{"id":157,"date":"2012-01-29T20:44:40","date_gmt":"2012-01-29T20:44:40","guid":{"rendered":"http:\/\/acg.ez-pea.com\/?p=157"},"modified":"2020-09-01T07:29:14","modified_gmt":"2020-09-01T07:29:14","slug":"the-greek-crisis-5","status":"publish","type":"post","link":"https:\/\/web.acg.edu\/web\/blog\/2012\/01\/29\/the-greek-crisis-5\/","title":{"rendered":"The Greek Crisis – Pt. 3"},"content":{"rendered":"

Part III<\/strong><\/p>\n

What\u2019s to be done?<\/strong><\/p>\n

By Nicholas Pirounakis, Ph.D. *<\/p>\n

To a very large extent what Greece needs to do to put her house back in order is implied in any serious and informed analysis of what caused<\/em> the Greek crisis in the first place. In this \u2013 the third \u2013 part of the series we\u2019ll attempt to provide a blueprint. We will not focus on the need for Greece to stay in the Eurozone (and the EU!), or effect a larger \u2018haircut\u2019 of her debt (including \u2018official sector\u2019 debt this time) than the recent PSI deal; we\u2019ll focus instead on the reforms her creditors demand.<\/p>\n

In this connection, crucial questions emerge. Does Greece want to reform herself? Can she? If so, how best can she go about it? After all, no amount of financial help from overseas will secure Greece\u2019s future unless the country manages to become more productive, internationally competitive and efficient.<\/p>\n

Without such a leap, even if the debt miraculously disappeared, in five years\u2019 time Greece would again be heavily indebted \u2013 not least, because she would still have to deal with her rapidly deteriorating public services (health care, education, police protection, the judiciary), and other challenges, like waste, energy and water management, or the rapidly escalating inability of her social security system to pay pensions.<\/p>\n

Sadly, although many of the reforms Greece\u2019s creditors demand are long overdue, the troika\u2019s program has singularly failed to incorporate them in a coherent whole. On their part, the Greek governments of 2009-2012, along with most of Greece\u2019s political class, have also failed to work out such a program. The fact is that they never had a clue as to what makes a modern economy successful. In so failing the Greek side\u2019s incompetence and irresponsibility in statesmanship became starkly clear. Its mentality was epitomised in \u2018statism,\u2019 the belief that (badly applied) Keynesian policies can be as effective in a globalized economy as they could, perhaps, have been in the protected economies of the past; that the state \u2018creates\u2019 economic development; that they must spend as if there is no tomorrow; that they must control the private sector to asphyxiation; and, of course, exchange votes for political favors as a matter of course.<\/p>\n

One of the troika\u2019s two main errors was that it appeared to attach much more importance to the need to consolidate Greek public finances than to the need to effect reforms in the real economy. A more even split would have been much more sensible. Its second main error was that it accepted too willingly the Greek side\u2019s insistence on more and higher taxes rather than effecting cuts in government spending and reducing public sector size. This deepened the recession and, fatally, did so by strangling the side of the economy \u2013 the private sector \u2013 on which Greece\u2019s hopes for development depend. Of course public sector cuts would have also deepened the recession; the difference is that Greece\u2019s public sector is the main source of her problems, and its reduction would have in the medium- to long-term allowed Greece to \u2018see light at the end of the tunnel\u2019. There is an asymmetry here which Greece\u2019s political class was unwilling to see or exploit: you tax more in order to preserve a bloated and inefficient public sector and the result is recession without hope; you reduce government spending and public sector size, the result is recession followed by recovery.<\/p>\n

Greece\u2019s private sector is not free of serious problems either. Its operation is burdened and distorted by the state\u2019s inefficiency and corruption which naturally spread across the entire economy. It is also characterised by lack of competition, caused by \u2018closed-shops\u2019 and frequent instances of collusion and price-fixing among firms, particularly in the energy, transport and retail sectors. Also, some private firms have flourished on the basis of shady dealings they have had with the state rather than on merit. Important sectors have for too long been enticed to rely on government (or EEC\/EU) subsidies and have consequently turned complacent and uncompetitive \u2013 e.g., farming. Sure enough, many occupations and firms have benefited from restrictive practices and do not welcome change. Such a private sector, however, cannot help Greece become internationally competitive and develop. Thus, although it\u2019s mainly the private sector that has any chance of achieving this, it must first be appropriately reformed.<\/p>\n

Necessary political reforms<\/em><\/p>\n

In Greece any package of radical reforms needs to be introduced as a \u2018big bang\u2019 in order to succeed. For example, you cannot reform the judiciary, wait for 10 years to see that this particular reform works, then proceed to the next one. In Greece the \u2018package\u2019 would also need to start with the political sphere on account of the size and role of her public sector.<\/p>\n

There\u2019s been a lot of talk in Greece since the crisis began about how selfish, corrupt and incompetent most Greek politicians are. The truth is that in any democratic system which lacks appropriate checks and balances the political game tends to degenerate into an exchange of votes for favors; far more so and quickly, in fact, where democracy is unsubstantiated by a strong middle class. A politician who will not \u2018play\u2019 will not be re-elected, so all who stay in politics \u2018play.\u2019<\/p>\n

