This article reviews, analyses and interprets the evolution of the state and the economy of post-war Greece, before and after the political transition to democracy in 1974. It is based on GreeSE paper no. 198, which provides a more detailed analysis.

The 1974 political transition led to a regime-change involving a very large part of the ideological and institutional edifice that characterised Greece in the twenty-five years between the end of the civil war in 1949 and the transition to democracy in 1974. Although social and political institutions and performance improved significantly after 1974, economic performance deteriorated sharply. The analysis suggests that although this was to be partly expected because of international developments, the sharp deterioration is economic performance was mainly the result of the failures of the post-1974 political regime to substitute the commitment and coordination mechanisms that had contributed to the economic ‘miracle’ of the 1950s and the 1960s, follow appropriate and consistent rules in economic policy and introduce the necessary reforms. In addition, Greece entered the E.U and, later, the euro area relatively unprepared economically, something which contributed to the deterioration in its economic performance and, eventually, the debt crisis of the 2010s and the great depression that followed. The final section of the article discusses several reforms that could help put Greece back on track economically, consolidating and improving its position in the E.U and the euro area, while strengthening the desirable social and political characteristics of the post-1974 regime.

The political transition of 1974 is one of the most important milestones in the history of modern Greece. The collapse of the dictatorship in July 1974 did not just lead to the restoration of the flawed post-civil war democracy, but to an entirely different and in most ways superior political regime. This political transition, called metapolitefsi in Greek, ushered in the most mature democratic period of the country and the beginning of the end of the great social and political divisions created by the civil war of the 1940s. It was a genuine transition to democracy and change of regime.

Until 1967, the country was ruled as a ‘crowned democracy’, the Kingdom of Greece, based on the constitution of 1952. However, an array of laws that had been put into place during the civil war of the late 1940s, allowing wide-ranging discriminatory practices against supporters of the left, were also in parallel operation, undermining political and social equity and freedoms. Furthermore, trade unions functioned under the umbrella of the state, which limited their influence, while workers’ rights, collective bargaining and the right-to-strike were also limited. In addition, the crowned democracy was also characterised by unwarranted, and politically destabilising interventions by the ‘palace’, i.e. the King and his entourage, and, occasionally, foreign embassies or extreme nationalist factions within the army and the security forces. Eventually, one of these factions planned and executed the military coup of 1967 and imposed a seven-year dictatorship.

During the post-civil war democracy, loyalty to the western alliance and values and the pursuit of economic and social development and monetary stability evolved into the main ideological driving forces of the policy of the Greek state. Economic and social development of the country within the framework of a mixed ‘western’ economy evolved into the ‘new grand idea’ of Hellenism, was accepted by a broad majority of the population, and was actively pursued by the Greek state regardless of which government was in power. Under these policies the economy grew extremely quickly in an environment of fiscal, monetary and external balance and converged quickly towards the more advanced western economies. This experience amounted to a true ‘economic miracle’.

After the collapse of the dictatorship and the transition of 1974, the political regime that took its place was the Hellenic Republic, a liberal presidential parliamentary democracy, based on the new constitution of 1975. This fully recognised and respected human and political rights, without exceptions, exclusions and discrimination among Greek citizens. The new regime has been associated with a full set of democratic institutions, an independent judiciary, press and trades unions, and the relatively smooth alternation of political parties in power. This is why 1974 did not just mark the restoration of the pre-1967 democracy but a genuine change of political regime.

The post-1974 political regime is without a doubt the best democratic regime in the history of modern Greece. Yet, the performance of the economy deteriorated significantly.

Greece’s economic problem in the post-1974 period was not so much a problem of insufficient financial resources as a problem of the inadequacy and inability of political institutions to promote long-term beneficial reforms in the state and the economy.

There were significant resources available to Greece, both due to the transfers from the EU and due to the large foreign borrowing.

However, the country’s post-1974 political institutions have not been able to ensure the effective utilisation of these resources by promoting the necessary economic reforms, nor to avoid destabilising short-term economic policy choices.

The post-1974 regime of economic policy evolved largely without long-term planning, as a result of a struggle for income shares among various social groups, with elected governments trying to satisfy conflicting objectives such as re-election, growth, employment, redistribution and social peace, through a short-term economic policy without clear and binding rules and institutional constraints.

This economic and political state of affairs led to choices that were overly influenced by short-term pursuits in social and economic policy, the underestimation of the longer-term problems of the economy and the systematic postponement of necessary reforms. Given that there were insufficient incentives for governments to maintain fiscal balance or monetary stability, until Greece’s participation in the euro area began to be pursued, the result was the fiscal and monetary destabilisation of the 1980s. However, even after Greece adopted the objective of participation in the E.U monetary union, the adjustment and convergence efforts were insufficient and largely fruitless, due to short-term political considerations. As a result, the path of minimal adjustment and reform was the one that was followed.

This unsatisfactory situation was maintained for a long time due to the increased subsidies and grants from the EU, which for many years allowed governments to postpone addressing the underlying problems of the economy.

It is clear that a significant number of important distortions remain in the Greek economy. These distortions have negative effects on total factor productivity, the effective allocation of economic resources, the accumulation of natural and human capital, and technological progress. Thus, the recovery of the Greek economy from the great depression that was associated with the adjustment programs envisaged in the memoranda has been weak and marred by a further deterioration in its external balance.

The key question that arises is why there is a constant postponement of the reforms that would address these distortions and thus lead to further economic and social development.

A number of social and economic groups in post-1974 Greece have secured important privileges that allow them to benefit from significant rents at the expense of the rest, while the cost of these rents is spread more widely across society.

Although no social group or productive sector dominates politically, as the post-1974 political system is inclusive in the broadest sense, every group, from business groups in non-competitive industries, professional guilds, trade unions in the general government sector, and others, have the ability to politically protect the privileges and arrangements that guarantee them these financial rents, i.e. they have secured a veto right against reforms.

Each particular social group has little to gain from reforms that reduce the rents of other social groups, hence it does not support them. Even worse, each social group calculates that if it agrees to reforms that affect other social groups, it may later find itself in the position of defending its own rents, without political allies. On the other hand, each individual social group has sufficient motivation and political power to block reforms that affect the special privileges it has secured.

On the other hand, governments face significant political costs from reforms that affect particular social groups in the short term, with the economic and social benefit usually expected in the distant future, or diffused among the remaining social groups in a way that is small to insignificant for each one of them. Given these facts, governments have few political incentives to adopt difficult but beneficial reforms.

Contributing to this is the competition between political parties for power, partisanship and corruption in public administration, the control of a large part of the media by business interests, the increased partisan influence of public sector unions and the indifference, or even the fear of the wider social majority regarding the promotion of beneficial changes and reforms.

Consequently, the interplay of political and economic institutions ultimately leads to inaction regarding the necessary reforms. In this way, Greek society is trapped in an ineffective economic and political balance, which is anything but conducive to reforms that would contribute to greater economic efficiency and economic growth.

Any attempt at reform, even if it directly affects a small minority, meets the strong political reaction of those directly affected and the indifference, if not hostility, of the large social majority. This is perhaps the main reason why socially beneficial reforms are not progressing.

Ultimately, however, it is the responsibility of the country’s political system and in particular its current government, which enjoys unprecedented political supremacy, to design and implement a way out of this ineffective and nationally damaging state of affairs.

*The Hellenic Observatory hosted a research seminar on the topic on 9 May 2024. For more information please visit the event page.

Note: This article gives the views of the author, not the position of Greece@LSE, the Hellenic Observatory or the London School of Economics.