Papandreou’s Influences: The Decisive Role of the American Economists Stiglitz and Krugman

Why was the prime minister late in taking fiscal adjustment measures? Why, when he finally adopted them, did the government itself undermine them? The answer concerning these critical questions lies partially in the ideological influences of Mr. George Papandreou, the American center-left scholars, the important members of which are his counselors.

On Nov. 3, 2008, just after the Lehman Brothers’ bankruptcy and while our country’s problem had already become obvious, Papandreou gave a speech in the so-called “Stiglitz Committee Conference” in Washington, D.C., underlying the need to use Keynesian policies to deal with the crisis, to take measures to protect the weak and supervise the voracious financial system.

“The problem is not inflation but the recession,” noted the leader of the opposition at that time, echoing the views of economists like the Nobel Prize awarded Paul Krugman and Joseph Stiglitz.

Since then many things have changed for Papandreou but not for the American center-left thought elite, from which he had obviously been influenced. Stiglitz, who is known as an informal counsellor of the prime minister, had already asked for the creation of a support mechanism and the extraordinary lending of Greece from the EU in January 2010, in line with the IMF, something that finally happened. But this support took place under conditions with which Papandreou himself disagrees.

In repeated public interventions Stiglitz has stated, “The tactics of austerity that the EU imposes leads to the shrinkage of the economy and has been proven to be unproductive.”*

Paul Krugman, with whom Papandreou has repeatedly met, has the same opinion. In his regular column in the New York Times, the American economist does not miss a chance to stigmatize the “recessive and deflationary” measures which the eurozone follows, as well as the insistence of the European Central Bank “not to extend its institutional role by creating new money.”*

The impact of this specific school of thought on Papandreou is certified by the sum of his public appearances before the 2009 elections and also from the composition of his first governmental scheme, with the award of critical portfolios to the “social” side of Panhellenic Socialist Movement, led by Louka Katseli.

Regardless of the general effect, the ideas of the American center-left school of thought which has influenced Papandreou, seem to be problematic for our country’s case because of two reasons.

First, they completely clash with the current views within the EU and the European Central Bank, from which our country is entirely dependent on for the payment of pensions and salaries. This fact resulted in, though fairly so, the impression that the government has introduced a fiscal adjustment program which the government itself does not believe in, creating tensions between the troika and few specific ministers.

Second, the implementation of Keynesian expansionary policies by a state which already from the beginning of the crisis had a huge deficit and debt level is practically impossible.

Finally, if Stiglitz lived in Greece maybe he would have advised the prime minister differently.

Restructuring the Greek debt

Despite his public interventions against the restructuring, the truth is that the prime minister had hoped, from the beginning of the crisis, that the country will end up with a kind of regulation and relief of the public debt. He was also expecting that this regulation will refers to debts towards institutional lenders (states and the European Central Bank), something that of course cannot be excluded at the next level.

Nevertheless, all of Papandreou’s mentors from the American center-left thought favored the restructuring of the Greek debt. What is usually overlooked is that the restructuring does not solve the problem of deficit creation by a non-competitive state which must comply with the rules of a monetary union. Maybe Papandreou should not have listened to Stiglitz that much, who was awarded the Nobel Prize for his work on information asymmetry but to (the not left-oriented) Robert Mundell, who essentially “designed” the Euro currency. In his interview for Kathimerini (on Aug. 8, 2011) Mundell demonstrated that Greece’s main problem is the combination of a large deficit (financial and competitive) and high debt. The partial dealing with one problem does not solve the other.

*Editor’s Note: This quote, accurately translated, could not be verified.