![Austerity policy in Greece A steep drop in average wages (right hand scale, 1995=1) and a reduction of the number of employees (an explosion of unemployment rates) did lead to rapid fall in the wage sum from 2008 onwards. At the same time the force of exploitation f (right hand scale, remember equation [2]) more than doubled. These developments are different from the general pattern observed in the Euro area (blue lines). Since 2008 the difference in unemployment rates and wage levels between Greece and the average EU area is dramatically increasing.](https://www.researchgate.net/profile/Hardy-Hanappi/publication/277954669/figure/fig2/AS:667839283355658@1536236701573/Austerity-policy-in-Greece-A-steep-drop-in-average-wages-right-hand-scale-19951-and-a_Q320.jpg)
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South-east Europe in Evolution (version 12-02-2014)
Edited by Hardy Hanappi, forthcoming 2014, Routledge Publishers.
Introduction (Hardy Hanappi) 11 pages
Economics
1. Structural Evolution of Agents (Doris Ritzberger-Grünwald) 33 pages
2. Commodities and Services (Vladimir Gligorov) 46 pages
3. Education and Labor Markets (Zeynep Siretioglu and Costas Josifidis) 34 pages
Politics
4. Environment and Ecology (Fikret Adaman) 20 pages
5. Military and Democracy (Darshana Udayanganie and Evangelos Charos) 18 pages
6. Embedded in Global Politics (Hardy Hanappi) 39 pages
Culture
7. Religion (Branko Ančić) 20 pages
8. Gender and Generation Relations (Edeltraud Hanappi-Egger) 17 pages
9. Organizational Forms (Ugo Pagano and Hardy Hanappi) 30 pages
Perspectives
Introduction
Why is a book on the evolution of Europe’s south-east an urgent task? Why is it an important
task at all? Are there not enough books on cultural uniqueness, esthetic qualities, and
historical importance of this area on the bookshelves already? There are indeed, though it is
always interesting to discover new aspects. But the motive for this book, its starting point, is
radically different. Its focus is on the contemporary stage of a large entity of political
economy, of a continental unit just being born, it is on the fragile fate of a future Europe.
Europe’s evolution, its second renaissance, takes place with different speed and in rather
different modes in the diverse parts of the continent. A basic suggestion put forward in this
book is that the south-east part of Europe is currently the most crucial component of
Europe’s further development
1
. To understand why this is the case a short tour de force to
explore the history of political economy of Europe is necessary.
Since the end of World War 2 Europe, the ‘old continent’, has experienced a most surprising
evolution. Reborn as a divided former battlefield, which just had lost a considerable amount
of its population and about half of its capital stock, its future seemed to be endangered. Torn
apart by the newly emerged global superpowers to its east and to its west and characterized
by the multi-facetted internal restructuring processes brought about by the dynamics of the
changed power relations – new local and global setups – Europe’s first long-run recovery
process lasting till the 70-ties was astonishing. In the west this process was embedded and
supported by international agreements and institutions like the Bretton-Woods system of
fixed exchange rates. In the east a new division of labor between more advanced
manufacturing in Eastern European countries to be exchanged for cheap energy from the
Soviet Union was established, basic infrastructure was rebuilt. Despite several dangerous
episodes the Cold War between the two hegemonic systems remained cold – Europe
remained on its reconstruction trajectory, but also remained divided.
Then a sequence of two important blows
2
lead to a shake-up of socioeconomic evolution:
First the breakdown of the fixed exchange rate system in 1971 initiated a global energy
1
Even surface phenomena like Greece’s financial turmoil, and the high hopes on Turkey’s possible future
contributions to European real economic growth show that there is a shift in public attention indicating that
the bottleneck characteristic of the area is sensed already.
2
To show how endogenous tensions slowly built up, and finally manifested themselves as the two bursting
bubbles of well-established forms of political economy, such a demonstration would go beyond the scope of
this brief introduction, but compare [Hanappi, 2014].
price shock, which in turn synchronized all business cycles in the western world and thus
lead to a heavy economic downturn in Western Europe in 1975. The falling US Dollar could
re-conquer export markets and the suffering West European economies had to restructure
themselves. In the end it has been this general defensive position with respect to the strong
second post-war upsurge of the USA in the early 80-ties, which lead to the re-launch of the
idea of a politically united Europe able to support its global economic players, its
transnational corporations. In this decade the political will for the installation of a European
Union materialized. Of course, the idea had existed earlier, but the critical mass of a coalition
of powerful groups in Western Europe only became possible under the threat of global
economic pressure. Then the second shake-up occurred: the breakdown of the Soviet
Union in the early 90-ties. All of a sudden the iron curtain fell, and the two parts of Europe
potentially could be re-united. This was a historically unprecedented situation; the European
project could suddenly be extended to include the so-called transformation countries. This
terminology, of course, immediately reveals the ideological supremacy of the west: Which
parts serve as the future role model, and which systems have to be transformed. After
twenty years of transformation it is rather evident that this process was not the easy return
to a natural state of affairs, which temporarily had been disturbed by Stalinist production
systems
3
. One lesson learned certainly concerned the wide variety of possible
transformation paths for Eastern European countries. While Finland – after a deep fall – in
several important respects quickly became a leading member of Europe, other countries
where confronted with a long-lasting stagnation or welfare decline - even if compared to
their Stalinist past. Despair of large parts of the population (all those not ready to organize
quick profit around the newly defined political setting) followed and till the day in many
areas an uneasy relationship between eastern and western parts of Europe cannot be
denied. To develop a common political and economic framework for a continent with such
diverse economic and political history, with languages and cultures constituting borders
rather than being an interesting variety of views offered and reconciled, is difficult. To start a
unification process under these circumstances certainly was a risky, though worthwhile task.
It is this context of the last twenty years which explains the special role presently played by
the south-east part of Europe. It all started with the Balkan war, a war initiated by the
president of a non-European superpower, partially against the consent of western European
3
For a macroeconomic definition of a Stalinist production system see [Hanappi, 1994].
leaders. To explain this move one has to refer to geopolitical considerations, which implies a
considerable amount of speculation about the motives of the US government at the time – a
daring analysis, which goes beyond the scope of this introduction.
Whatever its immediate origin, it is sure that the characteristics of the Balkan war are quite
unique. The way in which the former state of Yugoslavia broke into parts was demonstrating
how little can be explained by purely economic considerations, and how important the
ideological amplifiers not grasped by standard economic theory are. With the exception of
the religious aspects of anti-Semitism religious warfare had not been observed in Europe for
a very long time. The intensity with which at micro- and meso-levels ideological constructs
(including religious metaphors) became instruments of war on the macro-level has been
spooky and foreshadowed elements of Taliban warfare in the near east. The south-east of
Europe (in contrast to the rest of Europe) thus experienced not only war; it also saw the first
reappearance of micro-rooted ideological amplifiers of the religious variety. This feature, the
emerging importance of religious and cultural factors on micro-levels, has not disappeared in
south-east Europe since. The access of Turkey to the EU, its internal problems of extreme
cultural and economic imbalance, its external role as the outpost of a secularized Europe
towards the Islamic near east, almost every aspect of Europe’s south-east border is
infiltrated by ideological topics and religious beliefs.
As brute religious convictions proved to be powerful tools for warlords during the Balkan
war, so was the rediscovery of direct coercive action itself. The sudden loss of the executive
power of a more or less accepted central ruler in Belgrade gave local military leaders the
possibility for uncontrolled coercive action. Direct coercive power was on the agenda again.
Strong religious ideology and strong coercive power typically go hand in hand - so far these
developments are not surprising. What is surprising is that after decades of civilized
neighborhood relations (in a wide sense) such a fierce breakout of this evil pair of
religious/cultural convictions plus use of direct military action was possible. Even if in some
parts of Europe’s south-east the dynamics of these forces seem to be frozen (e.g. Turkey and
Cyprus), there is a continuing latent potential
4
. South-east Europe’s evolution can neither be
understood nor anticipated without a close inspection of this potential.
4
In this context it should be remembered that the military government of Greece as well as Ceausescu’s
regime in Romania are two other examples of frozen military state power not very far in the past.
Though these elements play a special role in the south-east as compared to other parts of
Europe, it never should be ignored that they are embedded in and even encompassed by
economic and geopolitical developments. Economic structures, either given as natural
endowments or acquired by endogenous efforts, are the foundation for the determination
of the role of the South-East in Europe’s future division of labor. In this sense the political
economy, more precisely its trajectory, is the basis for the above mentioned special
characteristics of coercive powers and cultural traits.
The structure of the book follows this trinity. The first part investigates economic aspects of
south-east Europe. The second part deals with politics including military questions. The third
part discusses cultural phenomena. Since the book aims at an overarching explanation of
recent evolution and informed mid-run anticipation, it remains sketchy in some detail to be
able to drag the reader to more general conclusions. This is necessary to avoid a loss of
attention caused by too many singular issues. In other words, this book is not encyclopedic.
It rather tries to follow some superficial esthetic principals
5
: Each of the three parts again
consists of three chapters.
The economic part starts with a chapter characterizing the evolution as driven by the major
agents at work in the area since the end of World War 2. This take-off is rather
unconventional for an economic analysis, but proves to be of utmost importance for taking
account of the changes of tide, the vivid switches of political economy constellations, which
occurred in Europe’s south-east part since 1945. Economic expansions, development of
infrastructure, consumption and investment patterns, all these elements in the end are
driven by economic agents. And if the set and the characteristics of agents changes
dramatically (as was the case in the period under consideration), then a careful description
of these changes is a precondition for any further analysis. Not only to understand the past,
but also to use this interpretation of history for the anticipation of future changes is the
challenge of this chapter. The second chapter introduces a somewhat contrasting view on
the same object of investigation: The spotlight is not on the dynamic changes of the set of
agents but on the somewhat more inertial evolution of the set of commodities and services
5
Esthetic in the classical sense - of being appealing without interference of rational thought - here refers to the
attractive power of the ancient three-step scheme of thesis, anti-thesis, and synthesis, which by the way
originated in Europe’s south-east. As a closer look at the content of the chapters reveals, this interpretation is a
bit farfetched and needs a lot of imaginative power. Let it remain at the esthetic level.
produced in the area as a whole. The basic goal thus consists in getting some insight into the
changes of labor productivity in production sectors, to see how they influence trade
between SEE countries as well as with non-SEE economies, and how these productivity
developments in turn are influenced by geopolitical developments. The latter task evidently
constitutes a link to the previous chapter. Again this chapter ends with some ideas on the
future, this time concerning the economic production structures possible in Europe’s south-
east and the policy recommendations they imply. It is thus more about constraints to be
considered and less about possible dynamic changes of power structures to be anticipated.
The last chapter in the part on economics, chapter 3, focuses on the most pressing
contemporary economic policy question, the point where agent dynamics currently meet
structural constraints
6
: labor markets and education. Organization of the division labor in the
last decades has become the central global problem. Its unsolved problems, its failed
attempts to overcome fundamental constraints, appear as financial bubbles, as liquidity
crisis of households, banks, and states. Once a bubble bursts an increase in unemployment
follows, a change in economic and sometimes even political structure becomes mandatory.
Chapter 3 takes a close look at the conditions prevailing in SEE countries. Clearly the outlook
for the future of this chapter has to include policy answers, that is, how education policy –
building on its stock of past experience – can adjust the quality of the labor force. Again,
several important side-constraints have to be considered: institutional structures, increasing
contradictions between big cities and the open land, political priorities of governments. This
chapter proceeds by a country by country analysis going from description of the specific
situation to some policy recommendations. Policy recommendations provide a nice link to
the second part of the book concerning politics.
The three chapters of the second part focus on elements of politics, which currently turn out
to be the essential bottlenecks of social evolution – not only in SEE, but even globally:
Environmental problems, problems of designing and implementing democratic governance
mechanisms, and situating and organizing change in the context of geopolitical dynamics.
