Trojka failure aggravates Greek drama


The Greeks are known as the founders of democracy, and they are very proud of it. The Greek philosopher Socrates plays an important role in the history of political philosophy: ‘not authorities and traditions, but logical argument is decisive, when it comes to establish what is true, just and beautiful’. The last decade, however, they seem to have the worst functioning democracy in the eurozone. In this essay I will try to show that their economic problems are also caused by unsolved social and political conflicts. More democracy is a necessary condition for having a sustainable economy.

As we know the global financial system had become increasingly fragile over the last two decades. The financial crisis in 2008 meant a shock for the global economy, which fell into a depression. Several countries stimulated their economies – such as the USA and the BRIC-countries. The eurozone leadership, however, decided to do the opposite. They took austerity measures: lower government expenditures, more liberalised labour markets and a smaller social welfare system. Meanwhile, the banks were forced to improve their solvency. Although the global bust took just 1 or 2 years, international trade did not return to stable growth.

The eurozone policies were a disaster, especially for the member-countries with a weak economy. In 2009/2010 the Greek economy appeared the weakest, and therefore the adverse effects of the eurozone policies were the strongest for the Greeks. It made the financial markets very nervous – suddenly the financial opinion makers began to talk about the possibility of sovereign default[1]. The spread between the interest rates of the Southern and the Northern countries increased significantly. This created severe problems for the Southern countries in having financed their government expenditures. The Greeks rang the alarm clock, and the eurozone decided to ask the IMF for assistance. They formed the Trojka, a co-operation between the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF). They formulated a number of conditions in exchange for a series of loans. These conditions were exactly the same as the eurozone had required of their other members: smaller government and more liberated markets. The Greek drama as it enrolled in the period 2010-now, is caused by

  1. The unhealthy state of the Greek economy at the beginning of the global crisis;
  2. The global financial crisis, which was caused by Western banks;
  3. The neoliberal reaction of the eurozone against this crisis;
  4. The neoliberal conditions imposed on the Greek economy.

In the next section we will discuss Greek economic development over the period 1990-2008. Then we see that the Greek economy was quite unstable at the start of the Trojka-intervention. In section 3 we will discuss the Trojka-approach and show that the situation had become worse because of their intervention. In section 4 we sketch the post-Keynesian perspective, which is an alternative policy that would have been more promising (Keizer, 2015). In section 5 we show the analytical differences between the neoliberal and the post-Keynesian approach, and we will see that the alternative perspective is still more realistic. In section 6 we discuss the idea of a democratic economy. In a last section we draw a few conclusions.

  1. The Greek economy during the period 1990-2008

At the beginning of the ’90s the balance-of-payments and the government budget were close to equilibrium. However, inflation and unemployment were too high. This performance indicates that there was something wrong with the institutions of the labour market. In 1990 the government adopted a law, arranging a National System of Collective Bargaining (Koukiadaki, Kokkinou, 2016). A tripartite system was set up, in which government, employers’ organizations and unions consulted each other and negotiated about labour conditions. On the national level negotiations were in particular about the wage level, which should function as a minimum in the sectoral and occupational negotiations. Councils of Dialogues were set up, where the various parties could communicate with each other about their common long-term interests. When assessing the economic performance over the period 1990-2008, we can draw the conclusion that this policy failed. When looking at the balance of payments and the government budget, the economy was far from equilibrium, while the level of unemployment was still high. In case of a welfare state an economy in equilibrium should build capital buffers. If there is a recession, the buffers can be used for the payments of social benefits to those who have become unemployed. But the Greek welfare system was not well-organized. It was fragmented, incongruous and unfair (Matiaganis, 2016). So, when the financial crisis 2008 hit the global economy, Greece was definitely not prepared for such a shock; it had become dependent on foreign goods and foreign capital.

