After 6 years of experiencing first-hand the worst economic crisis that Greece has faced since World War 2, my fear for a Grexit abated when I read an article in last week’s Economist on the “Grecovery.” Greece’s recovery started at the beginning of this year and according to the European Commission is set to continue into 2015. However, political inefficiency risks this long awaited recovery.
I was impressed by the remarkable progress of the Greek economy! The economy grew by 0.7% outperforming the rest of the EU. Despite this outstanding performance, political analysts suggest that early elections may be called as early as February next year that may bring Syriza, the radical left-wing party, to power. Syriza’s hostility to the EU-IMF bailout programme could lead to a never-ending conflict with Greece’s creditors. What is more, only few days after the good news, the Troika returned, demanding more cutbacks, amounting to 2.5 billion euros’ worth of measures (1.4 % of GDP) in a country brought to its knees by austerity and in the midst of political uncertainty.
For the sixth consecutive year I wonder if there is an end to this misery?And more precisely, if our politicians are capable of ending it.
The Greek population has experienced dramatic wage cuts, pension cuts, and tax increases as the result of demands by International lenders. For example, a medical director at a public hospital, who used to earn 2,054€ before the crisis, has experienced a wage reduction of 23% and now earns 1,580€. In the private sector, 53,7% of the workforce insured by IKA, the largest Social Security Organisation in Greece, earns less that 1,000€ per month, while in 2008 this percentage was 42.2%
Since the implementation of the austerity measures over a third of Greeks live on or below the poverty line. With 27,2 % unemployment rate, Greece is the country with the highest unemployment in the Eurozone. Youth unemployment reached 50,7%. Since 2009, Greeks have lost 31,8% of their disposable income, according to the ELSTAT. The businesses that survived the crisis so far, still struggle to survive. Revenue has dropped dramatically. Interest rates tripled, making businesses unable to bear the cost of lending and pay back their loans. Their customers have gone out of business, while the public sector cannot pay them on time.
As a result, employees have been either let go, or have experienced wage cuts. Those who are still employed do not receive their salary on time. In fact, a recent study by the Labour Inspection Authority suggests that only one in ten businesses are able to pay salaries on time!
In 2014 total investments shrank by 17.7 %. Some of the largest Greek manufacturing companies such as Viohalco, 3E and FAGE moved their domicile to other European countries.
How then does this economy function?
Everyone owes everyone with the risk of customer default threatening the survival of businesses every day.
The social impacts of this are numerous. For example, 50% of the self-employed are unable to pay their contributions to their Pension and Insurance Funds. Therefore, they and their families are no longer eligible for medical and pharmaceutical care, while some are threatened with seizures of assets.
What does the Greek government do in order to overcome the crisis and its implications?
According to the World Economic Forum, Greece ranks 129th among 144 countries in terms of government efficiency.
The political inefficiency is demonstrated in constant changes in the tax regime.
From 2010 to 2013, 23 laws were passed, with 248 amendments and about 111 Ministerial Decisions were issued.
Tax increase have become commonplace. One important recent finding by theELSTAT indicates that income and property tax increased from 3.806 billion euro in the first quarter of 2014 to 4.79 billion at the second quarter (2% of GDP), while in the second quarter of 2013 taxes amounted to 4,33 billion euro. This finding suggests a 10% tax increase on an annual basis. The Troika is now demanding more tax increases. Such a high tax burden results in no consumption and hence no development.
The government must instead focus on strengthening the control mechanisms against tax evasion, whose effectiveness has been weakened during the crisis. According to the Bank of Greece, if the government had the same control mechanism as in 2008, then the earnings only from VAT would be increased by 2.5 billion. This is equal to the amount that is the expected from the revenues from the hefty property tax ENFIA, which devastated further the property market in Greece. The main reason for the weakened tax control mechanism is the dramatic wage cut of the tax collectors, which has made them leave or retire early, leaving the tax administration understaffed, with poorly trained personnel and with huge responsibilities.
The government must also focus on the reduction of bureaucracy. Greek bureaucracy often stems from the fact that the state uses obsolete systems. It is remarkable that the Greek state has still not united its computer programs and essentially uses 280 different programs that often conflict and overlap. As a result, establishing a company in Greece is still complicated and time consuming. If bureaucracy were reduced, then tax evasion and corruption could reduce proportionately. However, little is done towards that direction.
Long-term thinking and investment could have an immediate economic impact.
Attracting investment should be first priority in the political agenda. To achieve this, a stable tax system, political stability and low interest rates are urgently required.
There is a plethora of opportunities. Greece not only has a long history. It is a popular tourist destination; it is sunny, beautiful and has exploitable natural resources. Most importantly it has sufficient young talent ready to change their country.
The first signs of economic growth are evident. Grecovery is possible. Sustaining this growth is the next big challenge to our politicians and international lenders.