Greece’s Soverign Debt

Introduction

Greece is at a critical juncture of its recent history: the economic policies of the last three

decades have brought it close to bankruptcy, but bankruptcy can be avoided and growth can

resume if important economic reforms are made and rigorously implemented. For the

reforms to succeed, a social consensus is important. In particular, there must be general

agreement on why reforms are needed and what reforms should be made. Yet, consensus is

missing. Some oppose the reforms that Greece has agreed on with its lenders on the

grounds that they are misguided or that they imply a loss of national sovereignty. Others

defend the reforms, but on the grounds that these are the price to pay for avoiding

bankruptcy‐‐‐thus suggesting that if Greece’s lenders had asked for different reforms they

would have defended those instead. And a large fraction of the general public is left unsure

about whether Greece will manage to exit the crisis, and how the reforms will help achieve

that goal.

This assignment will explain the need to build a social consensus around the reform process by

Stating what key reforms are needed to get Greece out of the crisis, and why these

reforms can make Greece prosperous. Understanding what the necessary reforms are

required & understanding the causes of the crisis will be discussed as well.

Much of the debate about Greece’s current problems has focused on the short‐run

The Essay on Globalization Study Greece Economic Crisis

However, besides Greece, there are other European countries also belonging to European Union; face a similar problem, such as Portugal, Ireland, Italy and Spain. Therefore, Greece’s debt crisis also triggers a European crisis. As the three companies lowered Greece’s credit rating the cost of their debt was on an upward trend. Consequently, Greece initiated an austerity program, the austerity ...

management of the crisis. Will Greece be able to repay its debt, or will it have to

restructure ? Will Greece exit the euro, and should it do so? Will the European Union and the

European Central Bank decide to offer further assistance to Greece? Discussion of these

Issues is pointless unless Greece undertakes the type of reforms that will be outlined in this

assignment. If reforms are not undertaken Greece is bound to default and the crisis to deepen. If

instead reforms are undertaken, the management of the debt will become much easier:

Greece will be able to borrow at much lower interest rates as its lenders will become more

assured about its ability to repay.2

Moreover, reforms are necessary not only for repaying

the debt, but also for Greece’s long‐run growth and prosperity. Even if Greece’s debt were

to magically disappear overnight, the same reforms would be needed; or else Greece would

find itself with a new debt problem again soon.

Some of the reforms that will be outlined in this project have been discussed before, but

Successive Greek governments have chosen to ignore these reforms– until, of course, they

were forced into it by the crisis. This is either because of lack of vision and courage, or

because of vested interest in the status quo, or because of lack of understanding of the

economic realities. It is time that such populism and lack of leadership of the past should be replaced by political courage and guided by the principles of economics so that Greece can resume growth and unleash the genuine productive creativity of which there is much among Greeks.

2

Moreover,the decrease in interest rates will be immediate even though reforms can take time to be fully

implemented because the rates at which Greece can borrow today depend on lenders’ beliefs about its ability

to repay in the future.4

Section 1 ofthis article explains whenGreece’s vast public debt was accumulated and how it

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affected the economy. Sections 2 and 3 outline the key reforms, which are on two fronts:

reformsto improve the government’sfinances, outlined in Section 2, and reformsto

improve competitiveness, outlined in Section 3. Each section starts with questions and

answersthatsummarize themain points. Some ofthese pointsstand in sharp contrastto

commonly‐held views abouttheGreek economy and the reformprocess; we highlightthese

views and explain why they are incorrectin boxesspread throughoutthis article.

1. The PublicDebt

• Whenwasthe public debt accumulated?Debtincreased sharply during the 1980s,

and furtherincreased, at a lower pace, during the 1990s and 2000s.

• How did the public debt affectthe economy?Debttriggered a decrease in

productive investment and an increase in consumption.

• Why isGreece heavily indebted to foreigners? BecauseGreek citizens were

consuming beyond their means with money thattheir government was borrowing

from foreigners.

When wasthe public debt accumulated? Let’sfirst explain the difference between debt and

deficit. In any given year,the government hassome revenue, e.g., arising fromtaxes, and

some expenditure, e.g.,to pay public servants. Ifthe expenditure is higherthan the

revenue,then the government has a deficit and needsto borrow. This generates debt.

Moreover, ifthe government has accumulated debt over previous years, because it was

running deficits during those years, a deficitin the current yearfurtherraisesthe debt.Note

thatthe relationship between debt and deficit goesin both directions: not only a deficitin a

given yearraises debt accumulated over previous years, but also debt accumulated over

previous yearsraisesthe deficitin the current year. Thisis because interest payments on

debtthat has accumulated over previous years are an expenditure during the current year,

and add to that year’s deficit.

3

During the 1960s and 1970sthe government was essentially breaking even. The deficit

increased dramatically during the 1980s: in each year during that decade, government

expenditure exceeded revenue by an average 8.1% ofGDP. The deficitremained high during

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the nexttwo decades.

The evolution ofthe deficitisreflected into that ofthe public debt.