  1. The Trojka intervention

As already said, the global economy, including the eurozone, slipped into a depression. In the language of mainstream economics depressions do not exist anymore. Neoliberal economists pretend to have developed sophisticated analyses of a modern economy. So, neoliberal politicians know what to do in case of a recession, so as to avoid the economy slipping into a depression. If recessions are deep, they prefer to speak of Great Recessions. In other words: ‘Don’t change the analysis, and don’t change the policy recipes’. In section 5, we will discuss an alternative approach, and see that it is important to reintroduce the concept of depression. While mainstream economists define recession as a negative rate of growth of production during two quarters, depression must be defined as a state of the economy where consumers have pessimistic expectations about the growth of production in the middle run.

The eurozone reacted on the global depression of 2009 with a series of austerity measures. In order to decrease their budget deficits, governments had to cut their expenditures significantly. Moreover, they had to implement reforms so as to liberalize markets. Prices had to become flexible again, especially the wage rate. To prevent a great recession the ECB had to increase the money supply – especially by lowering the rate of interest. This would stimulate private investments and offer banks the opportunity to increase their liquidity and solvability.

In 2010 Greece could not pay-off their loans anymore and asked the eurozone-leadership for financial support. The loan conditions were very ineffective. Strong cuts in government expenditures were meant to decrease budget deficits. The collective bargaining system was set aside, which should lead to large wage cuts. When we assess the Greek economy, we should be aware that its eurozone-context is in a depression for a long period already. In this context the Greeks had to accept loan conditions , which aggravated the Greek depression rather than reduce it. The years 2011-2016 were an outright drama: significant decreases in the level of production and employment, and a very large increase in the rate of unemployment. When we look at the balance of payments and the government budget, the dependence on foreign capital and foreign goods has declined. The huge capital support went for about 90% to the Western banks; it was not used for the recovery of the Greek economy. Making up the balance, we can say that the multinational banks got most of their money back, while having received interest payments that were and still are much higher than paid by Northern countries. When looking at the price the Greek people had to pay for the capital support, we must conclude that the Trojka is playing with fire. About half of the young workers are unemployed, most of them without any social benefit. On the whole, the unemployment rate fluctuates between 25-30%. There is hardly a social safety net; nevertheless the Trojka wants to see pension benefits being cut. Political radicalization is the result. The current left-orientated government also bowed for ‘capital’ at the cost of ‘labour’. In the next section, we will analyze the economic theory that functions as the foundation for the neoliberal programme. It appears that this analysis is far from realistic and that there is an alternative analysis of the situation, which is more realistic. In other words, much of the Greek suffering was and still is unnecessary!

Now we are at the core of the neoliberal failure: ‘Whatever the problem, there is one solution that will apply always and everywhere: liberate market economies from government intervention’. In the case of Southern Europe, and especially Greece, the result is political radicalisation. Conservative powers are organized at the right wing of the political spectrum, while socialist powers operate on the left wing. Greek society has become even more conflicting than it was in the last 30-40 years. In the next section, we will discuss the analytical background of the Trojka-approach in more detail and we will offer an alternative approach, which will appear to be more realistic.


  1. The neoclassical versus the post-Keynesian analysis

Neoclassical economics has dominated Western universities from the eighties of the twentieth century onwards. Other approaches are hardly taught anymore. This monopoly has framed the minds of so many economists; definitely also the minds of the people who occupy relevant positions in powerful Western institutions. Before the crisis there was only a debate about the level of the interest rate: ‘it should be a little lower; no, it should be a little higher’. Other economists warned for a serious crisis, but this was preaching for deaf ears. The Trojka considers neoclassical analysis as an acceptable abstraction, which describes the main mechanism determining economic behaviour. The paradigm of this analysis says that humans are economic (1), rational (2) and non-social (3) in nature. The logical implication can be shown by the most famous picture in economics: the law of supply and demand, explaining the functioning of the market mechanism (Figure 1).

Figure 1 shows that demanders and suppliers are always somewhere on the demand and on the supply curve respectively. If the quantities demanded and quantities supplied are not equal to each other, changes in the price lead to shifts along the curves until equilibrium is reached. This mechanism determines price and quantities sold on all markets, also labour and capital markets.











