Greece became the center of Europe’s debt crisis when the country was shut out from borrowing in the financial markets and by early 2010 faced bankruptcy. To avert the catastrophe, the “troika” (the International Monetary Fund, the European Central Bank, and the European Commission) issued a bailout of €110 billion. The crisis, however, quickly spread to Italy, Spain, and Portugal, revealing weaknesses in the architecture of the Economic and Monetary Union (EMU). Since then, a major legislative overhaul aiming to strengthen and complete the EMU involved increasing the resilience of EMU’s banking and financial sector (Banking Union) and reconstructing economic governance through the (“upgraded”) European Semester and its Six Pack, and the TSCG set of rules for economic and fiscal surveillance.

As of 2018, the Eurozone’s future remains hotly debated. However, before entangling in the discussion over the future of the Euro, one must first identify the crisis’ true causes. One “set” of explanations of the crises of the Euro periphery focus on external factors. Two Nobel laureates have argued that the main cause of the crisis is the (flawed) creation of the euro itself (Stiglitz; Krugman). Are these external explanations enough?

The Greek and Portuguese stories are telling. Scholars coming from different disciplines have argued that these countries –at least after their (successful) democratization– have followed a more or less similar historical trajectory when it comes to their socio-economic and political development, a view that is in line with the recent “varieties of capitalism” approach. As the American political scientist Samuel Huntington has argued, both belong to the third wave of democratization, undergoing a transition to democracy at the same time. In both countries, the democratization process of the 70s left its mark on the rules of the political competition by altering –among other things– the distribution of power between the State and the interest groups, limiting the State’s ability to resist to the demands various socioeconomic groups posed. This “new reality” in turn, played a crucial role in determining these economies’ structure. Even the crises that Greece and Portugal experienced were similar: a sovereign debt crisis with the countries being unable to repay or refinance their government debt without the assistance of third parties. If these countries have such similarities, and if the external (systemic) explanation is a satisfactory explanation, how come that Portugal managed to undertake the necessary reforms and, from 2014, is no longer subject to strict supervision while Greece seems less able to escape its fate?

Among the first to ask this question was Afonso[1], noting that when it comes to implementing their adjustment programs, in spite of their many cultural and socio-political similarities, the Greek and Portuguese political process supporting these adjustments has differed considerably. In Portugal took place a cross-party co-operation while Greece experienced a sharp political competition dominated by extensive blame-shifting strategies. But what explains these differences in the political economy of reforms in these countries? For Afonso it is the strength of the clientelistic linkages: the stronger they are, the more reluctant the governments to promote fiscal retrenchment. For the author, politicians in Greece (where, according to him, linkages were stronger) felt more vulnerable vis-à-vis their clienteles, providing political support in return for public spending, and could not agree on reforms. In Portugal, the “resistance” was weaker.

Although we agree with the “outcome” (cross-party cooperation vs. blame game) the author describes, we have some reservations regarding the explanatory mechanism he provides (strength of clientelistic linkages). First of all, Greece experienced much larger capital inflows than Portugal. It is therefore natural that the adjustment process in Greece would take longer given that the distortions were greater. Another objection to Afonso’s arguments is that he ignores the issue of social capital and trust. Fukuyama defined social capital as an informal norm that promotes cooperation between individuals. In the economic life, it reduces transaction costs. In the political life, social capital “promotes the kind of associational life that is necessary for the success of limited government and modern-day democracy”. Greece is an example of a low-trust society. The low levels of social capital in Greece crucially affect the level of performance in several public policy areas. In addition, low levels of social capital do not simply affect the performance of the state but have also a deeper, social impact. In low-trust societies, the citizens desire state intervention even if the government is ineffective. To the degree that the adjustment programs were linked with deregulation and the retrenchment of the state, they left a “power vacuum” that created even more uncertainty and instability. A society that has not yet found a new “pacing” will find it difficult to solve its problems, regardless the strength of its clientelistic linkages or the systemic obstacles/opportunities.

In this short note we do not intent to underestimate the importance of the systemic factors of course. We simply argue that, within the framework that the systemic factors create, it is the domestic political economy conditions that will tilt the balance and determine which path (from all the available options) will be chosen in each case. Under this light, an “ideal” Economic Adjustment Program would consider not only the structural (and sectoral) composition of an economy but also its political economy specificities.

[1] Afonso, A., Zartaloudis, S. and Papadopoulos, Y. (2015). “How Party Linkages Shape Austerity Politics: Clientelism and Fiscal Adjustment in Greece and Portugal During the Eurozone Crisis”, Journal of European Public Policy 22(3): 315-334