Although the Greek economy is classified as an advanced high income
economy, this has done very little in convincing its Eurozone partners, creditors
and especially the markets, that Greece is anything but ‘’fiscally
undisciplined’’. Since 2009, the country has been following an externally
imposed policy of fiscal austerity, spearheaded by the ‘’fiscally disciplined’’
Germany.
Exclusive to HellasFrappe
From Vasillis (Basil) Tomaras
Leading economists, business leaders, fund managers and even the
current SYRIZA government, all agree that policies have done very little to
improve the situation of the Greek people. The levels of unemployment levels,
the prime indicator of the effect austerity has on the ground , are/is still at
an appalling 26% and a vast majority of which is youth as half of the
population between 15-24 is currently unemployed.
The
‘’welfare state’’,
the myth and the real causes
A common and dominant narrative about Greece and the causes of the
crisis is that it is a generous over- bloated welfare state. According to the
OECD’s statistics for social expenditure over GDP, this is not the case:
The full Greek state expenditure is at close to 48.7%, which is marginally
higher than the EU-15 average (estimated at 0.6%). However, budget deficit is approximately
4.3% higher than the EU-15 average. What does this all mean? In simple terms,
it’s not state expenditures that heightened the economic crisis in Greece but
rather state revenue, or to be more precise a lack thereof.
Traditionally, tax evasion in Greece has been described as a
‘’national sport’’ by even the highest ranked government officials. The problem
of corruption and tax evasion in Greece is well known and is influenced by many
factors.
Austerity,
the real shock economics!
Without a doubt, the impact of austerity has been felt in all
aspects of life and in all sectors of the economy:
- Recession with no end in sight: The continuous drop in GDP, the lowest in the entire post-war period, led to the lowest reduction in domestic demand and consumption. Ensuing decrease in production led to the loss of thousands of jobs in the private sector (at one point even numbering in the thousands daily).
- Rapid labour decline: This resulted from the steep increase of insecure and uninsured work, degrading wages, decline of workers’ rights and also from the deregulation of workers accords.
- ·The slow killing of the middle class: Traditionally, the middle class economy consisted of small and medium sized businesses that were generously funded in the past by the banking sector which had no apprehensions about granting generous loans and overdraft lines with minimal collateral and oversight. After these financial institutions were respectively starved of funds, a lethal combination of liquidity depletion, decline in consumption and introduction of ‘’emergency’’ taxes, resulted in most of these middle income enterprises subsequently closing down (65.000 in 2010 alone).
- Migration push factors and ‘’brain drain’’: In contrast to the usual yellow press publications of the ‘’lazy’’ Greek, the truth is that the workforce in Greece is among the best educated in Europe and the most productive, actually surpassing their German counterparts. While those studying in academic institutions abroad were discouraged from returning to Greece after graduating, many already educated and skilled professionals also left the country.
- ·Homelessness: Along with the pre-crisis immigrant homelessness which was largely unreported, newly austerity borne destitute also joined their ranks. People and families with medium and higher educational backgrounds who previously belonged to the middle class. Notably, homelessness increased 25% between the period 2009-2011 (over 20.000 by NGO estimates).
- · Record level of suicides: One can only feel sorrow and sympathy for Dimitris Christoulas, a retired pensioner, who publicly committed suicide in early April 2012 at Syntagma square, just outside the Greek Parliament, leaving his family in complete sorrow. This gentle, cultured and above all sane man cited in a politically fueled suicide letter, that he preferred a dignified end to his life in lieu of an undignified existence after government austerity measures slashed his pension. Sadly, he is not the only victim of this crisis, as austerity driven suicides skyrocketed as much as 40% between the period 2010-2011.
- · Disintegration of the health services: The health care system also suffered greatly, through reduced access to health care services following massive cuts. As a result, HIV infections increased by 52% between the periods 2010-2011, while drug prevention centers and psychiatric clinics shut down after tough budget cuts.
The
Shadow economy of Sandanski and how Bulgaria is benefitting from the crisis
Greece and Bulgaria have very different social and economic environments.
In the interest of not confusing the reader with national quantitative data, I
will rather limit indication to a bite size measure by making reference to
Sandanski.
To most Europeans and Greeks alike, the Bulgarian border town of
Sandanski may not be on their radar, but to the inhabitants of Northern Greece,
the town is very well known. This is due to the fact it has benefited extremely
well from the Greek financial crisis. Thousands of Greek vehicles cross the border
every day to fill up on gas since it is 40% less expensive; Housewives do their
grocery shopping; Dentists, many of whom have relocated from the capital Sofia,
have opened up offices in Sandanski to service Greek patients bearing Euros;
etc.. Additionally, scores of Greek pensioners made a permanent move to
Sandanski simply because their reduced pensions were not enough to live on in
Greece.