When we analyse an economy as a whole, neoclassical economists assume that all markets are capable of restoring their equilibrium without disturbing the adjustment processes on other markets. There is one exception: the money market is considered as a true macro-market. Adjustment processes on the money market affect processes on all other markets. So, if the central bank increases the amount of money in circulation, all other markets will face an increase in the quantity demanded. This leads to an increase in the general price level. In figure 2, we have presented a situation of general equilibrium in a market economy, being the result of the functioning of many market mechanisms. Each market restores its equilibrium by a change in the price level. The money market shows us the way, in which changes in the interest rate (i) equals the quantity demanded (Md) and the quantity supplied (Ms).

It is obvious that economists, who frame the world this way, can only advise governments to let the markets ‘do their job’. ‘Governments should not intervene into labour markets. Unions can only be accepted if they are clubs, which act on behalf of their members. Governments should not intervene into money markets. Let independent central banks do their job, which means that they should aim at price stability. If there are monopolistic tendencies on goods markets, an Anti-Trust Authority, which operates independently from the government, should keep competition intact’.

This short exposition of neoclassical analysis clarifies why the Trojka advocates lower government expenditures and markets free from government intervention. They permanently stress the necessity of reforms, which means: ‘make prices, wages and interest rates flexible. Then markets can do their job, and the end result is that the market economy as a whole is always close to equilibrium’.

Heterodox economics differs in three respects (Keizer, 2015). In the first place, people are not only economically, but also socially motivated. People tend to group together and rank groups in order of status. Every group is constantly trying to maximize its status. Secondly, people are psychically motivated to maximize their short-term self-respect rather than being

perfectly rational. So, if research shows that people have made very serious mistakes, they are motivated to ignore this information. Thirdly, neoclassical economics starts with a simple analysis, in which all people are perfectly informed about their preferences and the characteristics of the goods. Heterodox economics, on the other hand, starts with a simple analysis, in which people are very uncertain about their future and experience their situation as chaotic. They develop rules of behaviour, which make it possible to feel safe. Only then people start economic activities, which are supposed to offer them some gain. When we compare the difference in starting point, we can conclude that the heterodox view is more general than the neoclassical analysis.

Especially in times of uncertainty, as is the case in the eurozone now, heterodoxy can deliver a more adequate theory. While in neoclassical economics everything is about flexible versus fixed prices, the core of heterodoxy is about the question what institutional framework leads to an economic development, that reaches democratic goals.

In the heterodox approach an economy in depression needs institutions, that help the economy out of the severe bust. Now the problem with flexible prices is that they decline in all markets, also the labour and capital markets. Neoclassical economists advise interest cuts by the central bank and wage flexibility, definitely leading to wage decline. In that case actual income declines. What neoclassical economists don’t recognize is the fact that the expectations of the consumers become more pessimistic. It means that they consume less, save more and start paying-off their loans more than in normal times. The result is that the depression deepens. When we picture this reaction pattern by means of labour supply and labour demand, we see that the market is unable to reach equilibrium by means of flexible wages (figure 3). In figure 3.a we see that a wage decrease leads to a shift of the demand curve; in figure 3.b we see that wage cuts do not lead the labour market back to its equilibrium. It means that we need a government to get the market economy out of its depression.










The ‘advice’ of the Trojka to cut government expenditures, including pension benefits and to break down the system of collective bargaining, are counter-productive[2]. Their attempts to lower the pension benefits, while knowing that other types of social benefits are low or even outright absent have the same adverse effects.

The recent conclusion of the IMF that Greece will not be able to pay-off its loans, is correct. But this inability is also the result of the Trojka policy; not only of the bad macro-policies of Greece in the pre-crisis period.

