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Why isn't Greece exiting the crisis?

21 February 2017

What is the extent of economic devastation in Greece and how is it being felt in Greece today?

The economic devastation is significant, and can be measured in different ways. If we look at formal numbers: 25% of GDP has been lost over 7 years, and unemployment is at just under 25%. Equally serious, the labour force participation rate is 53% (World Bank/ILO data), while salaries in the private sector have been cut. Hundreds of thousands of companies have closed; many have emigrated.

This means that, in economic terms, there is not enough tax revenue coming in through standard means, prompting the government to raise tax rates on nearly everything. Greece has now become a very high cost country in which to do business, while the quality of public services remain low.

But you most clearly see the devastation on the streets, in tangible terms. I have never seen so many homeless in Athens. I have never seen so many abandoned buildings in Athens.

Every family I know has unemployed or underemployed children, or children who have emigrated. Everyone has had their pension or salary cut, or has been unemployed for some time and is working at a salary much lower than what they used to make.

The gap between the very rich and everyone else has grown, so you see luxury hotels on Syntagma Square, and 100 meters down the road you see homeless. Outside luxury restaurants or cafes, there are beggars. In the working class neighbourhoods, you see beggars outside supermarkets or butchers shops. You see people spending hundreds of Euros at a beach in Mykonos, but two islands over, people are dying because the hospital has closed and they can’t be airlifted to Athens on time.

This is not an exaggeration: People are literally dying because the Greek healthcare system has collapsed. Hospitals don’t have basic consumables, like clean sheets, antiseptic cotton gauze. They don’t have medicines: patients are asked to bring their own.

The country has lost hope. The number of voters who believe in populist parties such as those running the country has grown. The number of conspiracy theories spread online has grown.

 

Why has Greece been unable to exit the crisis almost seven years since it agreed its first bailout program?

Greece was showing signs of exiting the crisis in the fall of 2014 under the Samaras coalition government. However, this government, despite its many flaws, was totally undercut by Troika demands on pension reforms. As a result, in the January 2015 election SYRIZA was elected. SYRIZA basically destroyed whatever was left of the Greek economy through its populist rhetoric, resulting in a massive climbdown and now, capital controls.

So a key issue in Greece is political stability, and whether political parties believe in economic reality, or hyperbole.

The greatest single problem in Greece today is the public sector. This has been the case for the past 7 years. The public sector is a hybrid, symbiotic organisation which includes:

  • The political parties that are elected to form a government

  • The roughly 2,000 political appointees each government appoints into government positions. There is no independent civil service: it is literally run by political appointees

  • The semi-governmental organisations which control large swathes of the economy

  • The state education sector, which retains its monopoly status.

Today, this public system retains literally what amounts of a patronage stranglehold on the economy. In Greece, even unexpected institutions are state controlled. For instance, the regional Chambers of Commerce and Industry in Greece are formally state organisations, controlled by the Ministry of Finance. This includes regular staff appointments.

This patronage control results in high bureaucracy with a very complex administrative system. To get anything done in Greece, you need to go in person to multiple government offices. Instructions are unclear; you need multiple approvals; laws change very frequently. This applies to everything from small transactions, like changing a car registration, to large ones, like applying to build a hotel.

The result is that the entire process is slow, expensive and unwelcoming. Even the state-licensed, high-priority investments are affected by this.

Moreover, the system places the burden of proof on the citizen, or businessman, or investor. You are guilty until proven innocent.

Now, this system creates misaligned incentives:

  • The system protects itself, particularly against reform efforts

  • Every party follows the same book, including SYRIZA, which sold itself as being an outsider or reformer: the number of family members of serving ministers or deputy ministers, for instance, that they have appointed to government positions, is very large.

  • In a time of crisis, the very real existence of bribery to navigate through the bureaucratic maze is very high.

It’s important to bear this in mind, because very often “reforms” are passed legally, and are monitored by the Troika, but these don’t translate into anything operationally. The same system is still in place, extracting rents from a very complex administration.

Let me give you an example: the Greek public sector has shrank from about 900,000 employees in 2010 to about 600,000 employees now – about 30% down. But rather than being fired, many permanent civil servants were allowed to take early retirement. So, the Greek government meets the reform objective of “reducing the civil service” but public pension costs skyrocket because these people are now collecting a public pension instead of a public salary. In expenditure terms, it’s like taking money from one pocket and transferring to the other.

Why else is Greece not changing? Multiple reasons:

  • The Troika has mismanaged the reform prioritisation and the calculations behind it. The true cost of interest, for example, in the first bailout (2010) was not properly calculated, and in fact equalled the total savings and revenue from public sector reform and privatisations.

