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.