The Bennett Newsletter
"Greece: Painful lessons"
Expect a bit of foot-dragging if you ask the average kiwi taxpayer to support a big government loan, which is unlikely to be redeemed or even appreciated, to a neighbourhood country. One suspects that people would say “What about the IMF, or the World Bank or any commercial bank?” And in a country which understands “kicking for touch”, the shrewd would say “this is so urgent and so important that we ought to set up a committee”, and “we can start thinking about its terms of reference very soon, after wide consultation”.
The Germans have had this problem with Greece, and have finally consented to the most reluctant bail-out in history. The terms are so tough that massive resistance can be expected from the Greek unions. The terms include huge tax increases, slashed services, and a steep raise in the retirement age. There will be a huge increase in unemployment and grinding deflation for years.
But no German political party wanted to support Greece. That is interesting as for almost one hundred years, with the inception of the League of Nations; it has been assumed that small powers could expect international help in an emergency. New Zealand has always been a stalwart of collective security. So it is relevant to ask why Greece is unpopular. Is it conceivable that if New Zealand got into difficulties would it also lack international goodwill?
My argument is that, while no one loves a debtor, Greece is in a mess of its making. Those who know about its peccadilloes and corruption have very little sympathy for its misfortune. Other countries needing help may receive a more amiable response. Greece’s behaviour is worth explaining to Kiwis who would normally regard that country very benevolently. They might not rush to condemn Greece’s massive tax evasion, but they would detest its bloated, cheating public service and endemic corruption.
Greek Tax Evasion
A tourist in Greece finds a credit card useless. Hotels and restaurants want cash settlements. Receipts are unknown. Greece has a massive black economy equivalent to 30% of GDP. Citizens also lie blatantly about their assets. In Northern Athens only 324 residents admitted they had a swimming pool in the sworn declaration on their tax forms. A satellite image revealed a mere 16,974 pools.
Tax-evasion cost US$30 billion a year. If tax had been collected a lot of Greece’s budget blow out would have been avoided. The evasion is not merely by tradesmen, but architects, lawyers and doctors. When suspicious inspectors investigated doctors in a trendy part of Athens, they found, according to the New York Times, more than half claimed an income of less that $40,000, and many less that $13,300 which exempted them altogether.
Visitors to Greece see many signs of wealth in flash restaurants, cars and holiday homes but only a few thousand people in a population of 11 million declare an income of $132,000+. There are many with a couple of houses, and nice cars and boat who declare about $15,000.
The tax–take (2000-2007) increased less than declared GDP. Usually, tax creeps up in a growing economy. So when Athens told the EU recently that it would catch evaders the EU declined to admit higher revenue in the draft budget. They had heard it before. Little is expected of tax collectors. This venal group commonly has a three-way split with offenders: one third that is owing to the state, one third retained by the offender, and one third to the collector.
Corruption is rife
Tax collection fails because of “fakelaki” (little envelopes enclosing bribes) and “rousfeti” (cronyism). A Brookings Institute study published in the NYT said that if the Greek administration was a clean as the Netherlands’ or Sweden’s’ Greece would have been in budget surplus for a decade.
Surveys show that 13% of household pay €1,355 on average per month in bribes. Ordinary citizens have to hand out bribes to get a driving license, doctor’s appointment, building permit, or tax reduction. Senior officials are continually on the take: recently some helped a monastery claim ownership of a lake, and then swapped the lake for valuable public land, losing €100 million in revenue. The scandal contributed to the conservative’s defeat in the last election.
Bribery is so ensconced in medicine that the Prime minister admits that heart stents cost five times more in Greece than in Germany. A UK court jailed an executive of Depuy International for paying ₤4.5 m pounds to Greek surgeons to buy its orthopaedic goods for public hospitals. Siemens has admitted paying slush funds to Greek politicians.
A former finance minister believes tax collection eases massively before elections: the last budget blew out from a 6% deficit to a 13% deficit a few weeks before the election.
Public service bloated
Politicians give jobs as favours. 27,000 public service jobs were created in the month before the election, and these jobs are for life. Many public servants never go to work. Some people get a bonus of two-months’ pay for turning up. Foresters get a bonus for working outside, if they turn up. These unsackable public servants can retire on full pension at 40. Their pension continues after death for some relatives. Being on a committee is very lucrative; my favourite is one which manages a lake that dried up 80 years ago.
Even the Greek government does not know how many employees it has. It certainly has plenty of teachers, with 20,000 employed with a classroom. One small school had 15 PE teachers. Many schools have more teachers than pupils.
Germany’s dilemma
Germans think of themselves as honest, hard-working and frugal and resent bailing out the shiftless, corrupt Greeks. Every party is against a bail-out. Chancellor Merkel might be brought down because she put Europe’s interests before her party’s. She appeased public opinion by insisting that the unpopular banks shared the risks too but that could backfire; if Greece defaults, German banks will need more taxpayer support.
Meanwhile, spare a thought for Greeks. Their retirement age will increase from 53 to 67, they will have tax hikes, pay freezes and their public servants will lose all incentive to go to work as their two-month pay bonus is to be cruelly scrapped.
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