Political science is the scientific discipline investigating the dynamics of power structures in
society. Social power manifests itself usually either via the implementation of institutions, a
kind of temporarily frozen setting of opposing powers, or via outbreaks of sudden upheavals
6
For the methodologically interested reader: synthesis of antipodes has to take place in the arena of practice,
preferably on a topic that poses the most severe problem.
against the existing power structure. Since economic mechanisms - exploitation of nature by
man as well as exploitation of man by man – are always embedded in institutional
frameworks, these frameworks and their eventually occurring revolution, i.e. politics, can be
considered as concentrated economics. In this sense the two elements of economics and
politics have been conceptualized in the classical political economy oeuvres of Malthus,
Smith, Ricardo, and Marx. The first two parts of this book are meant to follow this concept of
political economy.
Politics understood as concentrated economics implies also a concentration in time; times of
relatively slow changes in power structures are followed by sudden and profound breaks
leading after a brief consolidation period to another slowly changing regime
7
. The current
speed-up of political change is rooted in the inability of existing political structures to handle
rapidly increasing, dangerous threats. Chapter 4 starts by investigating how the global
menace of environmental damage questioning the survival of mankind expresses itself in
south-east Europe. The mechanisms, in particular the market mechanisms maintained by the
political systems of the area have proven to be rather insufficient and inadequate to solve
the upcoming questions, to say the least. The chapter thus not only provides a critique of
current practice but also suggests possible routes to be followed in the future, emphasizing a
profound break with the still prevailing growth-oriented ideology. The necessary political
change to initiate substantive environmental policy points at the need to design a different
political process. A certain, crucial aspect of this topic is discussed in chapter 5. Here the
focus is on the rather fragile relationship between military backed dictatorship and
democracy. The question is approached by an empirically oriented econometric analysis that
tries to detect how the relationship between democracy (measured by certain well-
established indices) and military (measured by military expenditure) works. Developments in
Europe as well as in some comparable Asian countries are used to derive the main issue:
High military expenditure in low-income countries is detrimental for their welfare growth.
This result shows the most acute political problem in Europe’s current situation, namely how
to redesign democratic mechanisms to avoid the self-amplifying circle of more authoritarian
national regimes and increasing unemployment. But a closer look at the link between
welfare and democratic governance reveals that the concept of welfare has to be expressed
7
The parallel to Schumpeter’s concept of basic innovations, in this case basic social innovations, is evident.
Several more recent schools of thought, like the French school of regulation [Boyer, 1986] and the American
Social-Structure-of-Accumulation approach [Gordon, 1980], have made this theoretic liaison more explicit.
in a much more specific way than just taking GDP per head of a country as an index. This
index, averaging total output and total population, hides the most important internal
struggle between the different classes of an economy, which in turn is handled and hopefully
civilized by democratic mechanisms. A first set of measurable economic variables to
highlight class dynamics are the distributions of income and wealth
8
. To stay in power
political leaders will either have to find comprises and coalitions within their countries and
also with the European Union or they might take a radical turn to an extreme right-wing type
of national governance. At least this seems to be the lesson to be learned from Europe’s
development after the big depression of the thirties. This not only is a drastic comparison, it
indeed might be the dramatic consequence of further deteriorating income distribution and
exploding unemployment. It is thus of utmost importance to implement economic policies
on national levels as well as on the European level that aim at improved distribution
mechanisms to defend democracy and civil society. The last - a bit synthesizing - chapter 6 of
this part on politics concentrates on the interaction between south-east Europe and global
politics. Environmental issues as well as local evolution of democracy in SEE are topics only
to be understood fully when considered in the context of global political dynamics. A full-
fledged theory about the latter, of course, would go far beyond the possibilities of this
chapter. What is presented thus is just a fragmentary subset of the international power play
involving and shaping SEE countries – and some possible scenarios for future developments.
It proves to be necessary to discuss the northern part of SEE, the countries of the former
Eastern Hemisphere, different from its southern neighbors Greece, Turkey and Cyprus. Each
of the latter three is separately dealt with. Nevertheless, as SEE in some respects is
considered in total, i.e. an indivisible part of Europe, it also is the European neighbor to the
Islamic world of the Near East. Evidently the break between a religious state dogma and the
secularized constitution of the European Union is of essential importance – and this also
provides the link to the third part of the book.
The third part of the book comes under the glamorous header of culture and goes beyond
the range of classical political economy
9
. There are good reasons why culture - the
8
For aficionados of dialectical reasoning: The anti-thesis that a chapter on the organization of power struggle
between classes (chapter 5) poses to a chapter on the organization of global general environmental benefits
(chapter 4) corresponds somewhat to the often discussed contradiction between economy and ecology. Would
a more equal income distribution be compatible with better considered environmental constraints?
9
Nevertheless it is clear that the classic authors were well aware of the importance of culture. From Smith’s
work on moral sentiments to Marx’ essays on the analogies between religious concepts and the perception of
normative power of the symbolic systems produced, perceived and used by the members of
society
10
– has gained a more dominant role in the last hundred years. One fundamental
reason certainly is the occurrence of profound technological revolutions in the twentieth
century. Technical progress from telephone via radio and TV to contemporary internet and
mobile phone applications has transubstantiated the world in which Malthus and Ricardo
had lived. In particular the computer - a device, which Herbert Simon and Alan Newell early
on had dubbed a ‘symbol manipulating machine’ – has extended the limits of our secondary
metabolism, our life in the information sphere, towards borders we still cannot really
determine. The second important driver for the surge of cultural amplifications probably is
the sterilization of possible impacts of micro-units on the primary metabolism. Be it that the
extremely interdependent networks of production are perceived as intellectually
impenetrable
11
, be it that the satisfaction of the basic needs involved in the primary
metabolism appear as ascertained in many European households, the fact is that in the 20th
century individual energy was rather easy to manipulate towards goals erected in the world
of symbols
12
.
But the basic features of the forces of cultural systems are much older than the current
technological means, which serve them so formidably. Chapter 7 is on religion, and is meant
to achieve a twofold task: To explore the primary cultural archetype, i.e. religion, and at the
same time to give a survey on its evolution in south-east Europe. Though the future of ever
larger parts of life taking place in symbolic environments might be a possible scenario, the
blossoming of religion under the secularized umbrella of the EU is not a likely trajectory. The
difficult task to take apart these two streams is the challenge faced in this chapter. The
difficulty to theorize distinctions in a scientific area generally haunted by vaguely defined
(not to talk about ‘commonly shared’) concepts certainly is a basic problem of part 3. The
opposition to chapter 7, which is brought into this mosaic in chapter 8, on gender and
generation relations, consists of establishing its distinctions as starting points of the
argument, rather than developing them in the course of future evolutions. Sex as a biological
capital processes there is ample evidence that they derived a lot of their ideas from the study of cultural
elements.
10
Instead of adding another one to the thousands of definitions of culture already existing, this brief
description of its working as a social power should be sufficient for the purpose at hand.
11
Classical economists have called this phenomenon ‘alienation’, compare [Hanappi and Hanappi-Egger, 2013].
12
Fascism in Europe is the outstanding example, but less disastrous examples after the defeat of Fascism
abound. The new fundamentalism is just the subset of movements using ancient symbol systems for their
games.
property is defined in opposition to gender, a property emerging in the way a society
handles biological predispositions. Biological age of an individual is related, but theoretically
to be always distinguished from what age-ism ascribes to the old generation in a given
society in a given era. The focus of the investigations in chapter 8 thus is on how this given
bipolarity of biological traits and the social use groups in societies make of it manifests itself.
Again the chapter has to struggle with a twofold goal: Describe some basic archetypical
algorithms (and a corresponding terminology) explaining the use and misuse of biological
traits in social procedures, and provide some eclectic examples on what this implies for the
evolution of south-east Europe. Though the object of investigation seems to be limited by
time and location (SEE in the after-war period) it turns out that the questions touched upon
are at the center of theoretical disputes of feminist theory as well as of the sociology of
aging societies in general. The concluding ninth chapter is on organizational forms. These
forms are manifestations of agreed upon solutions to handle behavior, which otherwise
would be damaging to at least one of the concerned partners. With respect to religious
forms, to manifestations like the Catholic Church, the standard algorithm consists of the
broadening of membership in the club of chosen people, where the choice is made by a
hypothesized supernatural being, which actually and visibly is represented by a group of
earthly officers, of priests. For the simple members a credible threat of being a non-member
has to be produced by officers, so the latter can exploit the primary metabolism of their lay
members paying them with the production of elements of the secondary metabolism. All
organizational forms of religion somehow follow this scheme. But chapter 9 takes up a
somewhat different, though related idea: Building on some seemingly irrelevant but still
visible historical differences existing institutional settings representing ruling power
structures can and will use cultural devices, i.e. the organization of culture, to amplify and to
deepen the existing hegemony. Organizational forms usually start at the meso-level, but
practiced for longer time in certain local environments they not only transpire into the
behavioral forms of individuals, they even tend to raise their head and determine
macroeconomic performance. A most prominent scientific field in which this phenomenon
has been investigated is the study of corporate governance. Chapter 9 provides an
introduction to these questions by starting with typical comparison between Anglo-Saxon
styles (USA) and European styles of corporate governance; and then proceeds to discuss the
particularities of south-east Europe. The south-east of Europe certainly can be considered as
a most interesting laboratory for intriguing crossings of formal and informal organization.
The outlook of this chapter points at further evolution rather than at a demise of
Mediterranean styles
13
.
The trinity of the three parts of the book leads back to its origin, to a better, a more
informed understanding of the history of this part of Europe. Furthermore in the course of
this intellectual journey it will become clear that the future of the European project to a
considerable extent hinges on the future of its new member states in the south-east. The
way the European Union can position itself as a neighbor of the Near East, as an example of
good governance of the difficult economic, political, and cultural structures existing in the
countries in its south-east – this challenge will either be met (and honored by European
citizens), or …
References
Boyer R., 1986, La Théorie de la Régulation: une analyse critique, La Découverte, Paris.
Gordon D., 1980, Stages of Accumulation and Long Economic Cycles, in: [Wallerstein, 1980].
Hanappi H., 1994, Evolutionary Economics. The Evolutionary Revolution in the Social
Sciences, Avebury Publishers, Aldershot (UK).
Hanappi H., 2014, Evolutionary Dynamics in Revolutionary Times, in 'Institutions and
Economic Development after the Financial Crisis' edited by Sebastiano Fadda and
Pasquale Tridico, Routledge Publishers.
Hanappi H. and Hanappi-Egger E., 2013, Gramsci meets Veblen: On the search for a new
revolutionary class, Journal of Economic Issues Vol. XLVII No. 2 June 2013, pp. 375-
381.
Wallerstein I., 1980, The Modern World-System, Academic Press, New York and London.
13
Indeed several specific organizational forms of SEE are shared with other Mediterranean countries. Though
some of them evidently will (and some even should) not survive European unification, there seems to be a
cultural pool of forms outperforming other alternatives of organization. It is thus good advice for the rest of
Europe that there is a lot to learn from its south-east part.
Chapter 6
Embedded in Global Politics
Hardy Hanappi
The eastern Mediterranean has been the birthplace of European culture. As its history vividly
shows cultural evolution always has been embedded in a powerful political organization, in
an empire. The ancient Greek city state first of all had to rely on the force of Athens’ fleet.
