Small Firms as a Blind Spot in Greek Austerity Economics

Abstract

This paper offers an interpretation of the Greek crisis focusing on the role of small firms. Most accounts of the crisis stress austerity resulting from macroeconomic conditions imposed from the outside. The paper argues that this is reductionist and ignores that the origin of the crisis lies in internal structural problems. Weaknesses in the productive structure explain why the Greek economy has not been able to recover. A key – but widely overlooked – feature of this productive structure is the preponderance of the small firms. Unpacking this small firm economy helps to understand the origin and persistence of the crisis and to see new ways forward. Analysing the Greek economy through this lens, we can offer an explanation spanning the entire period from the 1960s – the transformation of Greece from an emerging economy to EU member and ultimately to the EZ problem child. Far from being an obstacle to growth, dynamic small firms in the past showed resilience and withstood major shocks – entry into the EU, globalisation and EZ membership. The distinguishing feature of the present crisis – and the reason why exit is proving so difficult – is that small firms have been hit harder and have yet to recover. Moreover, misdiagnosing the crisis in exclusively macro terms, may make small firms’ situation worse. The paper attempts to fill the blind spot by proposing a scheme with two types of small firms – one dynamic and outward looking – aiming to compete – and another defensive and inward faced – looking to the state for protection. The latter were key players in clientelistic political economy, while propping them up imposed burdens on dynamic firms and required persistent borrowing. Dynamic firms were further burdened by a version of the ‘Dutch disease’ – the impact of capital inflows in marginalising efficient producers – providing a bridge between micro and macro considerations. Recovery in Greece without dynamic small firms is only possible in the presence of an external Deus Ex Machina – in the form of foreign investment, debt relief or both. Reading the crisis as a crisis of production and not exclusively one of public finance is a first step towards setting a viable exit strategy. Ending austerity may be a necessary, but certainly not a sufficient condition. Industrial policy towards small enterprise has a crucial role