The Greek crisis, tragedy or opportunity?

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PASOK POLITICAL PARTY AT THE EARLY BEGINNING OF GREECE, BEFORE THE JUNTAS?

This government was not really working because their policy was not in the culture: tax evasions and bribery became to be common: according to Transparency International, 18% of Greeks said they paid bribed over the year. In the 1980s’, the results of the junta policy were a public spending raise from 29% to 48% of GDP, a deficit averaged of 10% of GDP, and a raise of the public debt: from 28% of GDP in 1980 to 89% of GDP in 1990. The inflation was almost 20%.

Then, Greece entered the European Commission in 1981. After 1993, one year after the treaty of Maastricht, Greece liberalized its economy, cut deficits, took back the control of money supply and stabilized exchange rates. However, the public debt represented 110% of GDP in 1993 so that interest rates were high. Greece entered the euro area two years after its creation in 1999. The European Commission declared Greece met all the Maastricht requirements. After that, Greece made large economic progresses and knew from 2001 to 2008 an average of 3.9% economic growth rate. During these years of prosperity, they managed to reduce interest rates and to have a low inflation.

ECONOMIC STRUCTURE

Following the economic and political history of the country, at the time of the crisis in 2008, Greece had the worst combination of a high debt level, a large budget deficit and a large external debt. Several problems were existing since a long time but never put at the center to find a solution.

First of all, Greeks avoided taxes: there was a high tax evasion that costed to the Greek government 8% of GDP. It was common to make false declarations of revenues: only 6% of Greeks declared earning more than €30,000 while the national income was €20,000 per person. Also, it was explained by the majority of micro enterprises and self-employment, representing respectively 60% and 34% of the workforce, twice the figures of the EU countries. The election period contributed to the fiscal deficit because of politics’ relaxation on tax collection. The official data hid the size of fiscal deficit: it was shown later on that the Greek statistics agencies were telling stories, falsifying data.

On the other hand, there were large structural economic problems. Greece declined in competitiveness, either within Europe and the world. They specialized in services, were there was a large surplus in tourism and shipping while the industry sector was decreasing. The hourly productivity went up to 44% lower than the euro area and Greek labor protections were restrictive, which does not attract foreign investors. Also, the World Bank’s Doing Business report ranked Greece 109 out of 183, meaning there is a bad business climate. The development of infrastructure stopped so that the economy, especially the agriculture and industry sectors slowed down. The workforce was characterized by low to low-intermediate skills, showing a lack in the labor force for an advantage to attract investors. This way, Greece was 23rd out of 25 EU members in terms of amount of foreign direct investments (FDI). Nonetheless, Greece has a comparative advantage in manufactured exports in textile, clothing and refined petroleum products. Despite of the economic problems, the financial sector was in good health, except for the government debt.

PUBLIC SECTOR AND GOVERNMENT UNRELIABILITY

The main reason for which Greece fell in trouble is the government deficit and policy of hiding the truth. This lead to a generalized mistrust in the government. Within Europe, governments have less power as the market is regulating interest rates and Greece is changing its way of trading because there are much more services than agriculture and industry.

The public sector deficit did not stop increasing since 1999:

- 3.1% of GDP in 1999

- 3.7% of GDP in 2000

- 9.6% of GDP in 2008

- 15.5% of GDP in 2009

To explain this large public sector deficit raise, several public divisions were in trouble. The pensions weighted heavily: the retirement was in average at 58 years old. They received 96% of pre-retirement income in average, much more than the OECD average. The cost of pensions were 12% of GDP in 2007 and was estimated to double (24%) by 2060. The social welfare system was in large increasingly deficit: €3 billion in 2000 and came up to €19 billion in 2009. The fear of Turkey made military spending high: 3.7% of GDP, whereas the average euro area is 1.7%.

All of these was surely a bad consequence of the junta period of power. The PASOK asked for an audit of the deficit data and it was shown it was higher than claimed. The informal economy counted for 25% of the Greek economy, and almost everyone – Europe as well as the Greek government – was aware of that. The systems were easy to fraud and lots of Greeks did not declare all their revenues. This way, the European Commission found out that Greece never complied with the 3% GDP deficit limit. The untruth of the political parties lead to a lack of trust from Europe. The PASOK came back in 2009 to realize Greek statistical office falsified data: they had to reimburse €53 billion instead of €20 billion for their national debt. The previous government had masked some of the debt through opaque derivatives. The subprime crisis revealed the toxic assets owned by banks and it was largely existing in Greece.

Papaconstantinou, president of PASOK, said they were always “behind the markets’ expectations” because the markets were going faster than the reforms he could put in place and even more the results of these changes. He had to stop tax avoidance and the public debt. Thus, influenced also by the European Commission, he put in place hard measures of austerity. The PASOK set up a higher VAT, taxes on fuel, tobacco and alcohol. They freeze on public-sector wages and cut public-sector bonuses and state-funded pensions. On the other hand, they start to make structural reforms to make the labor system more flexible.

Yields of government long-term bonds rose throughout the years as the graph shows below. It reflects a time of uncertainty about the debt of Greece and how it could be saved due to its indebtedness. European countries are subject to interest rates fluctuation due to the not-regulated financial market by international institutions. The lack of supervision in the levels of private debt and asset bubbles let Greece’s one explode.

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