much ithad caught up economically with Britain, France and Germany as the leading European economies. The interwarpolitical rationale for joining gold was no less powerful: currency stabilisation became closely linked to key politicalissues such as infrastructure projects, refugee relief, and political alliances. International funds would only flow, ifGreece re-joined the gold standard and allowed foreign oversight of its finances; the country grudgingly acceptedfinancial supervision for a second time. Lessons for todayThe long-run record of Greece suggests that lasting monetary union membership can only be achieved if thecountry’s finances are effectively constrained. The extensive monitoring by the IMF, the European Commission andthe ECB since the first bail-out in 2010 corresponds closely to earlier experiences with monetary unions and can beseen as the country-specific way of making the euro work.A second lesson relates to domestic attitudes: understandable public resentment against ‘foreign intrusion’ needs tobe weighed carefully against its potential to secure the long-term political and economic objective of exchange-ratestabilisation. The high drama of summer 2015 – when the Greek electorate first rejected a referendum on theconditions attached to a third bailout, only for the Greek government to agree to more stringent conditions a weeklater – followed a well-established pattern: if forced to choose, Greece prefers monetary union membership and iswilling to accept a high level of foreign interference. EMU membership enjoys extremely wide acceptance across thepolitical spectrum; any politician openly contemplating the idea of leaving the euro during last year’s turbulentsummer was evicted from parliament either by party-internal procedures or in the subsequent elections inSeptember 2015.This is explained by the importance which Greece has consistently attached to political factors behind monetaryunion membership. In the case of the euro, the weight of political compared to economic considerations has evenincreased over time, as many of the envisaged economic benefits have vanished (Greece has had zero growthunder the euro: boom and bust have cancelled each other out). While such political motivations are somewhatdiffuse by their nature (to remain part of an economically and politically more integrated euro area as an avant-garde group within the EU; or even the euro as a political status symbol), they have created a powerful narrative tostay within the euro essentially at any economic cost. The troika (European Commission, International MonetaryFund and European Central Bank) has ignored such political factors at its own peril: in underestimating its ownbargaining position vis-à-vis Greece, the troika has all too often acquiesced into diluting structural reforms whichwould have helped the Greek economy. The first 100 years of modern Greek monetary history show that Greece isable to implement meaningful reform, but they also act as a reminder that external pressure is crucial in unlockingthe reform potential. Greece and the troika would do well to remind themselves of the ambitious reform agenda theyset themselves in 2010.♣♣♣Notes:2/3This post is based on the authors’ article Greece in a Monetary Union: Lessons from 100 years of exchangerate experience, presented in the 2016 Conference of the Economic History Society.The post gives the views of its author, not the position of LSE Business Review or the London School ofEconomics.Featured image credit: The headquarters of the National Bank of Greece in the late 19th century in Athens.Author unknown. Public domain.Before commenting, please read our Comment PolicyMatthias Morys is an economic historian at the University of York (UK). His research interestsinclude 19th and 20th century monetary history and the economic history of Central, East andSouth-East Europe. He acted as an academic advisor to the South-East European central banks(including the Bank of Greece) in their 2006-2014 project to collect, systematise and publish theirmonetary history data from the 19th century to World War II. Copyright © 2015 London School of Economics3/3

History shows that Greece is able to implement meaningful reform

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