Ancient Athenians were aware of this vulnerability of democracy. They knew that individuals are susceptible to corruption. Rather than rely on the off-chance that virtuous politicians might be elected, they introduced institutions that made systematic corruption extremely difficult \u2013 institutions that involved transparency, accountability, and placed limits on politicians\u2019 power. In modern times political systems with a philosophy close to the Athenian ideal are the American and the British, to name but the best, perhaps, examples.<\/p>\n

In Greece nine critical and long over-due political\/institutional reforms are (1) a constitutional ban on the central government, prefectures and municipalities running systematic<\/em> budget deficits, (2) repeal of the virtual immunity from prosecution that the current constitution affords ministers, (3) complete transparency on all public appointments and projects, (4) abolition of the permanent tenure regime for civil servants accompanied by the introduction of meritocratic procedures, (5) a constitutional ruling that MPs cannot be ministers, (6) a stop to funding political parties with public money but also transparency on private funding, (7) a constitutional provision that the rights to protest, march or strike cannot be exercised in ways that block essential services or the fundamental rights of others, (8) affording greater protection to private property which is presently often encroached upon due to, for example, excessive taxation, or expropriation without appropriate or prompt compensation, (9) allowing private universities to operate. Some of these things are not directly political, but since they all involve politically controversial changes in the current constitution they end up being so.<\/p>\n

Excessive taxation and the middle class<\/em><\/p>\n

There is one particular reform whose importance is so great that deserves a section unto itself. This is taxation, which bestrides politics, fiscal consolidation, and middle class \u2018structuration.\u2019<\/p>\n

Taxes reduce efficiency. \u2018Tax something, there will be less of it,\u2019 the motto goes. Additionally, two desirable properties of taxation are that it must be \u2018fair\u2019 and take \u2018ability to pay\u2019 into account. Both fairness and ability to pay have been grossly neglected by the Greek state since 2010, whereas in the past it was probably fairness that suffered most as the tax system allowed tax evasion to flourish. (But then why shouldn\u2019t people evade taxes if they can when, despite decades of profligate spending of borrowed money by governments, the level of state services is so abysmal?) Government tolerance of tax evasion continues to this day, but it has been \u2018married\u2019 to horrendous disregard for people\u2019s ability to pay the many new taxes imposed. As for efficiency, a look at the construction industry is telling: crippling property taxation has helped bring the sector to its knees, and property prices continue to decline.<\/p>\n

But there is another side to all this, which is more worrying from a long-term perspective. It is about what property taxes in particular do to Greece\u2019s middle class. Most Greek households, taking advantage of a historically very wide distribution of land ownership and other favorable factors, managed over the post-war decades to build wealth portfolios made up predominantly of real estate. Even in advanced Western countries houses are the most valuable material possession most people ever get to have. Real estate wealth, in other words, and also the possibility that such wealth can serve to enhance the life chances of people\u2019s children, is the basic element in the way a middle class comes into being (which, admittedly, also requires a certain measure of income, education, and culture). In turn a strong middle class is a sine qua non<\/em> for a strong society. Historical experience, from ancient Athens and republican Rome to Victorian Britain and modern America, suggests as much.<\/p>\n

The way the Greek middle class has been burdened of late with a new series of unrealistically high property taxes means that hundreds of thousands of Greek households who thought they had a secure wealth portfolio are now facing expropriation. According to Kapa-Research, a Greek consultancy, 18.1% of Greece\u2019s property owners felt in January 2012 that they could not<\/em> pay these real estate-related taxes, and 32.7% that they probably<\/em> could not. Even if the state does not confiscate or auction away their properties, they\u2019ll have to sell at hugely discounted prices because of taxes. The property market is already going downhill, and so will banks\u2019 property portfolios. The result is a fast downsizing of Greece\u2019s middle class, impoverishment, aversion to investing in real estate ever again in Greece, and widening inequality between haves and have-nots. Social cohesion will suffer; so will law and order, and Greeks\u2019 faith in their country.<\/p>\n

To avoid all that, it is imperative to abolish all wealth property taxation immediately, including inheritance taxes, and reduce other transfer taxes. This would allow the Greek middle class to preserve some hope for the future; would improve economic optimism dramatically; would raise real estate investment, something essential considering construction\u2019s low-import content; and would be an incentive to improve state finances in the only sound way \u2013 i.e., through cuts. Other tax reductions are also necessary, like VAT, but property taxation reform is key.<\/p>\n

Enhancing competitiveness<\/em><\/p>\n

The next level of reforms concerns factors that enhance the ability of both the public sector and the private sector to operate efficiently, i.e., with the least cost or waste of resources; the ability of the public sector to offer good services to all, and direct welfare to those actually needing it; the ability of the private sector to operate, produce, and adjust quickly. It also concerns factors that enhance the quantity and quality of factors of production needed by both sectors.<\/p>\n

It seems, therefore, that the following should top the relevant reform agenda for a Greek government with the desire or mandate to save the country:<\/p>\n

(1) Decouple the operation of businesses from social policy aims; give companies complete freedom to hire & fire workers in response to economic exigencies, but also install a comprehensive system of unemployment benefits and retraining.<\/p>\n

(2) Radically reform the social security and health-care system:<\/p>\n