Lessons from the Greek crisis

I have just formed part of a Socialist group delegation to Athens to see the scale of the social and financial crisis in Greece. With the financial markets predicting a possible Greek default even though the government has reluctantly agreed to an IMF advised €50 billion sale of government assets to the private sector, questions still remain over whether Greece can recover as it teeters close to bankruptcy. Moreover, how is the government coping with the mess it inherited?

The crisis in Greece began when the new government found that its predecessor had falsified the state of its public finances. Instead of a Budget deficit reported earlier at 3.7 per cent, the true figure was 15.4 per cent. Unsurprisingly, Greece was soon on its knees, as credit rating agencies downgraded government debt to junk status. Facing bankruptcy since it could no longer borrow money on the markets, last May it accepted a €110 billion loan from the EU and the IMF at a five per cent interest rate and with brutal cuts demanded as part of the “strict conditionality” of the loan.

More pain was to follow. Last year, the combination of tax rises, alongside cuts to wages, pensions and public spending led the Greek economy to contract by 6.8 per cent. Despite slashing its Budget deficit by six percentage points (equivalent to €30 billion) to 9.4 per cent in 2010, the country is still in a deep recession with 14 per cent unemployment and youth unemployment at 30 per cent.

The good news is that the government is blessed with high quality leaders. Judging by Prime Minister Georgios Papandreou, his Finance Minister Georgios Papaconstantinou and Labour Minister Louka Katseli, all of whom we had the opportunity to meet with, Greece is in good hands. Having said that, 2011 is unlikely to be much better than 2010 for the Greek people.

The government is focusing on job retention, offering generous subsidies to businesses to retain workers, alongside training and apprenticeship programmes. It is pumping €24 billion of EU structural funding into green technology investment, developing social enterprises by supporting hundreds of small businesses through micro-finance and building what Ms Katseli described as a “social economy”. It is also, sensibly, using the resources of the European Investment Bank. Meanwhile, the “green shoots” of recovery are that exports in 2011 are 40 per cent up on 2010 levels.

That being said, the restructuring in Greece is slow and painful. Despite a government drive to get 55,000 people into work, unemployment benefits have been cut. With VAT revenues having grown by four per cent, wages cut by 15 per cent and pensions by 10 per cent, living standards have fallen. Ms Katseli was candid in admitting it would take a Herculean effort to make the necessary deficit cuts so that Greece can regain access to financing, and also reduce unemployment, but confident that Greece’s recovery would begin in earnest in 2012. The pain will continue but there is light at the end of the tunnel.

What lessons can be learnt from the Greek experience?

The first is that it took a crisis to force massive reform of the Greek economy, which had become crippled by debt, administrative corruption and mass tax evasion by the wealthy.

Greece had experienced a four per cent average growth rate during the good years of the past decade but, yet, its debt to GDP ratio remained stubbornly around 100 per cent. It had also become far less competitive compared to most other EU countries, meaning its import levels were consistently higher than exports. Its current account balance was constantly in deficit.

However, aside from these deep-rooted structural problems, which are not exclusive to Greece but to a number of European countries, the economic crisis demonstrated how elected politicians found themselves at the mercy of the financial sector. Mr Papandreou and his Cabinet never dreamt they would have to slash public spending and wages. But there was no alternative: it was that or bankruptcy.

The unwelcome truth is that macro-economic policy, particularly for the smaller and weaker member states, is increasingly dictated by the banks. The supranational nature and size of the financial sector has made it, arguably, too big to fail and, thus, ironically, it has loaded the risk of failure onto the countries themselves.

Another lesson is the need to tackle tax evasion and the black economy. Much of the public resentment to the cutbacks, which have brought waves of strikes and work stoppages, is because many wealthy Greeks were not paying tax, the black economy remains large. The result is that the taxpaying majority have borne the brunt of the pain and are understandably angry. Mr Papandreou noted that about €1 trillion of tax evasion takes place in Europe each year. This is a problem that all governments, not just Greece, have to tackle vigilantly.

As the birthplace of democracy, it is very sad to see Greece in such trouble. But there is cause to believe that if they keep to their programme they can weather the storm and return to growth in 2012 or 2013. I hope my impressions are borne out in practice. Namely, that Mr Papandreou is a man who will implement a hard-headed plan with a soft-hearted attitude. Today, Greece needs both to secure its own future.

www.timesofmalta.com – Friday, 15th April 2011

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