Before the financial crisis struck in 2008-9, the Greeks had hardly any concept of recession. From the beginning of the 1950s until the middle of the 1970s, the country’s average rate of GDP growth was 7-8%; in the early years of the new century, this rate hovered around 4%. By European standards, this is very good indeed. Now living standards in Greek are not far from those of the developed countries of Europe.
Yet Greece faces today two main problems. First, the country is beholden to a variety of vested interests that assert their presence and defend their privileges at the expense of the rest of the society. And vested interests can be anything from organized groups in the construction industry and other recipients of public contracts to lorry drivers, lawyers, accountants, and many others.
Second, Greece has an inefficient and increasingly corrupt state that walks hand-in-hand with the political parties alternating in power. Those parties expend more energy in satisfying clients than serving the interests of voters and the country at large, financed largely through state borrowing. This means that Greece has been living beyond its means for years.
But unlike many other western countries, Greece’s crisis is not the result of a private consumer boom that went bust; rather, it is the result of an overblown public deficit. That is why the crisis has centered on sovereign debt, although surely the gradual loss of competitiveness has also played a major role.
Behind Greece’s massive public deficits, tax evasion has been a major contributing factor. But why is tax evasion so prevalent? Two reasons come to mind. One has to do with the structure of the economy; the other has to do with political tradition.
The structure of the Greek economy is essentially that of a service economy, with a preponderance of small family businesses and high levels of self-employment. In that environment, it is much easier to evade taxes than within large companies.
The other factor has to do with history. Greece became an independent state at the beginning of the 19th century, after more than four centuries of Ottoman rule. Beyond this, there is a rather underdeveloped sense of ‘civic duty’ in Greece. For many people, cheating, or rather outsmarting, the state is not entirely reprehensible and, in fact, is often considered a commendable feat because the state had historically been seen as the enemy.
Europe’s rescue package, with the support of the IMF, is to be implemented in return for fiscal consolidation and structural measures being enacted by the Greek government. It is an extremely ambitious but also very painful program intended to be spread out over three years. And most of the pain comes in the beginning, not at the end.
Until very recently, just trying to impose a one-year freeze on public sector salaries would have been treated as political suicide. Now the government has imposed a 15% reduction in salaries for public sector employees, and it is still there! You can indeed say that “crisis is the mother of reform”.
In the West, we are now in a phase when financial markets are getting cold feet as sovereign debt is rising fast. Questions about sustainability are thus being asked more and more. The response of most European countries is therefore to cut the deficits. But is economic recovery solid enough, or are we running the risk of entering another deep recession? China and the other emerging economies are unlikely to provide much-needed demand. Greece is, of course, more vulnerable than other economies, but the specter of low growth and rising unemployment is one that is worrying many other countries facing the risk of a deficit cutting/recession spiral. Heavily indebted states, such as the US, UK and Japan, are being presented with a very awkward dilemma.
So what does the future hold? Historically, inflation has been one way out of debt. The alternative could be recession or stagnation, unless new conditions of growth are to be created. Many developed countries have ageing populations and high unemployment, thus putting strong pressure on their social security systems while also creating the potential for social unrest. It is a difficult period ahead of us.
The governance of the euro will change. Difficult decisions will need to be taken regarding coordination of national fiscal policies, sanctions and surveillance. The euro will also need a permanent mechanism to deal with crises in the future. Here again, we are doing things that would have been unthinkable a few years back. Nobody can afford to let Europe’s single currency fail.
Japan and Greece: Comparisons and Contrasts
There are interesting similarities, as well as huge differences, between Japan and Greece. For one, Japan retains a very strong and dynamic manufacturing sector and a large domestic market. We Greeks, on the other hand, are not so heavily geared toward manufacturing; we are a service economy, with shipping and tourism as our most important exports.
One similarity that can be drawn between Japan and Greece is that both countries carry heavy public debts. Greece will reach this year a level of public indebtedness of more than 130% of GDP; the Japanese sovereign debt, meanwhile, is approaching 200% of GDP. However, a critical distinction emerges in that the Japanese debt is mostly owned by the Japanese themselves.
At the mercy of the markets, Greek government bonds went, in a very short time, from being almost riskless to being junk. When the prevailing mood changed, markets typically over-reacted. The same could happen to other countries, including possibly Japan.
The second similarity, though perhaps of a different scale and form, is the “interesting” link between the political class and organized economic interests. After last year’s election, it looked as if Japan was on the brink of radical change. There were strong signs of deep dissatisfaction with the old political establishment on the part of the electorate. As an outsider, I cannot be a good judge of how far change has materialized – though not very much, it seems.
As far as Greece is concerned, my prediction (and hope) is that much of the Greek political class will not be around after the next parliamentary elections scheduled in three years’ time, if not before. Greece needs political catharsis. The economic crisis is thus merging with a political crisis – renewal may be the more appropriate and optimistic term to use.One lesson to draw from the Greek saga, for Japan and other countries, is that when necessary reforms are delayed the pain becomes much bigger in the end. Closing your eyes to reality, or simply telling people what you think they want to hear, is a very costly habit in which politicians often indulge. Populism is easy and dangerous – and it risks growing in difficult times of transition like the one we are going through today.