  1. An alternative approach to the Greek crisis

The opposite of a neoclassical approach is a typical macro approach. The macro story runs as follows. The eurozone is in disequilibrium. The consumers are economically depressed. It means that they are pessimistic about the medium-run economic development. That is the reason why they are inclined to save more and to payoff their consumer loans. Even if their actual net wage is increasing – through incidental cuts in their tax rate, for instance – they are reluctant to spend the additional money. The investors notice the depression among the consumers and are also inclined to save their profits and pay-off their loans. An additional problem is the fragility of the banking system. The banks have two reasons for being reluctant in giving credit to firms. Firstly, because they consider the investment plans of firms as risky. Secondly, they use their resources to improve their liquidity and solvability ratios, which make them more solid. In this situation the ECB is unable to stimulate investments by lower interest rates. Neither the banks nor the firms are inclined to react positively on so-called expansive monetary policies (‘quantitative easing’). To let the money supply grow with a warranted rate, the government should step in and finance part of their investments monetarily.

If the Trojka does not radically change its strategy, unemployment and poverty will stay on socially unacceptable levels. The IMF tries to persuade the ECB and the EC to a partial remission of the debts; so far without success. That’s a pity, since this idea could give the Greeks more oxygen, without loss of face for the Trojka, because of the serious mistakes they have made in the recent past. Irrationality rules the eurozone!

The Greeks feel humiliated. High unemployment and poverty is painful. But in this situation it is – to a certain extent, at least – the eurozone is to be blamed. This makes people furious and radical. To prevent a conservative-right wing victory in the next elections, Greece should take the following measures.

  1. To solve the problem of uncertainty and depression, the government should increase their infrastructural investments. The ECB should be prepared to finance these investments by means of newly created euros. It does not lead to an increase of the debt when the period is eternal. Additionally, the interest rate should be zero.
  2. It would have been better if Germany and the Netherlands had implemented this policy. Unfortunately, these countries are stubborn, although they have a structural imbalance towards other countries for a very long period already. In the current situation, the ECB should increase the amount of money in circulation by financing Southern investments (increase in this amount of money over 2015 was about 1%, which is far less than necessary).
  3. To make the Southern economies more stable, the nominal macro wage rate should be kept fixed for a number of years. The increase in production and income will reduce unemployment and after a while it might create some inflation. That is no problem at all; a national system of collective bargaining is responsible for a fixed nominal wage (rather than a decline because of unemployment). Some inflation leads to lower real wage costs, thereby improving the competitiveness of the economy.
  4. As soon as the economy is close to equilibrium and the consumers have faith in its medium-run performance, the depression is over. Then the time has come to implement institutional reforms. The most important sector in Greece that needs reform is the social security and assistance system. Now it does not function as a buffer for those who are ill, disabled, and unemployed. In times of bust, it has also an economic function: to keep the demand for goods on track. The social function of the system is obvious. A well-organized, congruous and fair system delivers a major contribution to social peace.
  5. Southern Europe suffers from corporatist-like institutions. On the labour markets they can fulfil an important function, in particular in times of depression, but on goods markets they can hinder true technical and economic progress. Professional groups might monopolize particular crafts, thereby protecting privileged people. As soon as the institutions are genuinely democratic, these corporatist elements can be cleared up.

In the next section, we will discuss what we mean by a true democratic society.

  1. Democratic institutions are superior in the end

The concept ‘democracy’ refers to self control. Persons, organizations, government agencies, countries all rule their Selves. Directors, Boards, Councils should always be legitimized by those who are supervised. The idea of democracy is an ideal-type of a system of governance. Straight application to the real world is quite problematic. Corruption and fraud seems the norm, virtuous behaviour the exception. Southern European countries are used to hierarchy and masculine behaviour. Many Southern people consider corruption and fraud as quite normal – as something ‘always been’. Northern people are more strict; their culture is closer to the ideal-typical democratic attitudes. It seems as if increasing interaction between North and South leads to less strictness in the North. In the sixties and the seventies of the twentieth century many people in Western Europe liberated their Selves from traditional culture; society became more open and transparant. But increasingly we discovered much fraud and corruption – and it seems only the tip of the iceberg. Vicious behaviour undermines the functioning of markets as well as of organizations, including government agencies. The two major trends in the world – globalization and technological progress – make it necessary to improve the virtuousness of the elite as well as of the mass of the people. Without mental-cultural improvement, crises will become increasingly severe.