  • The second bailout, which featured a PSI of EUR 100 billion, was actually more like EUR 25 billion after all indirect costs are included (the EUR 20 billion “sweetener”; the EUR 50 billion Greek bank recapitalisation).

  • The Greek government never took real charge of the reform process. There is no Greek vision of reform, or a Greek state, or a Greek economy. There is not a single long-term strategy compatible with a globalised economy today. In most European countries, if you look at a ministry’s website, you will find strategic and planning documents which a good level of foresight and planning. Not so in Greek Ministries or State Organisations.

  • The Greek economy is characterised by large investments in primary sectors (such as energy), but very few competitive investments which are externally focussed. And many of the few companies in these sectors have transferred their headquarters outside Greece due to the high bureaucracy and costs of doing business.

  • Many small companies have registered in Cyprus, Bulgaria or other countries with a low tax and are doing business from there.

  • There are major private sector investments waiting to be authorised, that would create thousands of jobs and important tax revenues. Most of these are delayed by bureaucratic obstacles. SYRIZA in particular has done its level best to block any kind of private sector investments.

  • Privatisation has stalled and has only proceeded because the Troika has insisted on it. Major projects, such as the Hellenikon development, are deliberately sabotaged by SYRIZA, and in the past have been delayed by other governments.

  • The Greek state continues to want to play the role of both regulator and operator in the economy. We see this in key sectors, such as education and energy. This role is incompatible with reality.

  • Most “reforms” involve high taxes to save the public sector system. Note that there is almost no debt repayment going on: the tax revenue is being spent primarily on public sector operations. So Greece has become a high cost country, with very low quality public services in key fields such as investment licensing, tax administration, education, healthcare, justice and transport.

  • The labour force participation rate is falling, prompted by high unemployment but also a high grey economy. This means that there is not enough tax revenue coming in on employment to maintain the country’s pension system. The pension system is effectively bankrupt, creating the need for added revenue transfers from the central government.

As a result, most businesses are doing everything they can to avoid paying taxes on revenue. Or they simply can’t pay taxes on revenue. Any many people are leaving.

Basically, Greece needs to:

  • Deregulate its economy, including education

  • Understand that the state should be a regulator, not an operator

  • Streamline the public sector and put public sector transactions online

  • Rapidly license investments

  • Remove barriers on private sector operations

  • Develop 5- and 10-year strategies for regions and sectors, with the participation of key stakeholders

  • Reform the justice sector so that civil and criminal penalties are applied faster and are implemented

None of this is rocket science: it’s basic public sector administration. But it has never been done.

 

We will also like to talk about short and long term debt..

In terms of short-term debt, we have to understand that the third bailout (€ 86 billion) covers most short-term financing needs, and that these are mainly refinancing. In other words, this money is being used to roll over debt that expires. It’s not new debt.

The problem is that this debt is only being released based on the Greek government achieving some reform results. The Greek government, led by SYRIZA, is not doing this, for various reasons. So, there is once again the risk of delays in disbursement. It is quite a quandry, because much of the debt that has to be rolled over is public sector debt: debt owed to the IMF, for instance. So you have the Troika unable to release money to pay themselves back, because Greece has not met its commitments.

In terms of long-term debt: Most of Greek debt is now refinanced to about 2030, at very low interest rates.

What people may not understand is that the bailouts were designed to give Greece room to reform and get its economy back on track, so that it could finance its public operations through normal means.

Greece now has a significant government primary surplus, which is laudable, but this surplus is not enough to refinance its public sector debt. This is why the bailouts continue.

For me, the challenge right now is not the debt. It is reforming the economy to license private investments, foster private sector employment, streamline and reform the public sector. This is what is not taking place, and it is very frustrating for two reasons:

  1. First of all, these are entirely national responsibilities. There are no barriers to reform, except for political barriers within Greece.

  2. Second of all, there is massive economic potential in Greece. There are short-term investment opportunities right now in the pipeline that could bring in EUR 50 billion of investment and at least 100,000 high-paying jobs after construction completion. This number can easily increase with the right policies and promotion. Again, there are no barriers to this, except the public sector and the political parties behind it.

 

(c) Philip Ammerman, 2017

 

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Greek Debt Restructuring is not the Answer: Economic Growth Is

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15 March 2015

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Is the Greek Debt Sustainable?

21 January 2015

The Day After: Likely Events following a SYRIZA Election

19 January 2015

Are Greece's Creditors Really Loan Sharks?

19 December

Public Sector Cutbacks and Political Paralysis in Greece

10 December 2011

The Coming Crash of the Green Energy Bubble in Greece

20 May 2011

Recommendations for Improving Greek Sectoral and Tax Competitiveness

May 2011

Small Countries in the Economic Crisis (view 47-slide presentation in image gallery)

 

 


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