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Greece: The Self-Inflicted Wounds of a Careless Country

Liz | Wednesday, July 08, 2015 - 9:03 am

Bernie Sanders is delighted that Greeks voted “No” to creditors’ demands to reduce the country’s unsustainable debt. Like other self-described socialists, Sanders believes the poor Greeks have taken enough of a drubbing from international lenders. His view: “At a time of grotesque wealth inequality, the pensions of the people in Greece should not be cut further to pay back some of the largest banks and wealthiest financiers in the world.” It must be comforting to see everything as black or white.

In Bernie’s world, lenders are bad and borrowers are good. Whether it’s homebuyers during the property bubble, in-hock students, Puerto Ricans or the Greeks, being forced to repay debts is inhumane. On the one hand you have innocent people, on the other a bunch of greedy bankers.

Related: Why Greece Can’t Grow Its Way Out of This Mess

Except the lenders to Greece are actually the taxpayers of countries like Germany, who have shouldered the bulk of the bail-out. And, the borrowers are far from innocent. Forget the retirements at 45 and the outsized pension payments. The real problem is that Greeks have long considered it beneath their dignity to pay taxes. Even during this debt crisis, Greeks have balked at a property tax introduced by the former government. One of the winning planks of the Syriza government now in power was to welcome an anti-tax movement summed up as “I won’t pay.” What did they think was going to happen?

To put the issue in perspective, Athens’ immediate crisis sprang from non-payment of a $1.7 billion debt; Greeks, at last tally, owed their government $86 billion in unpaid taxes. And, it isn’t just the wealthy that play this game. The Wall Street Journal reported that the “vast majority of tax evasion occurs at the lower end of the income scale….”

Moreover, about one quarter of all Greek commerce takes place underground – completely outside the taxman’s purview. 

Greece’s tax structure is in line with other EU nations, but its tax evasion is extraordinary—amounting to about 6 percent of GDP. If people paid their taxes, the budget hole would disappear overnight.

Some trace this behavior to the country’s long occupation by the Ottoman Empire when tax cheating was hailed as patriotic. Others suggest it reflects a long-standing and profound distrust in the government. The latter argument seems convincing, particularly given several administrations’ habit of lying about the country’s budget.

Related: Why Germany’s Hard Line Carry’s Enormous Risks

Greece has been cooking its books for decades. In 1992, the early days of uniting Europe, members were required to keep deficits below 3 percent of GDP. From the outset, Greece cheated. At the time, the nation’s railway system had more employees than customers and was running a billion Euros a year in the red. One former minister was quoted as saying that it would be cheaper to send everyone around by taxi than by rail. The company masked its losses by selling stock to the government; the transfers showed up as balance sheet transactions, hiding the gusher of red ink.

In 2004, a disgusted electorate voted in a center-right government, which discovered that while official accounts showed the country running a 1.5 percent deficit, the real figure was 8.3 percent. That may be one reason why Greeks trust their government less than any other OECD nation, other than Slovenia.

If Greeks don’t have confidence in their government, why should taxpayers elsewhere? 

The sternness of Greece’s creditors has been lambasted by Sanders, and by liberal economist Paul Krugman, who claims that proposed further reforms would have “condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.”

Related: Greece’s New Marxist Finance Minister: More Polished, More Radical?

But, he’s wrong. In fact, the measures adopted in 2010 had begun to take effect. Though Krugman and Sanders highlight budget measures like cuts to pensions and reductions in the number of public employees, more promising for long-term growth are changes aimed at making the economy function more efficiently. Problems in Greece, as in other struggling nations like Portugal and Spain, include public institutions not paying their bills to private enterprises on time, difficult barriers to entry – like onerous licensing requirements—into protected industries, judicial bottlenecks and many other impediments to new business formations, innovation and growth.

A European Commission 2014 report noted that Greece had introduced an electronic registry through which new companies could be launched more quickly, and a novel limited liability corporation that together propelled Greece up 110 slots to number 36 in the World Bank’s Doing Business Report.   

The EC report says that reforms enacted through mid-2013 had boosted labor productivity in Greece by nearly 9 percent. One particularly bright spot was that some 74 percent of the red tape preventing Greeks from entering 20 different professions—like auditors and tour guides—had been removed, boosting jobs. The number of actuaries and auditing firms increased nearly 10 percent and 50 percent respectively between 2011 and the final quarter of 2013 and the number of travel agents grew from 4,015 to 4,328 over that time.

Related: ECB to Keep Banks Afloat Until Sunday—Merkel

Greece still had outsized deficits that placed it on the OECD fringe; in 2013 the country reported a budget gap of 12.3 percent, compared to 4.2 percent for the group overall.

But, in 2014 that figure had declined to under 5 percent. Also in 2014, many saw signs of recovery. Tourism and tourism-related businesses were thriving, but most analysts projected that real progress required staunching the exodus of businesses fleeing Greece, many to set up shop in cheaper lower-cost neighbor Bulgaria, a shift that began in the mid-1990s. It’s not just businesses leaving Greece. Residents have for years moved elsewhere, seeking better jobs and opportunity.

It may be that the EU will be better off if officials can figure out a way to string Greece along. Some reduction in the country’s outstanding debt may be required, as the IMF has suggested. But, until the Greek people get serious about saving their nation, about rebuilding their competitiveness and paying their taxes, we will be revisiting this problem indefinitely.

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