The internal development of cultural advance only did follow the victories of external
military might. The population controlled by Greek rulers - and later by the Roman Caesar –
was directly subordinated to the commands of the local military representatives of the top
of the coercive hierarchy. With a growing territory to be controlled the biggest problem of
the ruler soon was how to delegate military power to lower ranked commanders. Too much
power would eventually result in a revolt of some lower parts of the hierarchical pyramid,
whereas too little power could endanger the enforcement of local exploitation, which these
lower ranks had to ensure. Call this problem the ‘power distribution problem of hierarchy’
(PDPH), it reappears again and again in history. Each of the ancient empires (Greece, Islamic
and Roman Empire) passed its zenith and started its decline as a consequence of inability to
meet the challenges of the PDPH. It is interesting to study this breakdown of large empires in
detail. The slowly starting disintegration of those parts of the territory, which are most
distant from the empire’s central city, first appears only as a minor difficulty of coherent
governance. But then matters are getting serious as soon as local military forces declare
themselves to be independent, and cannot be brought in line with the empire’s central
coercive force any more.
The eastern part of the fallen Roman Empire with its center in Constantinople was quite
significant in this respect. The centralized power hierarchy that Rome had constructed and
maintained dissolved into bits and pieces of a network of smaller power nodes. When the
Ottoman Empire during the 17th and 18th century was able to reassemble this large territory
its major achievement was the implementation of a military rule combined with a strict
administrative and ideological organization. It is important to acknowledge how these old
but deeply rooted structural features of this last large empire of the eastern Mediterranean
still are mirrored in some of today’s political features of the area. The way in which a local
society at the periphery gets rid of its central authoritarian exploiter has not changed too
much: It needs the local soldiers led by a military officer with political ambitions. Be it Gamal
Abdel Nasser in Egypt fighting colonialism, or Gadhafi in Libya, or be it Marshall Tito in
Yugoslavia trying to break loose from Moscow-centered Stalinism – they and many others
first and most important were cadres of the local military.
The feature of an emergency of a set of military backed territorial rulers after the breakdown
of a large empire also can be found with respect to the end of the Ottoman Empire (compare
[Hanioglu, 2008]). But as the power of the old regime typically is a mix of military and
ideological power – with the latter till the 20th century being the power of an
accommodating religion – the broken up structures after its end are characterized by both
layers of power too. While relative military strength of successor states is rather easy to
determine since the means of direct coercive force do not change too much during this
period of metamorphosis
1
of the global system, there always is a broader range of possible
ideological frameworks available for these newly emerging political entities. The power of
information - how the interpretation schemes of political dynamics are used by local
populations and how they can be formed and manipulated – is a much more shapeable
process, a domain which allows for some creative new elements grafted on pre-existing
inherited views. In the eastern Mediterranean after the Ottoman Empire by and large four
strong and different ideological frameworks can be distinguished: Arab nationalism, Islam
(and parallel, though with less impact, the two other monotheistic religions Christianity and
Judaism), socialist ideology, and capitalist ideology. As history teaches the blending of some
of these basic elements often proves as particularly successful to maintain social coherence.
To complicate things even more the two forms of power in the successor states of the
Ottoman Empire, military power and ideological power, were subject to interference by the
global colonial powers, in particular Britain, France, and Italy. This overlay of global colonial
power structures to some extent hides the kind of agreements, compromises, and purely
oppressive solutions which global players did choose to incorporate these states in their
empires. Only with the end of this stage of colonialism in this area, more or less after World
War 2, the older forms of local power reappeared again.
Before discussing the global embedding of the eastern Mediterranean politics after World
War 1 it is necessary to highlight another property of the Ottoman system of governance, a
feature that was essential for its long-lasting dominance: the millet system
2
. This system was
an institutionalized method of administration that helped to exert ideological dominance of
Muslims by giving a limited range of legal rights to all non-dominating religious streams. This
was necessary since at the zenith of its power the Ottoman Empire had population of
approximately 70 million people with a majority of 40 million non-Muslims. The millet
system established categories for the Greek Orthodox, the Armenian (including Armenian
Catholic, Evangelical and Apostolic), the Syriac Orthodoxy and the Jewish communities,
organizing people according to their religious affiliation. It aimed at equality of these
religions by ensuring that each community could exercise its own personal status law as
administered by the relevant religious authorities. But at the same time it also assigned a
special status to Muslims: All disputes between non-Muslims and Muslims were to be
administered under Muslim law (1), non-Muslims could not officially hold positions within
the imperial government (2), and non-Muslims had to pay a tax (3). The millet system thus
combined legal protection of local ideologies (religions) with measures ensuring the
dominance and attraction of the Empire’s prime ideology. To take pre-existing individual
religious believes as a starting point for institutionalizing ideological dominance has proved
1
Compare [Hanappi, 2013a] for a discussion of the evolutionary concept of alternating periods of
metamorphosis and (crystal) growth.
2
Compare [MacQueen, 2013, pp. 10-11].
to be an incredible political success: The empire lasted from 1453, the conquest of
Constantinople, till 1918, the end of World War 1. As MacQueen emphasizes, ‘Of the
imperial rulers in the Middle East, it was the Ottomans who arguably left the most lasting
political, economic and social legacy in the region.’ [MacQueen, 2013, p. 9].
What needs to be highlighted in the context of the contemporary political situation is this
early occurring focus of politics on pre-existing individual social identity. To combine plurality
of less powerful groups at low local levels with strict rules for making it impossible for
members of these lower ranks to ascend to really powerful positions, this administrative and
legal achievement is indeed remarkable. The illusions of plurality might be sufficient for
some backward oriented believers to feel protected, but there also is a dynamic element, a
temptation: Religious affiliation need not be a fate; the more flexible individuals could
convert and become Muslims. This selection of those who are career-oriented, with clear
legal and monetary advantages, it is extremely attractive to join the dominating ideological
group. It is this general type of selection mechanism on the ideological battlefield which
seems to be the most long-lasting behavioral trait inherited from the millet system.
Seemingly strong determined ideological leaders at the top often selected as most flexible,
opportunistic career-seekers looking down at the backward, though well-administered
plurality of the religiously confused majority of the population – is this the frightening
caricature mirroring contemporary societies?
3
As mentioned above the evolution of the Eastern Mediterranean is characterized by a
somewhat special trajectory. When the global colonial competition between the major
European nation states, above all between Britain and France, was culminating the area still
was under the political umbrella of the Ottoman Empire. There were, of course, already
some severe cracks in its governance structure – in 1789 Napoleon had landed in Egypt, in
1830 French rule was established in Algeria, Britain was dominating the Persian Gulf since
1820 and in 1869 had opened the Suez Canal, in 1881 Tunisia became a French protectorate,
and in 1882 British rule was established in Egypt – but in principle the Ottoman Caliphate in
Constantinople lasted from 1517 till 1923. In other words, the essential turning point in the
history of the area indeed was the breakdown of the old established state system of Europe
during World War 1. Until this point the populations of the Eastern Mediterranean were
military and ideologically dominated, mostly by the Ottoman rulers, but partially already by
colonial empires.
The explosion of newly emerging political entities after WW1 did follow the strategies, and
relative spheres of influence, of the victorious colonial nations. In the south and east, the
African countries and the Middle East, rich oil reserves and the ideological surge of Arab
nationalism were the essential elements of the political reshaping. On the northern shores of
the Mediterranean a substantially smaller secularized Turkish state emerged. And the
3
Western societies might well be considered in a similar perspective, though the dominant religion in OECD
countries now typically is mainstream neo-classical economic theory, a believe system I have dubbed
‘microtheology’ in [Hanappi, 1994, p. 168].
territories on the Balkan Peninsula entered a state of quickly changing unstable local
regimes. These territories had been dominated by the ideological combat between Islam and
Christianity, shaken by the armies of Istanbul and Vienna for centuries. When both old
empires crashed in WW1 these lands had not developed any independent political and
institutional structures. They were doomed to fall prey to short-lived revitalized kingdoms
and transient adventures of dubious political groupings – in most cases themselves
marionettes of the new big players in the rearranged global political arena. As a matter of
fact the Ottoman Empire was the last power that unified the larger Eastern Mediterranean
area; just like the Byzantine Roman rulers had done it in the previous centuries. After the
final fall of the Ottoman Empire northern and southern remainders experienced very
different developments - with a substantially smaller and geopolitically (at first) unimportant
Turkey in the middle. Austria also had been reduced dramatically after WW1, the territory
between the old centers of Vienna and Istanbul were sliding into an indeterminate political
vacuum, while the Arab part in the South was finally subordinated to the needs of the large
colonial powers. Britain took Iran, Iraq, Palestine and Egypt (plus some less important areas),
France took Syria, Tunisia, Algeria and Morocco, and Italy just had to be content with Libya.
The anti-colonial forces that immediately responded to this belated attempt of colonial
expansion – the main global subordinations had taken place in the previous centuries
already – could be based mainly on two ideological frameworks: Arab nationalism and a
politically interpreted Islam. But during the interwar period the center of gravity of political
power rapidly shifted away from Europe, leaving Britain, France and Italy as minor players in
the approaching confrontation between capitalism and communism, between Washington
and Moscow. Moreover the new political and social phenomenon of Fascism in Italy,
Germany and Austria quickly attracted the attention of European policy making. The Balkan
was out of focus and the societies there took their own winding road in between the
emerging global forces that prepared for World War 2. There were communist and socialist
groups structured along the schism of the labor movement, i.e. Kautsky contra Lenin and
Lenin contra Trotsky; there were fascist groups of different shades, there were conservative
monarchists and nationalists, there was the socioeconomic split between (often Islamic)
land-owners and the poorer (less religious) mass of population – and its mirror image of
(mostly catholic and more to the North) lower nobility insisting on inherited feudal rights
subordinating their menial staff. The war then drowned all these transient power
constellations, the German Wehrmacht swept over the Balkan and even to North Africa.
Though the two decades of the interwar period certainly were a most turbulent episode for
the population of south-east Europe their deeper socioeconomic impact on economic
structures and lifestyles was probably less pregnant than the 500 years before WW1. The
mountainous landscape was important for military strategy, but only of minor economic
importance. It rather was the Ukraine, which attracted central European powers as a
supplier of agricultural products. And a cultural impact of the Nazi army on the oppressed
population during the seven years of war can rather be expected as an insisting on national
and religious identity – against the also existing local collaborators. The interwar period thus
was not at all an ideologically and politically stable environment in Europe’s south-east,
despite the efforts of several later emerging regimes to enrich their national history by
legends of a return to national roots during these two decades.
With World War 2 and the new global world order to which it led the fate of global
influences on Europe’s south-east took another dramatic turn. The globe was divided into
two distinct spheres of influence – in military, economic, and cultural terms – one dominated
by the USA, the other one belonging to the USSR. And for 45 years the borderline between
these two hemispheres cut south-east Europe into two parts! The development path of
these two parts during this era was different and for each of the parts it proved to be rather
significant.
The northern countries (Yugoslavia, Romania, Bulgaria, and Albania) became part of the ring
of satellite states around the USSR and all adopted some kind of ‘Stalinist production
system’
4
for their economy. Each of these four examples needs a somewhat different
analysis since they were confronted with a rather different involvement of the new leading
political cadres. Moreover those closer to the USSR (Romania and Bulgaria) clearly had a bit
less room to move than those who were a little bit distant (Yugoslavia and Albania). In
Romania and Bulgaria a strong and centralized clique emerged. In Albania a more
independent, but soon highly ‘ortho-Stalinist’ development lead by Enver Hoxha could be
observed. First Albania’s communist party during the war was closely cooperating with the
Yugoslav communists, but already in 1948 the animosities between Tito and Hodxa resulted
closer links between Moscow and Tirana, and a more distant relationship between
Yugoslavia and the USSR. After Stalin’s death Hoxha felt safe to strengthen his connection to
Mao Zedong’s China, while Tito was experimenting with what he called the ‘third way’ – a
road to socialism, which was in between Kautsky (central European Social Democracy) and
Lenin (Bolshevism). Vis-a-vis this new and more open-minded approach the party
establishment in Albania followed an extremely Stalinist policy stance
5
. In such an
environment it is no surprise that the Albanian democratic and cultural evolution had a hard
time.
