When the
crisis began in 2010, Greek politicians bemoaned a Greek public that is loath
to pay taxes. What they didn’t want to
tell everyone, is that the government lets the public get away with this by
design. The complaint by the Greek
politicians had a cleverly devised purpose, to deflect attention from the
politicians, by portraying the Greek public as an unruly lot.
The logic
goes as follows: a Greek public that doesn’t pay taxes, has limited standing to
complain when government officials mismanage funds and projects. High within the professional ranks, doctors,
lawyers, builders, architects etc… have been known to underreport
earnings. As a result, they must tread very
carefully in acting to correct any flaw in the system, lest they be subject to
tax inspections (a routine retaliatory action).
For those paying full taxes, they may be denied licensing, permits, or
be subject to a varied number of other retaliatory actions, if they don’t play
by the unwritten ground rules.
On the tax
office front, there had been numerous reports of tax officials offering to significantly
reduce a company’s tax bill in return for a “fakeliki”, which translates into
little envelope, one that contains cash.
A win-win for everyone but the underfunded government.
On to the
crisis. Upon becoming a member of the
Euro zone, the Greek government literally capitalised on the imprimatur of the
European Central Bank by selling massive amounts of Greek government bonds
denominated in the newly minted Euro (a windfall event that allowed the
Government to expand a government budget rife with “missing” or “unaccounted
for” funds - without having to ask the Greek public to raise more taxes). The Greek public, which widely believes the
Greek government pilfers a large percentage of their tax payments, would not
have tolerated such a budget expansion through increased taxes, so Euro
denominated bonds fit the bill. Thus
began a golden age for all involved in the Greek government and its administration. There were seemingly endless funds to go
around!
As is human
nature, regardless of what country you look at, people tend to take a good
thing too far. The day of reckoning came
in 2010, when the Greek government had to admit that the government had
concealed a significant amount of debt.
Thus began
the second wave in the grand abuse of the Greek public by their own government. As the Greek bond well ran dry, Greek
politicians exploited their Euro zone membership for a second time; this time
by scare mongering the Greek public into paying unsustainable taxes, lest their
European world come to an end. Instead,
their economic world came to an end.
Here Greek officials,
who their constituents frequently describe as self-serving, had to choose the lesser
of two evils, save themselves, or save the public they are entrusted to
protect. They chose to save
themselves. Thus when acceding to
European demands to balance their budget, in return for a European rescue
package, they chose to tax the private sector economy into oblivion, instead of
applying badly needed cuts to a bloated, inefficient, and frequently corrupt
bureaucracy that produced comparatively little and spent much.
For their
part, European politicians clearly had two items on their agenda, save the
European financiers, who like the Greek government, couldn’t get enough of the
Greek government bond game; and save face with their electorate. So they too sacrificed the Greek public. Instead of insisting that the Greek officials
immediately cut back a bloated and inefficient government sector in order to
balance the budget, they allowed the Greeks to impose onerous taxes instead,
which led to the widely predicted collapse of the Greek private sector economy. Obviously tax receipts collapsed along with
the economy.
Ironically, European
taxpayers essentially paid to initiate the collapse of the Greek economy, which
would then necessitate more bailouts, so they could pay for even more bailouts. The key question is: why was the Euro
designed with so little audit oversight of individual Eurozone member
countries? If all countries fates are
linked by a common currency, there should have been a commensurate expansion of
trans-national audit structures within the Eurozone. This is the little lie being hidden by the
large core Eurozone member countries - they messed up on oversight structures
when forming the Eurozone. It isn’t what
the Greek government did to get into the Eurozone that is at the heart of the
problem, it’s what they did after they got in.
Talk to Greeks
on the street of Athens, and many will tell you that their government is not a
trusted entity, that there is a widespread absence of accountability, that
their government is rife with corruption, nepotism and favouritism. The core Eurozone countries, in their zeal to
expand, failed to do their homework before initiating their grand Euro
plan. When the bottom finally dropped
out, Europe placed the load on the Greek electorate, instead of where it
belongs – the professional European bankers who should have known what the
Greek public knows - you can’t completely trust the Greek government, and
should be very careful with Greek government bonds. As a consequence, a large swath of the Greek middle
class are watching their life savings wither away, so that we can rescue the
European financiers who facilitated these massive bond sales out of sight of
the Greek public. In yet another irony,
while much of the Greek public may have avoided Greek government bonds, they now
have to pay for huge bond losses.
What is it
that the troika (aka “the institutions”) didn’t bother to find out? Greece is the equivalent of Britain’s elected
dictatorship combined with widespread institutional malfeasance – the Greek
people never controlled their public institutions, and in many cases prefer to
avoid them. While the public is free to
riot, say just about anything they want, and dodge taxes, Greek politicians
have learned that by allowing such freedom of speech, assembly, and tax
avoidance, and by using methods of soft-retribution (such as tax inspections,
denial of licensing, permits, etc…), they gained a lock-grip on the structure
of public institutions; hence the painfully slow progress Greece is making in
reforming its public institutions. Greek
politicos have become masters in the art of diplomacy, pretending to be sheep
when they are wolves, outwitting many a counterparty - if only this talent had
been applied to a more noble cause.
