A collaborative blog for Current Affairs and Policy Debate

Up the Greek Without a Paddle

In Europe, Foreign Affairs on July 1, 2011 at 1:39 pm

By polarii for The Daily Soapbox

Amid cheers inside the Greek Parliament building, and near-riots outside it, Greek legislators voted through a tough packet of austerity measures, which enabled them to receive billions of Euros to pay off their next installation on their debts. The broad consensus is that this will buy time for a “haircut” – as it less-euphemistically known, a partial default. Standard and Poor’s, the credit ratings agency, has now reduced Greece’s credit rating to CCC, four notches away from listing Greek debt as a certain default; Greece’s previous rating of B stood for roughly a 50% chance of default.

Meanwhile, in Greece itself, the austerity is curtailing growth. Raising taxes hurt business, cutting public sector funding to so great an extent risks undercutting the 40% of GDP the public sector provides. Increasing taxes have meant that increasing numbers of Greeks have begun to find ways to avoid paying their taxes. Increasing numbers are leaving the country altogether. The public mood is so opposed to the government that, when elections come round next year or the year after, the ruling Pan-Hellenic Socialist Movement is sure to lose. With debt now topping 150% of GDP, Greece needs a bail-out; there is no way it can continue paying its debts. However, it also needs to address more structural issues – an over-dependence on small business and lack of industrial diversification, state overspending and ‘brain drain’; losing too many educated graduates (and their tax) overseas.

Firstly, there are several areas where Greece can cut, and is not cutting greatly, without any major consequences for the economy. The Greek government currently salaries the clergy (both priests and monks) of the Orthodox Church in Greece. While the public are against it, disestablishing the Orthodox Church would save Greece many hundreds of millions. The Orthodox Church has a considerable number of congregants, estates, and works of art that can be used to fund its activities in the event that Greek government funding is withdrawn.

Greece suffers from chronic complications in its tax code, which also enables abundant tax evasion and deters investment. Greece ranks 109th on the ‘ease of doing business’ index, putting it below powerhouses such as Zambia and Yemen, and has the lowest level of economic freedom in the EU apart from Poland. It suffers from widespread tax evasion and corruption, being more corrupt, according to indices published by Transparency International, than Saudi Arabia and Namibia. Tax code simplification and cuts in rates of business taxes are not silver bullets for these issues, but they will go some way to helping Greece score higher on the indices and attract more investment. This will also enable Greece to cut down on its stiflingly inefficient and corrupt bureaucracy.

Another area for cutting is defence. Greece currently spends 4.3% of GDP on defence, whereas its NATO commitments only require 2% of spending. Since Greece does not have much of a defence industry, much of the money spent on defence – mostly planes and tanks – goes abroad. Consequently a cut, mostly achieved by selling off hardware, can find upwards of 1% of GDP to go towards the government’s debts. The reason that Greece maintains such a large force is due to the instability of the Balkans and traditionally difficult relations with Turkey, which disputes several Aegean islands, and, most importantly, Cyprus. A bold government would sit down and thrash out as many issues as possible with the Turks. While selling off islands to Turkey would be so impolitic as to be impossible, accords could be reached that Turkey will renounce some of its claims if Greece will support (tacitly) its EU membership bid. This is a distant enough possibility, given German opposition, to take a calculated risk. While they’re at cutting the military, they could also abolish the compulsory nine months national service, and establish a professional army, usually considerably more efficient and cheaper to maintain. While this would create further youth unemployment, monies saved could be redirected to investing in business to counter that.

Greece ‘sends’ 60,000 students per year to foreign universities, compared to 100,000 from China, which has over 100 times the population. The root of this is the constitution, which forbids private providers of universities to establish themselves in Greece. Aside from the obvious conflict with EU competition law, it means that Greek students must go abroad for the best education. Once they have left, they tend to stay in the country of their tertiary education, get a job and pay taxes there. New Democracy, the opposition party, attempted to amend the constitution at the start of this decade, but was blocked by the Socialists. Immediate reform in this area, to allow private tertiary education, is required to enable Greece to retain more of its graduates, making Greece’s economy more attractive to investment.

If Greece were to be bold, it would leave the Euro. This would give the government additional levers over the economy, and would allow it to pursue quantitative easing, which it currently cannot do because the Euro serves however many other countries who do not need it to the extent that Greece does. The problem with this move would be that all Greek debts are currently denominated in Euro. A change back to the drachma would be incredibly complicated, and may amount to a total default on all debt. But, given how low Greece’s credit rating is, a total default may remove the burden of debt repayment without significant increase in the rate of interest that future loans would incur. It may also scupper the Euro project, and trigger fears, if it works, that Ireland might do the same, and, if it doesn’t work, that Ireland can’t do the same.

A brief flick through recent Greek politics will reveal that few of these solutions are new. In fact, most of them are about ten years old and proposed by Kostas Karamanlis, the former leader of New Democracy. They are all sensible solutions, and will help address some of Greece’s structural problems. Karamanlis was unable to pursue them because of opposition from the public and from the left parties – the Socialists and an influential coalition of Communists and Greens. But even these reforms, even on a very generous reckoning, account for only around 4% of GDP, when the current deficit runs at 10%. These are comparatively painless reforms; whatever happens, Greece will have to stomach a lot of austerity.

The Greeks are known for being innovators, not least the Athenians. In the late 500s BC, they could not choose between various types of aristocrats, and so invented democracy. A similar thing – a new party, or a minor party coming to the fore – could happen. But if it doesn’t, Greece needs to begin to take its debt problems seriously. The option the Ancient Greeks tended to pursue in such circumstances – a brief war against some rich yet weak city or kingdom – is not open to the modern Greeks. The politicians and public have to start taking bold decisions. The EU and IMF, after all, are not unlimited pots of money.

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