By far the most interesting case is Yugoslavia. First of all the new state unified a large and
heterogeneous territory, providing common state institutions and even a common official
language (Serbo-Croatian). As can be observed in all members linked to the Soviet bloc a
specific redirection of trade flows was quickly installed: Exports of a variety of goods to the
USSR should be met in particular by energy imports. But Tito, who had survived Stalin’s
murderous attacks against old bolshevist comrades during his time in Moscow and after the
war was sent by Stalin to govern Yugoslavia in Stalinist style, Tito turned against Stalin in
1946. Using Stalin’s own methods (e.g. extensive secret police) to get rid of direct control by
the USSR a first profound crack in the Eastern bloc occurred. Yugoslavia was excluded from
its trading network from one year to the other and had to start trade relations with western
4
See (Hanappi, 1994, pp. 112-161) and (Hanappi, 2004) for a detailed treatment of the concept of Stalinist
production systems.
5
Albanian politics had been characterized by extreme brutality already during WW2, when German Nazi troops
were said to have held back Albanian Nazis to prevent the worst war crimes.
European countries (compare fig. 1). This immediate disadvantage turned out to be an
important positive factor in the mid-run: The more open borders to the west allowed for
faster economic growth and the remittances of workers immigrated to neighboring
countries proved to be a substantial contribution to local purchasing power. After Stalin’s
death in 1953 the USSR and its allies slowly took up trade relations again.
Figure 1: Trade Flows
In this first after-war period, which lasted till the mid-seventies, Yugoslavia’s remarkable
upswing to a large extent was stimulated by its accelerating imports from Western Europe,
starting in 1966. Later, when higher oil prices exploded the trade balance with the West, it
again turned to its Eastern hegemonic power. But the trade with the USSR was so closely
balanced on the political level that no large disequilibrium occurred.
After the war Yugoslavia successively developed a rather unique new microeconomic feature
too: the labor-managed firm. It was one of the few innovations in economic policy, which
tried to break the spell of the doctrines of Stalin: Centrally steered industrialization and
‘socialism in one country’, i.e. in an enlarged USSR. The first two decades after the end of
WW2 Yugoslavia indeed experienced an impressive rise of economic activity. Despite –
perhaps even ‘because’ - the trade embargo of Stalin it could further develop its role as the
second largest state in the area of the large empires of the previous century, Ottoman
Empire and Austria-Hungary (compare fig. 2). And in the bi-polar that had emerged after
WW2 the border between the two hemisphere cut right through these old territories making
Turkey the largest state belonging to the USA dominated world and Yugoslavia the largest of
those states closer to the USSR. But unlike Turkey Tito’s Yugoslavia tried to propagate a
‘Third Way’ of non-aligned states and heavily invested in its own military forces.
0
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Trade Flows
Imports Western Europe
Exports Western Europe
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Exports USSR & EE
Figure 2: Real GDP Levels 1946 - 1978
It is indeed rather significant that the Eastern hemisphere repeatedly had troubles with its
satellite states in this period – Yugoslavia in 1947, Hungary in 1956, Czechoslovakia in 1968,
not to speak of the competitor China – while most outposts of the Western hemisphere in
this area (Turkey, Persia, Israel) were more firmly in the hand of a centralized military
command, which basically was the US dominated NATO. The brief attempt of local
communists in Greece immediately after WW2 to get into power was doomed to fail from
the beginning as Stalin had already agreed with Western leaders (Churchill) that this state
should be ‘to 90%’ a Western ally. While the support of Yugoslavia kept left forces strong
enough to engage in a civil war till 1949, when Tito stopped that support, the final decision
of Greece’s global role was clear when it joined NATO in 1952. Nevertheless its population
remained deeply divided into the two political camps, and when a victory of the united left
at the elections in 1967 seemed possible a right-wing military coup ended democracy.
Greece was again saved for Western powers, but the rule of a military junta was not the type
of government that the USA would propagate as their preferred political style. So after some
severe political and even military defeats, e.g. with respect to Cyprus, the military junta was
replaced by a more civilized conservative government in 1974. It has to be noted in that
respect that the widespread and long-lasting diaspora of the Greek population all over the
world has produced a high potential of Greek power groups in the USA, in particular in the
political parties there. Greece thus even in its national policy to a considerable extent is
subject to influences from expatriates having gained importance (e.g. as politicians or ship-
owners) in other parts of the world. The visible political instability of Greece was certainly a
main reason why its leaders joined the European Union rather quickly in 1981. To participate
in the economic prosperity, which a tighter woven and more specialized economic network
undoubtedly brought to EU members was the best safeguard against any socialist ambitions.
0
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Return again to a consideration of Yugoslavia during this long period of reconstruction after
WW2
6
. After the first phase of emphasis some deficiencies of the network of labor managed
firms running under political elites, which more or less still were militarily controlled,
became visible. As several – nowadays mostly forgotten – socialist economists soon
remarked
7
, the mix of certain market mechanisms with some socialist features (e.g. state
guarantee of full employment) is a rather difficult policy design problem. And this does not
just concern the way in which socialist features can be translated into accurate policy
measures, it also concerns the selection of well-defined market mechanisms. As many
mainstream economists only start to discover today, ‘the market’ as an independent deus ex
machina does not exist, it is not an invisible pre-existing subject somehow implicit in all
human societies. What can exist is a certain market mechanism, which is embodied in a
socioeconomic environment and is regulated and policed by certain institutions. And there
always has been a great variety of possible market mechanisms. With the quantum jump in
information technologies the amount of possible market mechanisms (compare the world of
auction design) has recently exploded. It is no exaggeration to state that human societies
only have just started to explore what market mechanisms (note the plural!) can do. There is
a big task ahead of our humble current knowledge.
The political trajectory of Yugoslavia, Bulgaria and Romania during the first two decades
after World War 2 is in general characterized by the way in which these countries were able
to deal with the imperial aspirations of the USSR. The example of Tito insisting on his own
national type of communist organization of production seduced a prominent leader of
communists
8
in Bulgaria, Georgi Dimitrov, to take into consideration a closer cooperation
between Bulgaria and Yugoslavia. While Tito liked the idea Stalin immediately found the
formation of a stronger center of gravity of a Balkan type of communism - a Federation of
Southern Slavs was discussed since 1944 - rather dangerous for the monolithic power
structure of the USSR. When Tito and Dimitrov were invited to Moscow in 1948 to discuss
the matter Tito did not participate, only Dimitrov did – and died briefly after the meeting in a
hospital near Moscow. Till today rumors about an involvement of Stalin’s secret police exist.
Years later (1965) the Romanian communist leader Gheorghiu-Dej, who also was an early
companion and admirer of Stalin, died in a Moscow hospital – again in unclear
circumstances. Gheorghiu-Dej had been installed by Stalin as Romania’s premier in 1948, he
had been sceptic when Nikita Khrushchev gave his secret anti-Stalinist speech in 1956, and in
the same year he had supported the quick military intervention of the USSR when Imre Nagy
in Hungary tried to change its countries type of communism; but like in the other cases he
also had set out to give priority to Romanian nationalist goals: He always insisted on
territorial integrity of his country and had not allowed Warsaw Pact maneuvers on its soil, he
6
A most remarkable account of Yugoslavia’s modern history is [Calic, 2010] (in German).
7
In this context e.g. Branko Horvat (Horvat, 1986) and Ota Šik (Šik, 1976) have to be mentioned. And as a major
forerunner in this debate Oskar Lange laid some important foundations (Lange, 1935).
8
It is characteristic for Stalinist regimes of that time that they were tailored to the profile of one single leading
personality. After Stalin’s death this form of strict adherence to the command just one person was denounced
as ‚cult of personality‘.
established special bi-lateral relations with countries like China and Germany challenging the
hegemony of the USSR, and he increased output of consumer goods and introduced
elements of self-managed firms and economic decentralization. When from 1966 onwards
Nicolae Ceauşescu took over leadership in Romania, he continued the later type of a more
open policy in some specific areas
9
and in his first years was rather popular. So in Romania
like in Bulgaria and Yugoslavia a certain continuity of policy in the first decades after WW2
can be observed too.
Of course, it has to be mentioned that this continuity was also strongly based on an
extensive network of secret police in all of these countries. Stalin’s methods of population
control by an omnipresent secret police had been successfully copied, and occasionally could
be used to turn against their master to achieve local nationalist goals. Despite the many
differences between these countries in the Northern part of the Balkan Peninsula, the
common experience of a hegemonic military power lead by Moscow occupying their land,
with local proconsuls playing an ambiguous game to exploit nationalist feelings while
keeping control with impermeable network of secret police and party connections certainly
has produced a general attitude vis-à-vis politics in the populations of this area. This attitude
probably can be characterized as skepticism, even cynicism, with respect to ‘Grand Politics’.
After centuries of experience with the two feudal empires, then an intermezzo of fierce
fascist aggression, and finally an arrival at a promised socialist land, which rather looked like
a nationwide prison – physically as well as intellectually – such an attitude is certainly not
surprising. Even more so as a brief look at the economic situation in neighboring countries
revealed that those countries, sponsored by the rival in the bi-polar world via Marshall-plan
money (e.g. Austria and Greece) were pushing ahead in real GDP per capita (compare fig. 3).
9
He extended the international foreign policy ties to include even Israel and Pinochet’s Chile, while at the same
time daring to speak against the Soviet intervention in Czechoslovakia in 1968.
Figure 3: Real GDP per capita 1946 - 1978
These were the preconditions for the breakdown of the Soviet bloc that took another
decade, the latent discontent of the populations combined with an irreversible process of
degeneration of the mindsets of most representatives of the political elite. The deeper
reasons for this singling out of such a political class certainly can be found in an implicit
social selection process that gratifies a combination of apparent opportunism with secretly
applied police methods. But notice that these were just preconditions and not the triggers of
the downslide of power of the Soviet empire. The triggers are to be found in a remarkable
change in the politics of the Western hemisphere that occurred as a response to the crisis of
the 70-ties.
10
The conservative roll-back in the western hemisphere started with Margret Thatcher’s
electoral victory in Britain in 1987, reached its first zenith with Ronald Reagan’s presidency in
the USA in 1980 and was completed by Helmut Kohl’s triumph in Germany in 1982. Contrary
to most of the comments in Western media the crisis in Yugoslavia during the decade from
the late seventies onwards was not an internal affair of conflicts between aggressive ethnic
groups forced into an artificial political unity. Neither was it the logical outcome of another
failed communist experiment trying to improve on the ‘natural’ best social order, i.e.
capitalism. Any overly simplifying polemic based on vested interests prohibits the learning of
the valuable lessons that the history of Yugoslavia provides. The internal dynamics, which
indeed prepared a development that finally led to war, to the attack of NATO forces, have to
be traced back to an economic policy, which allowed for some Western style improvements
of consumption: Workers could leave the country to work in Austria and Germany and their
remittances to their families in Yugoslavia did improve purchasing power. This in turn
enabled another new element, the growth of consumer credit. As long as the USA backed
10
The breakdown of the stable exchange rate regime (Bretton Woods system) in 1971 had induced a sudden
increase in crude oil prices and this worldwide energy price hike (via the expectation of a global recession) had
indeed synchronized (and as a consequence deepened) business cycles in Western countries.
