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Greece–some thoughts from a plane

7 July 2015
Last week, while flying home from a visit to Denmark, I wrote down some thoughts on the Greece situation at the request of my uncle in the USA. This is written from the perspective of a European economist who cares about the European Union and what it represents. As I write this introduction, the situation is uncertain to say the least. There will be an EU summit later today at which the Greek government has to present new proposals, the banks in Greece remain closed, and the attitude of Greek people that I see on television can best be described as a mix of delusion, defiance and nihilism. In any event, here are my thoughts from a week ago, with just some slight editing to correct errors:

Back in 2010, when the Greek crisis first broke and the first bailout was being worked on, my thought was that rather than throwing good money after bad, the EU should look for a MANAGED way for Greece to leave the Eurozone—not the EU, just the common currency, meaning that they would return to the drachma. Why did I think that back in 2010? Because Greece, more than any other country, should never have adopted the Euro. By their own admission, the government of the day cooked its books so as to make its budget deficit appear about half as large as it really was. This illustrates a basic difference between Greece and the other countries in the EU that have needed help during the crisis (Ireland, Portugal, Cyprus, and to a lesser extent Spain). In all those countries there were problems: too much crazy speculation and debt in Ireland and Spain, lack of competitiveness in Portugal and Spain, some level of incompetence and corruption in Spain and Cyprus…but Greece combines all those problems, and more, in a perfect economic storm. And this is why the other countries that have needed help are now recovering, with rising employment and decent economic growth. But Greece continues to be in a recession with seemingly no hope. Let us look at its problems:
Start with corruption—from what I have read, it is pervasive, both at the highest level of public life and business, and in everyday life, where apparently getting access to public services such as medicine or education requires paying bribes, just as it did in the Communist countries.
To the corruption we can add the clientelism which has bloated the public sector to a level that is mindboggling. Each time the government changes, the new governing party adds thousands of its supporters to the public payrolls, but without getting rid of the previous party’s people (the way it happens in the US at the higher levels of the federal bureacracy when the presidency changes hands). They cannot get rid of the previous lot because as civil servants, they cannot be sacked. The new Syriza government is apparently no different from its predecessors in this regard.
Crazy pension rules. Greece spends a higher percentage of GDP on pensions than any other rich country (soon we can stop calling it rich, it is on its way to middle-income status, similar to Latin American countries). It is not because its pensions are that generous. Rather, it is that people become eligible for them at incredibly young ages. Civil servants, school teachers and other public employees can retire after as few as 20 years of service—so you have people retiring when they are still in their late 40s in some cases. And since Greece faces the same demographic changes as the rest of Europe, i.e. the aging of the population, this kind of generosity is simply not sustainable. Other countries (including Spain!) are raising their retirement ages to reflect the fact that people are living longer. In Denmark the official retirement age is now tied to life expectancy so it will rise automatically as life expectancy goes up. This sort of reform is badly needed in Greece.
Tax evasion. Apparently, most Greeks regard paying taxes as something optional, to the point that Greece is described as having a dysfunctional-to-nonexistent tax collection system. This makes it difficult to close the budget gap, obviously. And it is linked to something deeply ingrained in people’s way of thinking about the state—that it is something distant, not part of “us”. The corruption only reinforces this.
Bureaucracy: Greece is listed as one of the worst countries in the world in terms of ease of doing business, something like no. 130 in the latest ranking. This refers to bureacracy, corruption, slowness of the legal system, difficulty enforcing contracts—all sort of boring things, but these are important things, as the legal system and efficient administration are the plumbing of the economy. There is a reason why all the well-functioning economies—Denmark, Singapore, the US, the Netherlands etc.—are in the top 20 on this ranking.
So, what all this adds up to is that the Greek economy is incredibly inefficient and has many third world elements. This is of course not new, but back when they had their own currency the markets took care of things: the value of the drachma against the D-Mark, the pound, the dollar etc. continued to fall, ensuring that Greek products continued to be competitive abroad. With the adoption of the Euro, devaluation is no longer possible, so Greece has to compete on equal terms with Germany, the Netherlands, Finland, etc.—this is simply an impossible task for them.
So, the reality is that Greece would be better off outside the Euro (but still in the EU). And the money they owe will never be repaid anyway, so this is a non-issue. Most of it is owed to the IMF, the ECB and thereby to the governments of other EU countries (Germany is the largest creditor). Only a small portion of Greek debt is held by private investors, because no sane person would buy a Greek government bond in the past several years. I think that the creditors would be better off recognising the losses and, more importantly, the Greek people would be better off outside the Euro straitjacket. They need to work hard to reform their economy—the problems I listed above are serious and need to be solved. And they can be solved, as shown by many of the ex-Communist EU member states that in less than one generation have become dynamic and well-functioning market economies.
So why is this “managed Grexit” not happening? Of course, I don’t know what Merkel and the other leaders think, but I suspect they are afraid of a contagion effect. If Greece leaves the Euro, will other troubled countries be next? Big ones like Italy which have similar problems to some degree? This is the big fear. I think that if the rest of the Eurogroup were sure that any impact would be just on Greece, then Greece would have been abandoned long ago.
Legally the situation is also complicated. The EU treaties do not contain any provisions for a country to leave the Euro and re-create its own currency. There is simply no mechanism for it and no precedent. Ironically, there IS a precedent of a country leaving the EU altogether: in 1982, Greenland, an autonomous Danish territory, was allowed to leave the EU (which it had joined as part of Denmark in 1972). They were worried that the fishing fleets from the other EU countries would come and take all their fish, the main industry in Greenland. So a Greek exit from the Euro while remaining in the EU itself would require some legal creativity. But I am sure that if the political will is there then a legal construction can be found. The EU has in the past shown itself quite flexible and creative when a need arose to accommodate a “difficult” Member State—that is why the Danes have the opt-out of the Euro (together with Sweden and the UK) and from some other things they do not like.
I will finish on a personal note. I was in Athens for a few days about a year ago, attending a conference. I came away with a feeling of profound sadness for the Greek people. Even though key economic numbers such as the unemployment rate were not too different from Spain’s, the feeling of crisis and depression was so much more palpable in Athens. The Spanish have hope; it seemed to me that the Greeks had lost all hope. The big square in front of the parliament building in this cradle of Western democracy and culture is full of homeless dogs, abandoned there by their owners because they could no longer afford to keep pets (or had become homeless themselves). At least the poor creatures get food from some of the surrounding hotels and restaurants.
As in Spain, there were many beggars, and I mostly ignored them—what can you do? If you give money to one then why not the other? But on the last day of my stay I was taking a walk in the neighbourhood around my hotel. It was an affluent neighbourhood (yes, they do exist in Athens). But I met a man, dressed normally, not a bum, who looked at me and simply asked, “Can you help me?” I could not NOT give him something.
So yes, the Greek elite and government can go to hell as far as I am concerned. But I hope that a solution is found so that the suffering of ordinary people can end.
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One Comment
  1. Maria Chiodo permalink

    Thanks for your thoughts. I wonder if we will one day punish the real responsible persons behind this issue instead of leaving the Greek people in misery. I really hope too that a solution will be found shortly!

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