For 'oil', read 'borrowing', but Greece is akin to an Arab state

Eurogroup president Jean-Claude Juncker and IMF managing director Christine Lagarde after the bailout was secured in Brussels (AFP/Getty Images)

Greece is like an Arab oil state minus oil. It has an overgrown, expensive state machine hard-wired with patronage and corruption. In the Middle East this is an unfair but partially effective way of distributing oil wealth and binding recipients to the state through jobs and favours.

In Greece, borrowing took the place of oil. Membership of the eurozone gave the country the same AAA credit rating as Germany, enabling it to borrow at cheap rates.

Euro membership, like oil wealth elsewhere, was a disincentive to political, economic and social change because the money was there to pay off friends and foes.

Greece is very much a divided society and the divisions are different from the rest of Europe. From the civil war in 1946 to the fall of the colonels in 1974, the country was dominated by the right, which looked after its own, from ship owners to small businessmen, who paid few taxes. From the Eighties on, the centre-left Pasok party was in the ascendant and expanded the state, giving jobs and welfare to its supporters. Everybody was happy until the money ran out.

And the money really has gone. While the Troika (EU, IMF and European Central Bank) devise elaborate schemes for reform, the government is often simply not paying its employees or paying them very late. There is something absurd about expecting a dysfunctional state machine to reform itself at a fast pace under foreign supervision.

There is a second more specific parallel with the Middle East in recent history. Sitting here in central Athens in recent weeks, I was reminded of the start of the US occupation of Baghdad in 2003. The Americans thought they were in control and they were not, but they were going to be held responsible for anything that went wrong.

The political ice in Athens is even thinner than EU leaders imagine. For the moment, they appear to have all the cards. The main Greek parties have signed up to the new austerity deal in order to get the €130bn loan and the €100bn write-off by private bond holders. Greece is effectively going to have a managed default, except that it is not going to be called that to avoid triggering the insurance element in credit default swaps. There is no chance Greece can be rendered sufficiently competitive by the new measures that it will be able to pay its debts. But the future may not be as bad as it looks. The efforts made by EU leaders to prevent a total default underline the fact that they dare not let Greece go broke. The profound impact of the recent negotiations on everything from the oil price to the New York Stock Exchange, show that Greece can still blackmail the rest of the eurozone by threatening to not pay its debts.