I frequently
hear how the Greek public have sacrificed in order to make the rescue work, but
seldom hear how. To start, home heating
oil prices have nearly doubled, in large part due to new taxes, with many
apartment buildings no longer running their centralised heating systems. Electric bills have nearly doubled, so that
those heating their homes with a/c units and electric heaters don’t get left
out of the tax game. VAT has been raised
to 23% and income taxes are paid from the first Euro earned, thereby hitting
the poorest with a heavy tax burden. Property
taxes have escalated up to five fold in a few short years, and to make it worse,
beginning in 2012/2013 the Government issued 6 years of these new property tax
bills in just under 24 months, using 2007 peak market assessed property
valuations to base these taxes on (generally double to triple current market
values).
Criminal
prosecution is now being threatened against those not earning enough to pay
these new property taxes (think 30% vacancy rate if you bought to let, and a
large percentage of tenants not paying rent).
Pressured by the Troika to collect taxes, the Greek government is not
content to confiscate property that has been rendered virtually worthless, so
it is now resorting to extortion by threatening criminal prosecution. Sad thing is, Greek property owners are being
punished for their prudence, as mortgage levels are well below those of many
western economies, and there was no property bubble. Erratic and frequently changing tax policy,
combined with uncontrolled government spending, devastated the Greek property
market. As the economy continued its
rapid decline, things just got worse.
The asset base of the Greeks, who largely saved according to the
national tradition of accumulating property, has been largely wiped out. Exactly the opposite of the U.K. and U.S
policy of reflating property prices in the wake of the great recession. With such severely reduced per-capita net
worth, it is difficult to forecast a meaningful recovery.
This is the
start of a long list of problems, which includes an infamously corrupt and slow
judicial system, poor public hospital services where doctors have been reported
to demand bribes in order to conduct surgeries, bad schools, and the list goes
on and on.
Amazingly
the Greek people have remained relatively sanguine through all this abuse. Imagine what you would do if so many of your
taxes increased so dramatically, and then your council taxes went up 5 fold,
and you were issued 6 years of these taxes in under 2 years, because the
government couldn’t get around to issuing the new council tax bills on time (for
“technical reasons” – or possibly for the convenience of issuing retroactive
taxes designed to fit the deficit) all in the middle of a staggering depression
– lets please tell the truth, this is not a recession.
So to answer
the question in the title, the Greek officials completely got the upper hand,
they are the winners. The bureaucrats
still have their jobs, nepotism and favouritism survive, and accountability is
amazingly low – the hallmarks of an elected dictatorship gone awry. In contrast, one can only imagine that if one
were to break-down the 25% Greek unemployment rate into private sector
unemployment and public sector unemployment, that it might look something like
public sector unemployment 5%, private sector unemployment 40%. Job security is a good thing, but what has
happened in Greece is dangerously unbalanced.
In the other
corner, Eurozone politicians have come out looking like fools, and their
electorate are frustrated at being ask to perpetually bankroll a failing Greek
state. As a result of failed European
economic policy over Greece, other Europeans citizens now have guilt where they
should have none, thanks to the failings of their own politicians - both for
falling victim to the machinations of the Greek politicians, and for being
careless and overzealous in launching the Euro.
Yet it is
not neither the European taxpayer or politician who pays the real price for
these serious missteps, it is the Greek public that is getting wiped out, while
the Greek bureaucracy remains largely intact, secure, inefficient and
unaccountable. I hope the moral to this
story is not “go into public service and serve yourself instead”, but it may
well turn out that way in Greece.
Now, the
country’s capital, Athens, is beginning to depopulate, and to make things worse,
there is a damaging exodus of young talent which not only limits future growth
potential, but threatens a downward spiral economic spiral akin to the decline
of Detroit (Detroit recently filed the largest municipal bankruptcy in U.S.
history).
Taxes must
drop back to normal levels for the Greek economy to mend (as the U.S. recovery
clearly exemplified), or there will be no end to the economic crisis in Greece. Yes, Greek tax revenues will temporarily drop,
but Eurozone politicians only have themselves to blame for their failed Greek policies,
and they should have bothered to do the necessary groundwork before embarking
on their Euro odyssey.
Once the
Greek economy mends, higher tax revenues will come, and the Greeks will pay
their national debt, provided that it is responsibly rescheduled. If both Greek and European politicians work
together to ensure that the Greek public sector is truly reformed, something
good may come of this seemingly endless mess.
We would hope this of the new Greek government, but the recent raising of
pay for public sector utility workers, at the expense of all the unemployed
private sector workers, reeks of self-promotion. Furthermore, demanding war reparations from
the Germans (while an understandable popular reaction to the Troika’s misguided
austerity demands and failed economic policies) is a destructive political move
on the part of Greek politicians, who should know better than to add fuel to
the fire of the Greek public’s anger.
So fear for
Greece, and fear for Europe. For as long
as Eurozone leaders fail to accept that taxes in Greece must be lowered, that
lower government revenues must be tolerated for a few years; and for as long as
Greek politicians fail take to substantive actions to reform and streamline their
government institutions, there will be no agreement between the Troika (“the institutions”)
and the new Greek government; no end in sight to the decline in Greece. Both sides must act in concert, or we may well
bear unwilling witness to a modern Greek tragedy.