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the idea of a united Yugoslav nation that acted as a disturbance of the USSR (a competing
Stalinist system) even the US-dominated IMF did not see a problem in the deteriorating
trade balance, which reflected the overshooting of import demand. But then the crisis in the
Western hemisphere struck: The extremely expensive ‘Star Defense Initiative’ of Reagan
caused a substantial jump of interest rates in the USA, which in turn attracted capital from
Europe causing European interest rates to rise sharply, leading to a massive shutdown of
smaller firms and high unemployment rates. This hurt the Yugoslav work force in Western
states, but it also made the interest on domestic credits in Yugoslavia unbearable. In this
difficult situation Milosevic, the prime minister, made two crucial decisions:
1. The Stalinist doctrine of economic policy had no place for wage-price systems or monetary
policy in general, it was only focusing on ‘industrialization in one country’ – the rest was
simply set by the central planning office
11
. As a consequence there was no theoretical
background explaining how to deal with the elements of a mixed economic system with
exploding credits and international labor migration. Milosevic thus just imitated what in
Western economies today is called ‘austerity policy’: Class struggle led by the ruling political
class to increase exploitation, in particular by reducing employment, lowering wages and
reversing all benefits brought about by enhanced credit systems and social transfers. The
disastrous self-amplifying forces of economic collapse quickly spread over all regions of
Yugoslavia.
2. Like Stalin, Milosevic and his political elite thought that strong centralization of power can
pacify the emerging unrest and turmoil in Yugoslavia’s regions. But Yugoslavian nationalism
rapidly turned into Serbian nationalism – reminding on Stalin’s Georgian nationalism – and
provoked all kinds opposing nationalist streams in the other regions of the country. The
short intermezzo of nationalist state-building during the interwar period was awakened
again, sometimes including the even older cultural traits of religious communities. But
administrative, police-supported centralization measures of course were completely
inadequate to fight the internal economic crisis. They speeded up the process of
disintegration. Taking away most of the autonomy granted to regions (e.g. Kosovo and
Vojvodina) earlier, these regions felt justified to cultivate their local nationalism.
Despite this preparatory internal policy mistakes the triggering element for the breakdown
has to be found in the international sphere. There were two distinctive steps in international
policy which pushed the Yugoslav economy over the cliff. First there was the initiative
advanced by Germany and Austria, which proposed to the most north-western region of
Yugoslavia (today Slovenia) to split from the rest. The argument was based on the fact that
this region’s was three times as productive as some least developed regions of Yugoslavia
(e.g. Kosovo). Subsidizing one part of the country with surpluses generated by another part –
a process that some would consider being the very reason for the emergence of larger
11
This deficiency of Stalinism is shared by all varieties of so-called ‚Marxist-Leninist‘-style that share a neo-
Ricardian interpretation (better: a reduction) of Marx’ views.; compare [Hanappi, 2014].
political entities – can be key with which an outside power can kill this political entity
12
. It is
interesting to note that this outside intervention was motivated by purely economic
expansionism. The second step, the political and military intervention of the USA
(commanding NATO forces) can be interpreted as a reaction to this economic expansionism.
Under the disguise of humanitarian intervention Albania was transformed into an entry
point for the US Navy while air strikes exploited the civil war between ethnic paramilitary
groups on the ground. The final victory of this policy consisted in the destruction of the
Yugoslav nation state. The political and military vacuum after the war was filled by a
diversity of small and weak political entities.
For Romania and Bulgaria the breakdown of the Soviet Union implied a fundamental shake-
up of their national political economy too. For both countries greater independence from
Russia suddenly became possible. In this respect the clearest picture of what has been going
on since the end of World War 2 can be seen if one returns to a famous thought usually
attributed to Clausewitz: ‘War is a continuation of politics by other means’ [Clausewitz,
1872, chapter 1.24]. Since 1949 the military forces of the Western Hemisphere – organized
as NATO – have been advancing towards Europe’s east in steps, which easily can be
interpreted as following the political power structure. In 1949 the military of the 12 founding
NATO members (Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the
Netherlands, Norway, Portugal, the United Kingdom and the United States) was installed to
balance the fragile bipolar structure. With the rapidly evolving Cold War between the two
blocks NATO moved closer to the USSR and its allies: Greece and Turkey joined in 1952, and
West Germany followed in 1955. With this move the hegemony in the Mediterranean Sea
could be secured, in particular since Persia, ruled by a close ally (the Shah) blocked the USSR
in the North East. Then, after the Eastern Block was imploding in the late eighties, NATO
expanded to the east; first the Czech Republic, Hungary and Poland joined in 1999, five years
later in 2004 Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia followed.
Finally Albania and Croatia joined NATO in 2009 (compare fig. 4). Military dominance of the
USA represented by NATO, which it controls, has been successively implemented in Europe’s
south-east. But while coercive force is an important necessary condition for the installment
of the basic institutions enabling capitalist processes, it is by far not sufficient to unleash the
corresponding economic forces. The newly won territory till today has not lived up to the
grand expectations, which many mainstream economists believing in a return to capitalism
‘as the natural state of society’ were propagating.
The countries in Europe’s south-east, which had belonged to the Soviet Block thus all
remained economically weak – even after they came under the influence of western
capitalism. With respect to employment and income security the population the situation
clearly worsened, whereas with respect to consumption possibilities at best a mixed picture
emerged. But besides this continuing malaise of structural economic problems the most
critical development in these countries did arise due to a lack of democratic evolution: On
12
Already during the Yugoslav war this argument has been brought forward in [Hanappi, 1993].
the one hand there was the devastating experience of Stalinist regimes dressing as the grand
aspiration of ‘Real Socialism’. On the other hand the image of a capitalist world where an
‘age of high mass consumption’ [Rostow, 1978] is already ruling – an image entering eastern
households via their TV-sets – proved to be unachievable for their own private lives. This
double frustration across the generations left a population with deeply ingrained cynicism
with respect to politics.
Figure 4: Eastward expansion of NATO
The development of the three countries in the south of south-east Europe (Greece, Cyprus,
Turkey), which never had been members of the Soviet Block took place along more diverse
routes. They will be dealt with separately.
Turkey in a sense is the easiest case to understand from a military point of view. Controlling
the entire southern part of the Black Sea, where the northern shores were controlled by the
Soviet Block, it is evident that including it NATO as fast as possible was mandatory for the
western military alliance. Moreover Turkey understood as the remainder of the Ottoman
Empire had a strong cultural tradition in rule systems obeying to hierarchical order, a
property that lends itself to an outstanding role of military command hierarchies. Parallel to
this cultural continuity a most remarkable rupture occurred with the ascent of Mustafa
Kemal ‘Atatürk’ to power in 1923. Immediately after World War 1 the monarchy in Istanbul
remained in power and accepted the terms of the peace treaty formulated by the victorious
colonial powers. Atatürk split from Istanbul and concentrated his supporters of the Turkish
National Movement in Ankara. From there he formed the territory of the new Turkish state –
with means of forcible displacement and other coercive measures, which cause hot debates
till today. Most important was his break with the political influence of religion, his strong
move towards a secular republican organization of the new Turkey. In 1924 the new
constitution of the Republic of Turkey officially abolished the caliphate and the use of the
shari’ah as the basis for the legal system. At the core of the new constitution of the secular
state were the famous six principles: Republicanism, Secularism, Populism, Nationalism,
Statism, Reformism. And the military was seen, and understood itself, as the defender of
these six principles. After the eleven years of constant warfare of the Ottoman Empire, from
1911 to 1922, the new Turkish Republic tried to avoid (outside) military conflict and opted
for neutrality in World War 2. But inside Turkey severe inequalities were only too visible:
between Ankara and Istanbul, between the large cities and the open land, between the
different ethnicities (Turks, Armenians, Kurds, etc.), and as a consequence between rich and
poor. Nevertheless, despite the internal socioeconomic problems, the primacy of military
influence did lend itself very well to the geopolitical role which Turkey was assigned to fulfill
as a Western NATO member from the fifties onwards.
To understand the current situation of Turkey and Greece in the geopolitical context, in
particular the sharp contrast that has evolved, it is necessary to take into account the
expansion of NATO towards the east (compare fig. 4). Since 2007 Greece is not a frontier
territory anymore, but Turkey still is
13
. Moreover, with the introduction of the Euro at the
turn of the century in core EU states - including Greece - there emerged a peculiar
opportunity for international finance, a condition which Greece shared with Italy, Spain, and
Portugal (but not with Turkey): The credit-worthiness of these EU states could be targeted
as if they were just large firms. With self-amplifying loss of value, steered by bank-led rating
agencies, the local government fraction of the national ruling class could be forced to
arrange a bail-out based on a sharp increase of exploitation the local working population
14
.
Since this type of dynamics could be of crucial importance for many states in Europe’s south-
east it has to be portrait with more details and some empirical data.
Assume that social dynamics are best understood by the consideration of (global and local)
class dynamics. Furthermore consider that the ruling class consists of three different
fractions: Owners of production units, bankers (financial intermediaries), and political rulers
(governmental bodies and their administration). Profits emerge by exploitation at the level
of production units, in other words revenues received by firm owners are larger than their
13
Of course, the historical conflict on the Aegean coast of Asia Minor during the first decades of the 20th
century still plays a role too. But this now, after almost 100 years and a common membership in the EU already
in a test phase in Cyprus, should vanish in the background of the minds of new generations.
14
The instruments of this policy range from tax increases via reduction of social transfers to a general decrease
in wages and firing of public employees.
wage cost. These profits are then shared between the three fractions of the ruling class,
bankers receive interest (called capital cost of firms: ) and state agents receive
salaries paid with government income (mainly wage tax , profit tax and value added
tax reduced by the cost of infrastructural work, plus interest on public debt, ,
which is a transfer to the banking fraction of the ruling class). Equation [1] summarizes this
distribution of gross profit.
with [1]
This distribution thus is determined by the different interest rates , mirroring the class
internal struggles between the fractions, and the historically inherited net debt levels .
Superscripts refer to the firm fraction (F), the bankers’ fraction (B), and the state organizing
fraction (S). Since total profit determines what remains as for the owners of production
units it is the increase of the force of exploitation , which is not just in the common focus of
all three fractions but also motivates the firm fraction during periods of frozen inter-fraction
relations. The force of exploitation is defined as
with [2]
It is the ratio between the aggregate of total revenues and wage sums of all
production units. The wage sum, of course, is the product of the number of wage receivers
and the average wage they are paid. Rearranging [2] shows how can be increased:
[2’]
The direct route would be to reduce average wage and employment decreasing the
second term, i.e. production cost. But as the first term shows this bears the risk that total
revenues – determined by the demand side – will decrease too unless the force of
exploitation is increased sufficiently. The after-war period was characterized by two
important mechanisms enabling such an increase in the force of exploitation: (1) By using
specific geographic or cultural differences to other countries domestic exploitation can be
supplemented by extending production and demand to these other areas thus establishing
what I call exchange rate exploitation
15
. (2) The second mechanism aims at the expected
stability of the prevailing class rules and enables long-run (social) contracts, which lead to
additional present demand out of expected future profits and wages – financial
intermediation based on trust in stability and the abstract nature of money, both handled by
the banking and the state fraction of the ruling class.
15
See [Hanappi, 2011] for a more detailed treatment of his concept.
Exchange rate exploitation typically concerned the interactions in production
16
between
leading OECD countries and poorer Asian, African, and Latin American countries. In a more
subtle form it also is part of generating profits in tourism, an export of services of some
poorer countries. When Greece joined the EU and introduced the Euro this type of
mechanism to increase the force of exploitation became impossible.
But these same developments, which had stopped mechanism (1), were enhancing the
possibilities for the second mechanism. Expectations on the political stability of Greece
became almost equivalent to the expectations of the political stability of the EU, a process
further strengthened when the Greek currency became EU currency. In the years from the
early 90-ties up to 2007 this increase of the force of exploitation based on financial
intermediation worked well. Note that this mechanism also allowed for some modest
improvements in the poorer strata of the Greek society, explaining why this time period was
in general not experienced as an increase in the force of exploitation.
Some basic features of this argument are summarized in figure 5.
Figure 5: Simple Class Dynamics
16
See the literature on global value chains, e.g. [Serfati, ].