Back to Greece. In 1974, the Third Hellenic Republic adopted legislation, in which a genuine tripartite system of consultation and bargaining was designed. According to the organizations of workers and of employers, the government intervened too much, making true consultation impossible. In 1990, new legislation was adopted, in which the tripartite system transformed into a bipartite system. Consequently, employers’ and workers’ organizations were allowed to decide upon important issues with respect to labour conditions. The new principle was called ‘collective autonomy’. When we look at the performance of the economy, the price of social peace was high: increasing macro-instability and unemployment, and decreasing competitiveness. In other words: the people who participated in the system were unable to serve the national interest. They wanted to get rid of government influence, but did not take over its responsibility. These weak personalities took vicious decisions, serving their own short-term interests. Groups, which were strongly represented went for their own income (profits, wages, salaries) and their own prestige – always at the cost of the weaker groups.

When the Trojka was asked to give financial support, it requested for liberalization of the system of industrial relations. Rather than a system of multilevel bargaining, they aimed at decentralization and decollectivization as much as possible. Their aim was to reach wage flexibility, the typical neoliberal solution. As we have seen strong wage reduction did not lead to recovery – on the contrary, it aggravated the depression.

With respect to the welfare system we see the same pattern: lower social benefits and an increase in the retirement age. As we saw the Greek welfare system was fragmented, incongruous and unfair. Most of it was of conservative origin and focussed on the preservation of the existing order, including its inequality. Especially the pension arrangements for the civil servants were generous. Other services, such as employment assistance were almost negligible. The social system mirrored the segmentation of the labour market: generous arrangements for the ‘insiders’ (civil servants, workers in public utilities and in formerly state-owned banks), modest arrangements for the underprotected mid-siders (workers, who are formally employed by private firms) and a third category of people, who are precariously employed on a temporary or part-time basis, immigrants in the shadow economy, women and youth trying to enter or re-enter the labour market, the long-term unemployed and others lacking access to secure jobs and associated benefits. The group of the privileged counts about 1 million people, the group of mid-siders about 1.5 million and the group of outsiders about 2 million.

By cutting the relatively generous benefits, the Trojka generated an adverse economic effect and a very negative social effect: many families live on the pensions of the grandparents and cuts in their benefit rate has had disastrous effects on the mood of so many people.

A better alternative has the following characteristics.

  1. Nominal social benefits are fixed for a number of years, as the wages are;
  2. As soon as production is rising, part of the rising profits must be used to paying taxes and to paying-off debts.
  3. As already said the government should increase its infrastructural investments, financed monetarily;
  4. After a number of years, nominal wages can increase with 1-3 % per year, dependent on the nominal growth of the GDP;
  5. As soon as the economy reaches full employment, it is time to restructure the system of collective bargaining and the welfare system. The first is meant to set nominal wage increases, which must be interpreted as the minimum for all workers. Sectoral or professional bargaining can decide to further increase some micro wage rates, in particular in case of scarcity. On an individual basis, employers can decide to scale up the wages for the very productive workers. In case of depression, which is not of a cost-push character, the government should use its authority to extend the validity of the collective contracts to all workers in the sector or region of occupation. The welfare system must become an integrated, congruous, fair and sober system. Every person can always decide to increase its own savings, so as to have buffers in case of bad times. It would improve the quality of the social relations and create a buffer for the economy as a whole.
  6. A very important last point is the mentality of the Greek people. Many persons and many groups feel as if they are caught in a prisoners’ dilemma. Whether I am virtuous or not, it will not affect the collective outcome. A solution to this dilemma runs as follows: a person decides to escape from this prison and liberates itself from viciousness. When he discovers vicious behaviour from his family, neighbours or boss, he talks with these people in private. Slowly the number of persons, who are liberating their Selves, increases, thereby improving the functioning of these ‘entrepreneurs’ and of the organizations in which and the markets on which they operate. When the government functions as a powerful instrument in the hands of a number of privileged groups, families and persons, only the actions of persons can solve this dilemma. For instance, persons can decide to pay their taxes correctly and keep the rules as set by government and tradition. ‘Do as if you trust your boss. If you discover, by accident, that he is not trustworthy, discuss it with him in private. Search for persons who are like you and erect groups, which aim at serving the general interest. Invite rich persons and firms to partcipate and sponsor your activities’. In socially backward neighbourhoods, sportsclubs and music bands can be set up. Within the firms, individual workers can seduce the leadership to set up training activities, which are also open for unemployed and disabled people. A true democracy is based on private initiative by persons, rich and poor. Democratic culture is threatened by social conflict – conflicts that start in the minds of the people. Advise: ‘be open to your self, be open to others, and be aware that humans are stewards rather than just exploiters of their (natural) environment’. In this way people can be proud of their Selves and of their country.


