Thursday, October 11, 2012

What went wrong with Greece

Aristides Hatzis is Associate Professor of Philosophy of Law & Theory of Institutions at the University of Athens, Department of Philosophy & History of Science.

He has some firm views of what went wrong in Greece, and it is not a view that fits the conspiracy theories of the Syriza party or the empty claims that Greece is a victim of financiers.

Hatzis says Greece joined the then EC (now EU) in relatively good economic health:

Seven years after embracing constitutional democracy the nine (then) members of the European Community (EC) accepted Greece as its tenth member (even before Spain and Portugal). Why? It was mostly a political decision but it was also based on decades of economic growth, despite all the setbacks and obstacles. When Greece entered the EC, the country’s public debt stood at 28 percent of GDP; the budget deficit was less than 3 percent of GDP; and the unemployment rate was 2–3 percent. But that was not the end of the story.

Greek voters voted to the left, and that changed everything:

Greece became a member of the European Community on January 1, 1981. Ten months later (October 18, 1981) the socialist party of Andreas Papandreou (PASOK) came to power with a radical statist and populist agenda, which included exiting the European Community. Of course nobody was so stupid as to fulfill such a promise. Greece, with PASOK in power, stayed in the EC but managed to change Greece’s political and economic climate in only a few years.

He continues to explain that PASOK changed the relationship between the state and the people, but even the so-called "rightwing" opposition did nothing to change that.  Recognise that pattern in other countries?

Today’s crisis in Greece is mainly the result of PASOK’s short- sighted policies, in two important respects:

(a) PASOK’s economic policies were catastrophic; they created a deadly mix of a bloated and inefficient welfare state with stifling intervention and overregulation of the private sector. (b) The political legacy of PASOK was even more devastating in the long-term, since its political success transformed Greece’s conservative party (“New Democracy”) into a poor photocopy of PASOK. From 1981 to 2009 both parties mainly offered welfare populism, cronyism, statism, nepotism, protectionism, and paternalism. And so they remain. Today’s result is the outcome of a disastrous competition between the parties to offer patronage, welfare populism, and predatory statism to their constituencies.

It wasn't as if the political classes didn't know there needed to be reforms either, but the bare minimum was done to reach a magic goal - joining the EURO.  So how did Greece expand spending on such a grand scale?  It wasn't from taxation, because tax evasion was rampant and tax collection very inefficient, but borrowing.  

He calls it  "party time":

The borrowing became much easier and cheaper after Greece 2adopted the Euro in 2002. After 2002, Greece enjoyed a long boom based on cheap and plentiful credit, because the bond markets no longer worried about high inflation or a devalued currency, which allowed it to finance large current-account deficits. That led to a crippling €350 billion public debt (half of it to foreign banks) but, more importantly, also to a negative effect that is rarely discussed:The transfers from the EU and the borrowed money went directly to finance consumption, not to saving, investment, infrastructure, modernization, or institutional development. The Greek “party time” with the money of others lasted 30 years and—I must admit it—we really enjoyed it! Average per capita income reached $31,700 in 2008, the twenty-fifth high- est in the world, higher than Italy and Spain, and 95 percent of the EU average. Private spending was 12 percent more than the European average, giving Greece the twenty-second highest hu- man development and quality of life indices in the world. 

Yes, most of the borrowing the Greek government undertook was not to build infrastructure (except for some very high profile totemic projects like the Olympics, a metro, tram lines and a new airport), nor to finance productivity improvements, but to consume.

People lied and evaded tax, but this culture was endemic.  Remember this isn't an outsider, but a Greek academic noting this:

Lying became a way of life in Greece. Still, one might argue that lying to protect what one has created is justified. But in Greece that wealth was not created, but simply borrowed. In 1980 public debt was 28 percent of GDP, but by 1990 it had reached 89 percent and in early 2010 it was more than 140 percent. The budget deficit went from less than 3 percent in 1980 to 15 percent in 2010. Government spending in 1980 was only 29 percent of GDP; thirty years later (2009) it had reached 53.1 percent. Those figures were hidden by the Greek government as late as 2010 when it admitted that it had not actually met the qualifying standard to join the Eurozone at all. The Greek government had even hired Wall Street firms, most notably Goldman Sachs, to help them fudge the numbers and deceive lenders.

Yet for entrepreneurial activity, Greece became a disaster. In 2012 it was ranked 100th out of 183 countries for ease of doing business, being the worst in the EU and the OECD and below Columbia, Rwanda, Vietnam, Zambia and Kazakhstan.  It ranked 154th for laws protecting investors and 147th for ease of employment.  The best ranking was 43rd, for closing a business.  One study indicated that 25% of Greece's GDP was "informal" or outside the law, and petty corruption cost €800 million in 2009.  42% of the state budget is on welfare benefits of some kind.  Pensions were ridiculously generous.  35 years working in the state sector allowed a man to retire at 58 on a pension.  

The "free" public health system actually saw 45% of total health spending coming informally directly from users bribing staff to do their jobs.

Greece is now facing some reality.  It is still borrowing, but this time from taxpayers in Germany in effect.  It is still overspending, but is set to break even in three years.

However, the Greek disease has been socialism, with parties outdoing each other to spend borrowed money to buy votes and evade economic reality.  Greece's economy has had to shrink, because it has been built on credit - not production.  The hard awful reality is that those who benefited from it, never have to pay it back, whereas the up and coming generation face paying for it.

Greece has had its economy destroyed not because of bankers, but because it was rotten at the core, sustained by socialist politicians and those whose support they gleaned by their bribery using borrowed money.   Since the early 1980s, more and more of the economy was built on nothing at all - sadly today, it isn't the public sector facing retrenchment and pain, but the private sector.   Increasing taxes and increasing tax collection is gutting the part of Greece's economy that is productive, and precious little is being done to gut the part that isn't/


thor42 said...

An excellent post.

Left-wing voters in NZ should be utterly ashamed that they are supporting exactly the same kind of policies that pushed Greeces economy into the abyss.

Well done, lefties.

Tony said...


Does sound similar to NZ and the UK. Left wing party followed by right wing party that moves to the "center".

smttc said...

Well I can report that the private sector in Greece is fighting back albeit in an illegitimate fashion. I spent most of June/July in many parts of Greece and every retail business selling goods offered me or my partner a 15% to 20% discount for cash as an incentive to purchase 2 or 3 items rather than one. Nothing rung up on the cash register. I figured it equated to the Greek consumption tax which simply wouldn't get paid over to the Government.