Force of exploitation f
Workers
Infrastructure σ
PROFITS
WAGES
Employment
Unemployment
rF
rS
taxes
The exploitation of workers is possible due to the private ownership of the means of
production, which allows producing unemployment, which in turn forces workers to accept a
wage sum that is low enough for the emergence of a profit sum, i.e. a difference between
total revenues and wage cost remaining in the hands of firm owners. The force of this
exploitation process (slope of the blue arrows) is measured as the ratio between total profits
and wage sum, called f. Growth of f measures an increase of exploitation and is due either to
an increase in revenues, or a reduction in the wage sum, or a change of both. Reasons for
this development can be increased sales, higher prices, technical progress, lower wages and
reduced employment (accompanied by increased labor intensity). Once total profit is
extracted the three different fractions of the ruling class are engaging in their infra-class
struggle. Major instruments for this conflict are interest rates and taxes (net of subsidies).
Part of the state activities produces necessary infrastructure (red arrow) and constitutes a
considerable share of total employment (green arrows).
The sizes of pie charts in figure 5 are approximately those existing currently in Greece
17
. The
long-run development of total profits (in firms and banks), total wages and infrastructure
(compensation of public employees) over time is shown in figure 6.
Figure 6: Long-run developments in Greece
The surge of profits, which started with EU membership, had been further fuelled by the
disappearance of the Soviet Bloc. The turning point in 2007-2008 came when several pivotal
- and interdependent - events occurred in global politics: (1) A further step in EU Eastern
17
The data collected by national statistical offices, Eurostat and OECD, which has been used to produce the
figures in this chapter, had to be somewhat adapted to be used as indices for the theoretical concepts
proposed. E.g. what is usually reported as ‘gross operating surplus’ is only profits of firms including banks and
has to be corrected to include the part of profit used by the state fraction of the ruling class. But a share of this
state part of profits is used to provide substantial infrastructure for a society’s reproduction and not just for
control by the ruling class. Since much more empirical work is needed for a proper analysis, the index for this
share simply is assumed to follow the wage sum of state employees.
0
20
40
60
80
100
120
140
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Mrd Euro
Greece
Gross operating surplus Compensation of employees Infrastructure
EU Member
Collapse of USSR
Bulgaria & Romania in EU
enlargement reduced Greece’s geo-political importance; (2) After a long period of radically
aggressive US foreign policy during the Bush era a possible change due to a new democratic
president Obama irritated the (global) ruling class; (3) The enormous amount of capital that
had been posed in financial markets due to narrowing possibilities for high expected profit
rates in the real economies around the world finally reached a sensitivity border of a critical
mass of top investors – a landslide of changed strategies in global financial markets
occurred. The third event – later to be recognized as the deepest global crisis since the Great
Depression – has to be discussed in more detail to understand its implication for Greece.
First it has to be noted that the role of Greek banks (within the country) has not changed
dramatically – neither before nor during the crisis. As figure 7 shows, their share in profits
remained rather constant
18
. They have been, and remained, rather unimportant parts of the
global network of financial intermediaries. The disaster of finance reached Greece from the
outside.
Figure 7: Development of profit shares in Greece
To see how small the Greek economy compared to the EU and the global finance is compare
figure 8. What has happened in the global economy, usually described as the burst of an
enormous financial bubble, therefore appeared to this country like a natural disaster, like an
economic earthquake, which came out of the blue.
But a financial crisis is not a natural disaster, is not just ‘bad economic weather’. It follows its
own internal logic, which can be described, can be understood, and even can be avoided as
soon as a different social system is implemented. Such crisis are not ‘natural’, they are just
fast processes driven by powerful economic agents with rather myopic expectations and
18
Note that the large share of profits of the state also indicates the importance to pay for coercive class rule, a
feature inherited from the times of the rule of the military junta. It also includes payments for the priests of the
Greek Orthodox Church (all paid by the state) who secure ideological dominance of the ruling class.
31,3% 33,0% 31,1% 30,6%
7,9% 5,6% 5,6% 5,5%
60,8% 61,4% 63,3% 63,9%
2000 2007 2009 2013
SHARES OF PROFITS
production finance state
little knowledge on (and interest in) external effects. The Greek tragedy in this perspective is
just another external effect. A quick look at figure 8 shows how small the country, its GDP
and its contribution to finance and insurance, really is.
Figure 8: Greece in comparison in 2012
From the point of view of capitalist dynamics the repeated pulsation of boom and crisis is
just the common profile which it necessarily follows. It is just the size of heavier, but less
often occurring downturns which is so alarming
19
. What typically happens during such a
Nadir of a usual business activity is that capitalist entities change from civilized competition
to massive and aggressive take-over behavior. Since the winner gains the market share of
the extinct loser there often occurs a desperate economic fight, with many participants
going through phases of existential crisis. Nevertheless the business world has developed a
civilized brutality: Once a new constellation is stabilizing, the winning firm will take over and
re-vitalize the most profitable remainders of the killed opponent – and will ‘externalize’ the
rest. The final victims of the process on this battlefield are always the now unemployed
workers of the closed down, ‘externalized’ production units. Considering the just reported
explosion of the profits of large banks paralleled by extremely high persistent
unemployment the current global crisis seems to follow the same pattern
20
. What is new this
time is the fact that entire nation states, like Greece, which financially are small compared to
the financial empires that rule the globe, can fall prey to the activities of the latter if several
conditions are in place. One of the most important pre-conditions for the financial assault on
Greece was the fact that its currency was the Euro. Being a Euro area country implied a kind
of additional special collateral: In case of emergency the state fractions of all Euro area
countries could enforce their taxpaying workforce as well as local SMEs to repay credits. In
19
Keep in mind that after the Great Depression of the Thirties not only the famous transformation of the US
economy towards Fordism became necessary, but there also emerged Hitler’s Fascism in Europe.
20
While the fight for dominance at Wall Street that started with the assault on Lehmann Brothers in September
2008 now seems to have calmed down with the help of the Obama administration, the many other battle
zones that were stimulated by it are still self-amplifying.
USA EU Greece
16245
12275
289
6334
309 7
Comparison of USA, EU and Greece
(billion US $)
GDP Finance & Insurance
the end it would be the political stability of the Eurozone, which would be at stake – and the
global financial engineers were correctly assuming that first the case of Greece and then in
the sequel the case of European banks would be not important enough to risk this
overarching task. What happened was that from 2009 onwards bank risk of the finance
fraction of the ruling class was transferred to the state fraction, a transfer to the promise to
use cuts in government expenditure for social infrastructure accompanied by increases in
wage taxes. The global squeeze on expected profit rates in the real economy, which in turn
had been the result of the successful return to conservative economic policies starting in the
Thatcher-Reagan-Kohl era which had produced tremendous amounts of profit sums waiting
to be re-invested, first could be channeled into the labyrinths of new financial ‘innovations’
traded in immaterial market places. This dubious practice – though artfully hidden behind a
veil of pseudo-scientific voodoo mathematics – enabled a delay of a great crisis from the
mid-eighties onwards. When finally in 2008 a coincidence of several trigger events caused
the fall of this house of cards and the big robbery of the global finance fraction started, the
turn towards political entities as possible prey was inevitable. Conservative ideology had
prepared the common sense to consider states like firms, less efficient firms of course. This
had been the background for the infamous debate on ‘rather private than public’ for
decades already. With this technology assisted brainwash the general public indeed was
speechless and confused when the global financial crisis struck and the immediately
following transformation into austerity programs executed by the state fractions followed.
But Greece is not just another big firm. It cannot be shut down, all Greek people fired and
advised to look for work somewhere else, just some islands be kept and re-animated to
serve as tourist attractions of the larger firm EU. Greece is a political entity and the essence
of such an entity is to provide and to safeguard the rule set necessary to guarantee the
reproduction its members, of society. This is different, in many respects opposed to the
essence of a capitalist firm, which is the accumulation of profit, the growth of capital.
Despite this simple and evident facts the Greek state fraction, partly forced by
representatives of the state fraction of other countries (the Troika), dealt with the assault on
the firm ‘Greece’ like any other firm owner.
Since intra-class conflicts of the ruling class in Greece became petrified with horror when
global finance claimed a quick repayment of its credits, all efforts focused on an increase of
total profits exploited from the local workforce. ‘National profit’ is the difference between
‘total sales’ and ‘total cost’. If in an environment of a stagnating global economy ‘total sales’
could only be increased by increasing government expenditure - which is unrealistic because
the increase of government debt needed to finance it would have to turn to the same
creditors that had initiated the financial pressure in the first place – it is straight forward to
concentrate on reducing ‘total cost’. All policy instruments directed at this goal are
nowadays summarized under the header of ‘austerity policy’. An additional fashionable
adjective for this kind of policy is ‘efficient’. It transports the idea that a policy has to lead to
the highest profit for a given set of inputs, or to the lowest amount of inputs – e.g. a
minimum of employees - for a given amount of output. Figure 9 shows how successful
austerity policy has been implemented in Greece during the crisis.
Figure 9: Austerity policy in Greece
A steep drop in average wages (right hand scale, 1995=1) and a reduction of the number of
employees (an explosion of unemployment rates) did lead to rapid fall in the wage sum from
2008 onwards. At the same time the force of exploitation f (right hand scale, remember
equation [2]) more than doubled. These developments are different from the general
pattern observed in the Euro area (blue lines). Since 2008 the difference in unemployment
rates and wage levels between Greece and the average EU area is dramatically increasing.
There is no sign that austerity policy will change its self-amplifying impact on further
unemployment, ever lower wages, lower government revenues and growing inability of
workers as well as the fractions of the local ruling class
21
to pay back their debts to global
finance. Figure 10 depicts these financial developments in Greece. Though total government
debt seems to stabilize at a very high level and the actual interest rate applied to it has been
falling (in particular since 2012) the dangerously shrinking economic activity that has been
caused by austerity policy will be less and less in a position to generate enough surplus to
avoid a moratorium of debt. Those households that were not able to transfer their bank
accounts to foreign countries constitute a problem for creditors too, though on a smaller
scale.
21
Parts of the ruling class of Greece have already left the country, or at least have transferred their bank
accounts out of the control of the Greek tax authority. The same applies to the flight of human capital, since
2009 emigration of well-educated workers is soaring. The latter development already has a long lasting
negative impact on the countries future prospect.
1,0
1,5
2,0
2,5
3,0
3,5
4,0
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
percent
Crisis in Greece
Unemployment rate Greece
Unemployment rate EU 17
Average wage Greece
Average wage EU 17
Force of exploitation
Index:
wage level Greece 1995=1
Figure 10: Financial developments in Greece
As the diagram also indicates, the explosion of government debt has in the first place also
been caused by the high interest rates Greece had to pay to global finance in the nineties;
that is before the Euro was introduced. This throws a light on an important issue: Analysis of
class dynamics has carefully to distinguish between the global players, e.g. the global
fraction of finance, and local national ruling classes. The chalybeate bath of the crisis of
global financial players - which reduced their number and purified their strategies – is
experienced at the level of national class dynamics as an assault on their culturally inherited
local class relationships and exploitation practices. Unification of the global finance fraction
of ruling classes is much more advanced than those of production firms, where the large
transnational corporations are still struggling along their interwoven relationships via global
value chains. Not to speak of the state fractions, which lag so far behind that they do not
even aspire to achieve continental unification in the near future. Admittedly, as long as the
rules of a democratic system are in upheld, the politically oriented state fraction of the ruling
class has the most difficult job. To pacify not only the usual class struggles, but as well intra-
class conflicts and conflicts between local SMEs and global players – to be even elected by all
of these groups – is not an easy task. There thus is the permanent danger that parts of this
fraction of the ruling class opt for less democracy, sometimes even for an intervention of
militarily supported dictatorship ‘to set the record straight’. Greece has experienced such an
episode in the seventies, in other European countries, e.g. Hungary, similar developments
0
2
4
6
8
10
12
14
16
18
0
50
100
150
200
250
300
350
400
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Mrd Euro
Greece - Finance
Interest on public debt
Household debt
Government debt
Interest rate on gov't debt
can be observed
22
. As the considerations in the first part of this chapter show the elites in
south-east Europe are historically and culturally somewhat in danger to be too easily
convinced that a quick jump to an intervention by military forces is an acceptable solution
for the problems of governance
23
.