  1. Conclusion

In the pré-crisis period Greece had designed an adequate structure for labour and social affairs. Unfortunately, there was no common culture about how to use this structure. Unions, employers’ organizations and government were conflict-prone. These conflicts were solved by structurally spending more goods than were produced. This made the Greek economy unstable and dependent on foreign goods and foreign capital.

In 2008 the financial crisis, caused by vicious behaviour of Western banks, hit the global economy. The eurozone reacted adversely, and aggravated the depression. As always, the weaker economies are hurt more than the stronger ones. Greece was the first, who was attacked by speculative capital. The spreads between Greek bonds and German and Dutch bonds were extreme. Greece had to ask for financial help and the Trojka offered it. Consistent with the dominating view in the eurozone, Greece also had to cut its government expenditures and liberalize its markets. This article shows why this policy aggravated the Greek situation rather than it would help the Greeks out.

A much better policy consists of the following elements:

  1. Restructuring Greek government debts: lower interest rates, longer pay-off periods, debt remittance.
  2. Increase in government investments, part of them monetarily financed; of course, all government programmes should be checked in terms of effectiveness – whether there is a crisis or not.
  3. An integrated, fair and sober welfare system should be set up
  4. Massive training of those who play a role in the system of collective bargaining; rejuvenation of the staff.
  5. The National System of collective bargaining should set minimum standards for the yearly increase in the contractual nominal wage rate.
  6. When the crisis is over, corporatism on goods markets should be reduced; no guilds anymore; only hallmarks.
  7. Stimulation of the idea of social entrepreneurship, sponsored by rich persons and organizations; also for the setting up of new corruption-free political parties.
  8. A democracy can only function well if many persons are democratic in their mentality: strong personalities, who have liberated their Selves from the fatal attitude ‘why me again?’. Long live democratic Greece!


    1. Keizer, P. (2015), Multidisciplinary Economics, A Methodological Account, Oxford: Oxford University Press.
    2. Keynes, John Maynard, The General Theory of Employment, Interest and Money, London: MacMillan Press; especially chapter 19 about the nominal wage rate.
  • Koukiadaki, A., C. Kokkinou (2016), Deconstructing The Greek System of Industrial Relations, European Journal of Industrial Relations, 1-15.


  1. Matsaganis, M.(2016), The Welfare State and the Crisis: The Case of Greece, European Briefing, reprint of Journal of European Social Policy, 2011.

[1] The announcement of the Greek prime-minister Papandreou that the Greek statistics were flawed, and in need of correction, was an important trigger in this respect. It is also important to know that the statistical office of the European Commission, Eurostat, knew how the Greeks had calculated their deficits and debts.

[2] During the thirties of the previous century in many West-European countries systems of collective bargaining were set up in attempt to solve the problem of the Great Depression.

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