Greece Crisis Has Roots in Indulgent U.S. Policy

May 11 (Bloomberg) — How did Greece get this way? That's what Americans wonder as the small country's debt rocks world markets.

There are plenty of obvious answers. Greek officials lied to the European Union when joining the euro. Corruption that preceded Prime Minister George Papandreou was the problem. And so on.

Here's another explanation: Greece didn't become what it is all by itself. We made it that way.

Recall the post-World War II situation in Europe. Josef Stalin was solidifying his control of Eastern Europe; the U.K. and the U.S. were desperate to stop him from advancing. To preclude that the U.S. adopted a policy that might be summed up as: "anything but Soviet communism for Western Europe."

The military and intelligence side to this policy is well remembered. The North Atlantic Treaty Organization and Central Intelligence Agency operated all over Western Europe, pushing back against the Soviets where they could. The CIA's actions were controversial and at times tragic. In the Greece of the late 1960s and early 1970s, a murderous military junta enjoyed the quasi-official support of the Nixon White House.

Western Europe, and especially, Greece, exacted much in exchange for shunning communism. Marshall Plan money, road construction cash, fighter jets, they all flowed to Athens at one point or another. In addition, political parties of European nations asked for, and often got, U.S. support of one kind or other. Sometimes money or advisers went to support conservative-led governments.

Big Spenders

In addition, we also supported heavy-spending, left-leaning national governments, the kind we usually refer to as social democracies. When it came to Europe, the U.S. government went along with prohibitive tax rates, nationalizations and union thuggery that Americans would deem too radical for their own country. After all, who were we to intrude on new democratic governments? All that mattered to the U.S. was that they weren't reporting to Moscow. If socialism in West Europe in the short run was necessary to win the Cold War and save capitalism then that was fine with us.

The consequences of the deal were especially dramatic in the Greece of the 1980s. The prime minister then was Andreas Papandreou, the father of today's prime minister. To U.S. diplomats, Andreas Papandreou looked unstoppable — and terrifying.

For starters, he was part of a dynasty — his father George had also led Greece. This Papandreou operated with the unchallengeable authority of one who had been imprisoned by the junta. He had learned or taught economics at the University of Minnesota (the state where the current Greek leader was born), at Harvard, and at the University of California-Berkeley. He was bringing democracy back to its cradle, Greece.

Open Marxist

Papandreou's party, the Panhellenic Socialist Movement, or PASOK, now led by his son, was unapologetically Marxist. Papandreou increased tensions over Cyprus, needling the Turks. He made friendly gestures toward Moscow, calling General Wojciech Jaruzelski's imposition of martial law in Poland "heroic."

But Papandreou gave in on the important security issues: Greece remained in NATO. He allowed the U.S. to keep strategic bases at Hellenikon and on Crete. The relief was so immense that Washington chose to overlook Papandreou's economics. How bad could a macroeconomist from Harvard be, anyhow?

Turning Out Awful

Awful, as it turned out. Papandreou took land from the Greek Orthodox Church. He mounted an expansion of government so sudden that state expenditures grew to 50 percent of gross domestic product in 1990 from 30 percent of GDP in 1980. He borrowed so heavily that in his era, 1981 to 1993, government debt averaged 111 percent of GDP, up from an average 29 percent in the late 1970s. In Papandreou's time debt rose, GDP growth slowed, and the unemployment rate quadrupled, to 8 percent. Even post-Papandreou reforms couldn't undo the damage, felt to this day.

The same dynamic played out in a smaller way in another nation on today's credit watch list, Italy. The U.S. routinely supported the relatively conservative Christian Democratic Party. In the early 1960s the White House also pushed for a coalition of Christian Democrats and Socialists — again, the idea was to preempt Moscow.

As scholar Michael Ledeen reports, White House adviser Arthur Schlesinger led the push for what was known as the "Opening to the Left." In an act of breathtaking disingenuousness, Schlesinger likened hardcore Italian socialists to the Democratic Party in the U.S.: "A progressive administration in Washington should not be in the position of discouraging progressive policies in Rome," wrote Schlesinger. This coalition promptly nationalized Italy's electricity companies. That hobbled a key industry, utilities, for decades.

U.S. Consent

Social Democratic, near communist, independent communist, or socialist — again and again, the U.S. nodded, rather than spoke out. We big-footed on military policy, and tiptoed when it came to domestic issues. Social Democratic leaders and their philosophers strode the Western stage like gods. Free-market leaders were rare and their philosophers, ignored. The size of European governments relative to European economies continued to grow.

The great trade-off was unavoidable, and maybe, worthwhile. Receiving new entitlements every few years doubtless did pacify European electorates. The U.K.'s Thatcher revolution and the recent restraint of Germany seem to demonstrate that it is, in any case, possible to undo social democratic damage. After 1989, the old Cold Warriors for their part claimed that, costly as it had been, social democracy in Western Europe was paying off. Capitalism had won.

These days that victory doesn't look so complete. It may be time to re-examine Europe's old Social Democratic moment. Sure social democracy stabilized the world once. But its consequences are destabilizing it now.

(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2010 Bloomberg

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