On a more theoretical level the case of Greece proves to be revealing too: When the global
financial crisis struck the mainstream macroeconomic model had not only completely failed
to predict the crisis, it also provided no answer for economic policy what to do next. For
many critical social scientists this proved that the mainstream neo-classical framework had
been misleading policy-makers and thus should be replaced by the older approach of
Keynes, which had been designed as a practical answer to the Great Depression of the
thirties. Such an interpretation fails in two crucial respects.
First, neither politicians, nor business leaders, nor important financial decision-makers ever
based their actions on a full-fledged neoclassical economic model, simply because none of
them really knows it. At best they have assimilated a few features dressed as slogans, which
they sell as management literature after retirement. It only is this mass of derived pseudo-
economic jargon that pollutes and confuses the media and acts as a weapon in ideological
class struggle. In the academia the neoclassical mainstream approach has not failed at all,
but was extremely successful as an instrument to seduce many of the most promising brains
of two generations of economists to spend their lives with useless formal exercises. This
theory never was designed to describe economic reality adequately so that economic policy
can be given advice. This theory is an instrument of class struggle using the via negativa: it
excludes reality and therefore under the label of a synthetic science leaves the scholar
speechless - but permanently occupied with language development. This characterizes what
the inhabitants of the ivory tower of high-brow economic theory praise as their ‘state of the
art’.
Second, the return to Keynes’ macroeconomics is only justified in so far Keynes indeed was a
man of practice who wanted to save capitalism from its self-destructing features.
Interpreted in the framework used in this chapter
24
his central advice is to let activity
oscillate between the firm-owner fraction and the state fraction of the ruling class to iron
out the inherent business cycles of capitalism. In this context the finance fraction of the
ruling class (banks) acts as a mediator between the state fraction (ministry of finance) and
the firm owners. Following Keynes some contemporary critics of the mainstream
neoclassical theory (Post-Keynesians) would therefore suggest that in the case of Greece it
just would need additional investment demand of the government to get the capitalist
process going again. Finance could provide money to enable the monetary authority to
increase government expenditure, or even better to increase the money supply to induce
firm-owners with the help of lower interest rates to invest themselves. Of course, the state
22
Evidently Stalinist regimes and contemporary authoritarian regimes in former states of the Soviet Bloc can be
interpreted as systems with an overwhelming dominance of the state fraction of the ruling class.
23
Recent developments in Egypt prove this common cultural heritage in the Eastern Mediterranean.
24
See the appendices 1 and 3 of [Hanappi, 2013b] for the details of this framework.
fraction would have to return this support to the finance fraction as soon as the next
‘natural’ capitalist boom returns and tax revenues exceed government expenditure. It should
be clear by now why all this sounds so wrong if applied to the case of Greece. And it points
exactly to the deficiencies of Keynes’ analysis. (i) The failure to distinguish between global
finance fraction and local national fractions of Greece’s ruling class blurs the difficulties
getting new government credit and leaves the sheer existence of the Troika unexplainable.
(ii) The trust in a ‘natural’ capitalist business cycle has no empirical correlate of ‘innovative
firms’ driving it in a small open economy that has been integrated in a large EU for political
and military reasons. More generally spoken the ignorance with respect to the political side
of political economy is particularly harmful in the case of Greece. (iii) There is a narrowing
down of Keynes’ agenda in the time dimension, namely to focus only the short-run, and in
the dimension of content, namely to concentrate only on the stimulation of the demand
side. The implied ignorance is reflected in a neglect of all stock variables, e.g. government
debt, and their influence on short-run dynamics via the expectations of economic agents,
e.g. traders in global finance. (iv) Despite Keynes’s insisting on the importance of the
monetary side of macroeconomics his treatment of the subject is sporadic
25
and inadequate
for contemporary dynamics. This not only concerns national, partly centralized wage-price
systems and the whole range of modern financial instruments but in particular is missing the
pivotal ingredient of an adequate model for exchange rate dynamics.
For all these reasons a return to Keynes macroeconomics is not a possible answer to the
problems of Greece, the name of Keynes only should remind us that economic theory is
always made for economic policy.
The most important lesson to be draw from the case of Greece is that the problem of the
Greek political economy is not an endogenous problem of Greece. It is impossible to isolate
Greek economic dynamics from the influence of European political economy and the
strategies of global players, e.g. the finance fraction of ruling classes. Therefore any advice
for Greek economic policy has to be just part of economic recommendations for Europe. An
attempt to provide such a preliminary policy program can be found in [Hanappi, 2013b].
In several military respects Turkey shares its history with Greece being a front country of the
West from the years of the Cold War onwards. But unlike Greece, Turkey remains to be a
cornerstone of NATO till today. How important this country still is for the Western military
alliance can be seen in the size of military expenditure of Turkey, compare figure 11. Being
the largest military power along the eastern border of the West, followed by Israel in the
south and Poland in the north, it certainly plays a special role. There is no doubt that this
25
First John Hicks, and later many other Keynesians have tried to construct a consistent framework based on
Keynes prose fragments. Nevertheless it only reached a somewhat closed formal representation when it was
rejected by the school of ‘New Classical Macroeconomics’ in the textbook of Thomas Sargent [Sargent, 1979].
Not all Keynesians were ready to give up the beautiful vagueness of Keynes’ rhetoric skills and therefore
dubbed the more formal type of Keynesianism ‘Bastard Keynesianism’. Neither of the two variants did stand
the test of time when the global financial crisis struck in 2008.
military strength also is one of the foundations of Turkey’s increasingly independent role in
European politics
26
.
Figure 11: Military expenditure along Europe’s east and south-east border
Another important difference to Greece concerns the ideological superstructure. While in
Greece the Greek Orthodox Church is extremely closely interwoven in all parts of the ruling
class and also exerts strong influence on the working class, Turkey’s ruling class is much
more split between secularism and Islam. The state fraction of the ruling class with its
central pillar in the military traditionally tended towards more secular views, which also
were attractive for capitalist firm owners. On the other hand politically oriented Islam,
reaching out from the Middle East was able to organize its own ideological power center
within the state fraction of the ruling class. When in 2002 Recep Erdogan’s new political
party AKP wins the elections and explicitly combines religious goals with state functions
Turkey’s ruling class is definitely split into two camps. An important pre-condition for the
electoral successes of Erdogan’s Islamic movement consisted of the rapidly increasing gap in
Turkey’s income and wealth structure, which mirrored the widening opposition between the
large cities and the open land (in particular Turkey’s south-east). Poor citizens living in the
little developed regions in Turkey’s periphery were voting against the secular ideology that
26
Comparing military expenditure in Greece (2009: 11,5 billion US S) to the military giant Turkey (2009: 17,3
billion US S) shows how ridiculous the argument for high military spending of Greece due to ancient rivalry
between the two states is. In 2009 (at the height of the crisis!) Greece spent 3,3% of GDP on its military, by far
the largest share of all EU states (Germany: 1,4%; France: 2,6%; UK: 2,7%; Italy: 1,8%; even Turkey only 2,6%).
Poland
Slovak Rep.
Hungary
Romania
Bulgaria
Turkey
Lebanon
Israel
Egypt
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
2011 constant US Dollars
Military Expenditure
Poland
Slovak Rep.
Hungary
Romania
Bulgaria
Turkey
Lebanon
Israel
Egypt
had favored the urban elites at their expense
27
. With the AKP religious consolidation
promised to go hand in hand with economic improvements.
These developments in Turkey are not just a possible sign for Turkey being a last south-
eastern outpost of Europe; they certainly are of even more general significance for the
return of religious movements to state politics. This return to religious state leadership is a
global phenomenon and has at least two major sources: On the one hand global
interdependencies - the real economic and political links as well as how they are
communicated – have become extremely complicated to understand, while on the other
hand the dominant interpretative template of the ruling class, i.e. the neoclassical theory
that is conquering all social sciences, aims at irrelevance and confusion
28
. In particular the
least educated strata of the population, which are most distant from the ability to
comprehend by their own experience what is going on, are prone to fall prey to overly
simple, but somehow consolidating religious manipulation. As the events of the Arab Spring
recently vividly showed nationalism and religious fanaticism are brothers in arms when it
comes to fight the awakening of enlightenment. But to use religion and ethnicity (or race) to
gain state power is a play with fire. Once these demons of the past are revived, their
foundations are so volatile that soon further splits and conflicts between newly emerging
groups will enter the stage. This is what starts to happen in Turkey within the AKP right now.
In its most dramatic form this already has happened in Iraq after the USA had tried to
implement what a strictly market-oriented paradigm would prescribe. After a formidable
failure of this economic policy to reach any one of its self-declared goals the country broke
up into a civil war between rivaling religious sub-groups
29
. A comparable process currently
takes place in Syria, though there is a more substantive issue of geo-politics at stake there:
For Russia the Syrian ports of Latakia and Tartus
30
are of strategic importance, and thus for
Western forces any peace arrangement in Syria is at the same time an arrangement with
Russia’s access to the Mediterranean Sea. Note that Latakia lies just 50 km south of the
Turkish border, according to the definition of Europe proposed in this chapter this means 50
km south of Europe. In that sense the civil war in Syria is a war along Europe’s southern
border. Consider also that Erdogan could expel an ethnically competing group, the Kurds, to
a region in the north of the dissolving state of Iraq. This piece of the south-east borderline is
also far from being consolidated, Turkish airstrikes repeatedly attack villages in this region
where they assume Kurdish PKK fighters, which in turn infiltrate Turkey. And finally Turkey
has Iran as a neighbor, a state, which is ruled by Shiite mullahs. In many respects Iran, a state
previously ruled by one of the most Western-oriented emperors, Shah Reza Pahlavi, did fall
deepest into the impasse of a dogmatic religious regime. The contrast to Europe – to be
presented by Turkey – to an even pre-Stalinist type of social system could not be sharper.
27
The Gini-coefficient of Turkey still is almost double as high (0,41) as the one in EU states.
28
In this respect it reminds on the dogmatism of the Catholic Church at the end of the middle Ages: Highly
educated and specialized scholars working with most sophisticated methods in ivory towers on extremely
irrelevant questions.
29
See [Cafruny A. and Lehmann T., 2012], [Bayat, 2013] and [Ali, 2013] for a detailed discussion of this process.
30
Tartus is the only port of the Russian Navy in the Mediterranean Sea.
And this fact makes the religious foundations of Erdogan’s AKP look dangerous for a future
EU membership of Turkey
31
. Ethnicity is as fragile a pillar of Turkish policy as is religion. One
of the darkest events of modern Turkish history, the treatment of Armenians, still lingers in
the background of many of today’s political bargains.
It is a classic policy move to distract observers of internal policy problems by turning to
surprising foreign policy issues. Following this route Erdogan has used the Arab Spring events
to present Turkey as an international role model for an economically successful, ‘secular
Islam state’ – a contradiction in terms. But trying to team up with some Arab states, e.g.