The most notable migration trend to Sandanski of all are Greek
businesses. The traditionally bustling Northeastern Greek town of Serres, 50Kms
south of the border has become a shadow of its former past as many businesses
moved north to Bulgaria. According to Dimitris Giannakis, the president of
Serres’ Chamber of Commerce and industry, at least 5.000 Greek businesses were struck
from the registry over the past five years. It’s painfully obvious where they
moved to (according to the Bulgarian Register these estimates could be as high
as 8.000). This is not taking into account migration to other countries such as
FYROM, Albania, Romania and Serbia. As it stands, Greece is the third largest investor
in Bulgaria after the Netherlands and Austria.
So the obvious question is, why did all these Greek businesses move
to Bulgaria? And what are the Bulgarians doing better which the Greeks are not?
Taxation
- Greece’s Achilles heel.
Two
countries with radically different taxation policies put into debt perspective.
Bulgaria - When Bulgaria exited the Eastern-Bloc sphere of influence in 1991,
it had just over €10 Billion state debt, which represented 180% of GDP. Bulgaria
entered the EU in 2007 after maintaining a decade long policy of budget
surpluses and reforming their tax codes in the process, after which public debt
reached a record low of 13.7% over GDP (the second lowest in Europe after
Estonia). Although Bulgaria was not immune to the European financial crisis, thanks
to sound fiscal policies and the resulting €4.3 Billion state fiscal reserve,
they managed to ride out the financial storm and maintain a public debt of only
18%. These post crisis deficits levels are comparable to
those of Norway, Sweden and Austria.
Greece - Although Eurozone entry had ‘’strict’’ criteria for government to
GDP ratio of under 60%, we can all agree that 14 years down the line and omitting
creative accounting practices of the past, the true present situation is
anything but Maastricht compliant.
Balkan
economic wars
Bulgaria has benefited from major investments. Here are a few
examples.
- · Montupet automotive (for those who remember the DeLorean) has invested €100M in Bulgaria and employed almost 1.000 people.
- · The telecommunications arm of AIG invested $2B in several plants.
- · American Standard - $240M.
- · AES Energy Generation Corp - $1.4B.
- · NU Image Film Productions - $28M.
- · Microsoft, Hewlett Packard and IBM have their European call and service centres in Sofia.
- · Turkish companies Sisecam and Alcomet opened plants that employ 2.000 people (blue & white collar) combined.
- · Germany’s SAP opened SAP labs, an ICT facility in Bulgaria employing over 500.
Bulgaria is not the only country that did the prudent thing by
lowering its taxes and simplifying their tax codes. Albania and FYROM both have 10%, while Romania
and Serbia have 16% and 15% respectively. Add to the mix, the brutal Greek 23%
VAT rate and the fact that you can open a limited liability company in Bulgaria
with just €1 share capital (€4.500 in Greece), it’s no wonder why Greece is
losing the economic war against its Balkan neighbors.
In conclusion, and according to very conservative estimates, a
combination of intolerable tax rates, a high VAT rate and inflated payroll tax
has driven one quarter of the Greek economy underground by tax evasion,
transfer pricing practices etc., while the more honest ones in the formal economy
are either forced to shut down or move to other countries such as Bulgaria. What’s
more, massive migration of businesses from Greece continually gains momentum
and at the same time delivering a huge blow to the state coffers in the
process.
The
call to reduce taxes and tackle reforms
The promises made by the previous ND-PASOK administration that there
would be a return to markets in 2014 has yet to materialize. It also hasn’t
silenced market experts and economists alike who claim that this will not be attainable
in 2015 either, since a third bailout package is looming on the horizon.
As EU-IMF bailout packages come with painful reforms and demands,
there is no doubt that Greece will once again be forced into a vicious storm of
austerity amidst a tranquil sea of more competitive economies right smack on its
borders.
There has recently been several appeals by the likes of economists
such as Nathan Lewis and even Steve Forbes to adopt measures that will not only
stem the exodus of businesses, but also provide a stimulus to foreign
investment and economic development.
- Adoption of a flat tax on personal income and corporate profits (which will also deter tax evasion. After all, who in their right mind is going to evade 10%?).
- Axing the ridiculously high payroll tax from 45% to 10%.
- Reducing VAT to 15%.
The current leftist-led coalition government of SYRIZA which claimed
victory during the January elections did so largely on a radical platform of
taxing the wealthy, easing tax burdens on the poor and more state interference
in the economy. This approach is a trip down the wrong avenue known in
economists’ circles as Sweetwater economics and is doomed to fail. It will not
only deteriorate the already toxic situation, but it is also going to alienate
valuable investors (domestic and foreign).
Is the Greek government seriously seeking a development stimulus
that will bring in foreign investment, deter tax evasion and fill up the state
coffers? Are they willing to learn from Bulgaria’s proven model? If yes, then they
should follow Bulgaria’s approach by reducing taxes, simplifying tax codes and
axing bureaucracy. The question is, will the government eventually get a grip
of reality and pick up the courage to fearlessly serve it to the EU and IMF on
a take it or leave it basis?
All self-respecting Greeks, who either live in Greece and/or abroad,
need to unite and make a stand to promote this policy by lobbying to their MP’s
and other interest groups. We also need to do this now as time is Greece’s number
one enemy and a commodity that our nation simply does not have.
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