Qatar, proved to be more difficult than expected. After the upheavals groups and leaders
still were in unstable positions and the new geo-political setting was – and still is – in flux. It
is not evident in which respects Turkish Islamism indeed can be a model, its historical
emergence seems to be much too specific to be of any help for the disasters of civil society
that in the moment plague the Arab world. Moreover, at the home front unrest could not be
stopped by ever more police, secret service and other coercive instruments. As internal
difficulties did rise the tensions not only between the army and the ruling party but also
within the AKP itself became severe. In the latter respect an additional policy aspect of
countries along the NATO frontier became visible: In many of these countries a considerable
part of the ruling elite has emigrated and stays now in Northern America, but still maintains
tight links to national policy in their European home country. Indeed this fact always has
been used by the USA to use these links to influence local European policy
32
.
The relationship between Turkey and the European Union mirrors the track of Turkey’s
domestic turns. Before the takeover by Erdogan’s AKP the accession of to the European
Union was a declared priority of Turkish governments. Resistance against these plans rather
came from some conservative parties in the EU, belonging rather to the state fractions of the
ruling class trying to please voters that could be irritated by a hypothesized danger of losing
their economic status by foreign intruders. Usually these voters were already endangered,
though by other forces: small shop owners by transnational corporations and workers with
precarious employment by cost reductions and austerity programs. Part of the strategy of
the AKP clearly was to play on the self-esteem of a Turkish nation; if the EU makes it difficult
for Turkey to join, then Turkey will work on becoming the leader of the prospering nations
around the Eastern Mediterranean. In the meantime the EU had its own problem of coming
to grips with its Eastern Enlargement in 2004. With 10 more Eastern European countries to
be economically and institutionally to be integrated the focus turned away from Turkey.
Then, in 2007, the European Union advanced to the western shores of the Black Sea by
taking on board Romania and Bulgaria. This move left several west-Balkan countries as an
internal home-work of integration (in the meantime Croatia has joined and Serbia is on its
way), while the case of Greece followed its own tragic trajectory. The situation changed
31
Note also that 84% of the Turkish population are Sunnis.
32
The influence of the Democratic Party of the USA on PASOK in Greece was a notorious case before Greece
moved back from the front. Policy in Poland, Turkey and Israel cannot be understood without taking a look at
these, usually even personal links.
when the global crisis pushed Europe’s core countries into the deep recession of 2009. As
figure 12 shows, the downturn of GDP in Turkey was similar to the one in the large EU
countries, but in the mid-run Turkey clearly is growing on a higher trajectory.
Figure 12: Real GDP Growth in Turkey and 5 large EU Countries
The potential for growth, i.e. capital accumulation, in Turkey can easily be explained by the
already mentioned high income inequality combined with a large and cheap labor supply
moving to the big cities. Figure 13 compares absolute sizes of GDP and labor supply.
Figure 13: GDP and Workforce (age 15-65) in 2012
It is this potential contribution to the European capital accumulation process, which induces
the firm-owner fraction of the European ruling class (since the crisis mainly consisting of big
business) to push for the inclusion of Turkey again. Global finance, at least its European
branch, until the more recent developments in 2013 has been quite euphoric about such a
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2005 2006 2007 2008 2009 2010 2011 2012
Percent
GDP Growth, real
Turkey
Germany
UK
France
Italy
Spain
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
9000000
10000000
US Dollar and persons 15-65
GDP and Workforce in 2012
Real GDP
Workforce
perspective too. But world politics, following Barack Obama’s advance across the Pacific to
focus on China-US relations, has made finance more skeptical with respect to the highly
explosive developments in the Near East – eventually contaminating countries like Turkey.
Nevertheless, as recent history shows the mood of global finance, i.e. the profit expectation
process of its leading decision-makers, is an extremely volatile variable. If Putin’s Russia can
be forced to accept the inclusion of the Ukraine in the EU (a process that started the hard
way in autumn 2013), pacifying the Black Sea region with its huge energy resources, and at
the same time conflicts in front of China and within China prove to be much more difficult
than expected, then investors’ choice might turn quickly towards Turkey again. In the latter
case it is highly questionable if the group around Erdogan can be the local partner for the
global ruling class again. The best guess probably rather would be a newly emerging mix of
important Turkish business elites and a rejuvenated army fraction. With that constellation
Turkey as a part of the European Union probably could be a modest contributor to a
reconciliation of the capitalist process in Europe – coming at the price of increased law-and-
order policy, markedly increased force of exploitation (remember variable f discussed in the
context of Greece), and a strong further shift to extreme inequality in income and wealth.
Though the question of energy supply provided by the Near East has not been discussed
explicitly yet, it is evident that this issue is at the heart of the interest of the global ruling
class in this part of the world. And with respect to European energy demand it is clear that
everything that happens in the Near East directly affects Europe’s other big energy supplier,
Russia. The three most southern parts of Europe’ South-East – Cyprus, Turkey, and Greece –
not only are important as countries through which the pipelines delivering European energy
have to flow, these countries – together with Israel – also own a large oil reserve that
recently has been discovered in the Eastern Mediterranean. This issue should wake up
policy-makers in the European Union. Perhaps a well conducted decision-making process on
the future usage of this wealth can be a challenge for EU-politicians that improves their
problem-solving capacities. Unfortunately this fraction of the European ruling class has a
rather disappointing track record in the region, e.g. with respect to Cyprus, so the odds are
not too good.
The island of Cyprus can best be regarded as a laboratory for testing dangerous economic
policies. Being remainders of British dominance in the Mediterranean Sea, Cyprus and Malta
early on developed some special economic, and in particular financial features, that served
the British (and other countries’) ruling class to store money under the control of a different,
usually easily manipulated, national legislature. This type of diversification of nation states,
the split-up of the state fraction of the ruling class, has been a significant institutional
evolution in the after-war period. In this respect Europe’s most famous examples of course
are Switzerland and Luxemburg. But contrary to these examples Cyprus is an island, exposed
far south in the open sea and a traditional port for all sea trade passing by.
The first experiment came soon after Cyprus became independent in 1960. With a military
junta taking power in Greece in April 1967, this most coercive part of the Greek ruling class
was propagating nationalist ideology. In Cyprus internal conflicts already had been
permanently evolving since the British had left a vacuum of state power. Greece as well as
Turkey had fuelled the rivalries by re-injecting and supporting religious motives from 1958
onwards
33
. In 1974 the Greek military junta tried to solve the issue for once and for all,
testing if the Turkish military – and the international community – would accept this move.
Turkey did not, and the northern part of the island was invaded by Turkish troops. Since this
failed military experiments the Cyprus is divided. It also showed that legal agreements are
just an epiphenomenon: From a legal point of view the Greek junta had broken a Treaty
signed in 1960 and so intervention of Turkey was legally justified, but on the other hand the
newly founded Turkish state on the island (the ‘Turkish Republic of Northern Cyprus’) never
was legally accepted by any other nation, only by Turkey. International agreements are
driven by current power relations and not vice versa. The failed conquest of Cyprus (by both
states) left the population of the island as victim.
Another failed policy initiative on Cyprus can be found in the attempts of the United Nations
to reach a unification of the island by diplomatic means. While the intervention of the
peacekeeping force of the UN (UNFICYP) from 1974 onwards certainly has contributed to a
more civilized style of conflict, the latest diplomatic initiative of UN secretary general Kofi
Annan in 2002 did not succeed. Despite political pressure from the UN, the EU, and the USA
the Greek government as well as nationalists (of both sides) on the island rejected the
project. The lesson to be learned from this failure is that once the seed of deep ideological
conflict (eventually supported by religious aberrance) has been successfully implanted, any
short-run intervention of international diplomacy has very limited influence. It either takes a
new generation of citizens socialized in a different environment, or an actual direct
interference in the power structure of a state (or both elements) to overcome this micro-
political potential for conflict. This Cypriot experience can be generalized to all Balkan
countries too.
The third example of a failed economic policy experiment on Cyprus dates from the recent
crisis years: the Cypriot debt crisis. Cyprus joined the EU in 2004 and introduced the Euro in
2008. After the collapse of the USSR in 1990 the island had increasingly attracted newly rich
tourists and businessmen from the former Eastern Bloc, with its currency now being the
currency of the core EU countries Cyprus acquired a new role: Surplus generated in Russia –
partly by more or less criminal activity - was transferred to the island and then re-exported
as hard-currency, ‘clean’ Euro amount. The sheer amount of this type of financial transfers
dwarfed the GDP produced in Cyprus
34
– and the profit shares remaining in the country
enabled its citizens to receive a disproportionally high amount of credit. Then the crisis
struck, the GDP decreased in 2009 by 1.6%, local tourism and the shipping industry wnent
33
The return to religious roots later proved to be an extraordinary strong instrument for the manipulation of
ethnic groups in Yugoslavia.
34
While GDP was 24 billion US $, the banks had deposits of 120 billion US $ (half of them from Russia).
Moreover these banks held 22 billion Euro of Greek private debt; a channel on which the Greek crisis could be
transmitted to Cyprus.
down, unemployment increased and loans could not be served. The value of commercial
property fell by on third, and the Cypriot banking sector was approaching a collapse.
Figure 14: Cyprus Finance in Crisis
This was the situation when the worldwide transfer of debts to the finance fraction of the
ruling class towards debts to the local national state fractions, i.e. the ‘government debt
crisis’, had started. When the Cypriot Central Bank applied for help the state fractions of the
core EU members seemed to have decided to make an exemplary attempt to directly take
hold of the large deposits in Cypriot banks by forcing them to stop to return savings. This
was an outstanding exploration of the use of such a measure, since it was clear from the
beginning that it would destroy any trust of customers in financial institutions. Such an
experiment could only be dared in a small, relatively isolated country; and it evidently aimed
to get hold of money from non-European, e.g. Russian, origin. The experiment failed
dramatically and caused permanent damage. Big money had been already transferred away
from Cypriot accounts to other countries when the strike was performed
35
and the effect on
the Cypriot economy was a lasting loss of reputation mirrored in capital flight (compare
figure 14)
36
.
Cyprus as a small laboratory for dangerous policy experiments has experienced a marked
economic decline and there is little hope for a new upswing. The role of a safe haven for
money stemming from unclear origins has lost much of its glamour, though remainders of
the Russian connections still can be found. One option for Cyprus hopefully would be to play
the role of a facilitator in questions of European energy policy, as already mentioned above.
But this certainly would need a unified island, a condition that crucially depends on the more
important players in world politics: the USA, the EU, Turkey, etc.
3535
At the time 10% of the shares of the Cypriot Central Bank were owned by the Russian oligarch Dmitry
Rybolovlev. It was at best naïve to believe that closing bank counters can beat the fast and sensible movements
of capital. In the hindsight it is much more probable that the exercise should simply be used as a signal to show,
how coercive measures of the state fraction can hurt everyday life.
36
While deposits of Cypriots in banks outside the Euro-area went up (right hand scale in fig. 14), those using
Cypriot institutions went down dramatically (right-and scale). Source: IMF
0
200
400
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1200
1400
1600
1800
2000
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011 2012
Million Euro
Cyprus - Capital Flight
Overnight deposits held at credit
institutions
Overnight deposits held at EEA-based
credit institutions (outside the euro area)
Overnight deposits held at non-EEA-
based banks
In many respects this also is a general result of this compressed tour de force through
Europe’s South-East. It is a hotbed of world politics for many reasons, energy supply and
important strategic position (from a military point of view) are just two dimensions. The
people living in this area of Europe have experienced more troubles and harder times since
the end of World War 2 than most other Europeans. Integrating them into European welfare
increase means also to learn from their experience, to understand how and where the
flourishing of the living conditions of one group of Europeans is built on the misery of
another group. The analytical tool sketched in this chapter, i.e. geographically structured
class analysis, can be used to throw some light on these dynamics. Despite its often
speculative character (and thus its necessarily short predictive horizon) it can and should
inform the citizens about which type of European democracy they should fight for. It should
not be too surprising if the wisdom slumbering in the south-east corners of Europe for many
hundreds of years can contribute major pieces to the blueprint of a future more democratic
Europe.
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