The high deficitsin the 1980sled to a dramatic increase in debt:from26% ofGDP in 1980,

debtrose to 71% ofGDP in 1990.Debt further increased during the nexttwo decadesin

response to the high deficits‐‐‐which were high partly because ofthe interest payments on

the accumulated debt.

How did the public debt affectthe economy?

Compared to the 1970s, consumption went up significantly during the 1980s, and

investment went down by a roughly equal amount(8% ofGDP).

ThismeansthatGreek

3

GDP includessome ofthe goods and services produced inGreece’sinformal economy. The informal economy

accountsfor 25‐30% ofGDP (Katsios 2006).6

citizens were consumingmore, while less wasspent on productive investment,such as

factories and highways. Both effects were caused to a large extent by the drastic increase in

public debt during the 1980s, and by the way the governmentspentthemoney thatit

borrowed. Indeed, lessthan 25% ofthemoney wasspent on productive investment, i.e.,

public infrastructures. The bulk wasspentinstead to increase the wage bill in the public

sector, i.e.,more public servants and highersalaries, and to increase the pension bill, i.e.,

more pensioners and higher pensions(Rapanos 2009).

The recipients ofthe government

money increased their consumption in response to their higherincomes, and this explains

the increased consumption in Table 3. Investment decreased because fewer private savings

were available to finance it. Indeed,the government was borrowing by selling bondsto

Greek citizens, who were in effect dividing theirsavings between bondsissued by the

government and bondsissued by private firms. As a consequence,fewersavings were

available to finance productive investment by private firms. And sincemost ofthemoney

thatthe government wasraising by issuing bonds was notspent on public infrastructures,

the aggregate productive investment by the public and the private sector decreased.

Why isGreece heavily indebted to foreigners?Greece’s external debt, defined as debt owed

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to foreigners, was 82.5% ofGDP in 2009. This is a large number: for example,

itis abouttwenty timesGreece’s annualspending on education.

How wasthe large external debt accumulated, and how did public debt contribute to this?

A country accumulates external debt when its government or private sector(i.e.,firms and

citizens) borrow fromforeigners. In the case of Spain, whose external debtis almost as high

asGreece’s,much ofthe external borrowing was done by the private sector: Spanish banks

were borrowing fromforeign banksto give loansto Spanish citizens, who would then buy

(whatturned outto be) overpriced houses. In the case ofGreece,the private sector did not,

in the net, borrow fromforeigners:the savings ofGreek citizens were enough to coverloans

to the private sector. External borrowing wasinstead done by the government. Indeed,

Greece’s external public debt, defined asthe part of external debt accumulated by the

government, was 89% ofGDP in 2009 (or 79% oftotal public debtin Table 2).

Thus,Greece’s

external debt essentially coincides with its external public debt.

When a country borrowsfromforeigners, it consumesmore than it produces. The extra

consumption is derived fromimports, which the country can buy fromforeigners with the

money thatit borrowsfromthem. In the case ofGreece,thismeansthatGreek citizens

were consuming imported goods withmoney thattheir government was borrowing from

foreigners. The borrowedmoney wasflowing fromthe governmentto the citizensthrough

various channels, e.g., wages paid to public servants, paymentsto governmentsuppliers,

pensions paid to pensioners. In response to their higherincomes, citizens were consuming

more‐‐‐and in the aggregateGreece was consumingmore than it was producing.7

Greece could import more than it was exporting because it was borrowing from foreigners.

During the 1990s, it was borrowing an average of 4.1% ofitsGDP per year.While this

borrowing rate is high, itincreased dramatically‐‐‐to 10.2%‐‐‐during the 2000s. And not

surprisingly, external debtincreased dramatically as well:from42.7% ofGDP in 2000 to

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82.5% in 2009.

Table 4 showsthat external borrowing increased becauseGreece wasimporting evenmore

relative to its exports, and because transfersreceived fromforeigners decreased. Twomain

effects drove the decrease in transfers. First,transfersfromthe EuropeanUnion decreased

as countries poorerthanGreece joined and funds earmarked for cohesion purposes were

reallocated accordingly. Second,Greece had tomake higherinterest payments on itslarger

external debt.

In summary,Greece becamemore indebted to foreigners during the 2000s because it was

importing evenmore relative to its exports, despite receiving fewertransfersfromthe

EuropeanUnion, and despite being already in debt. Why such profligacy? Part ofthe reason

wasthatinvestmentincreased during the 2000s‐‐‐with theOlympicGames being an

example. Butthemain reason wasthatGreek citizens became less willing to save during the

2000s, because interestrates were lower and consumerloansfrombanks better available.

How did the decrease in savingsinteract with the public debt?Despite theirlowersavings,

Greek citizens were stillsaving enough during the 2000sto finance loansto theirfellow

citizens and to private firms. The problemisthatsavings had become insufficientto buy the8

bondsissued by the government. As a consequence,the government had to turn to

foreignerstomeetitsfinancing needs. In thissense,the increase inGreece’s external debt

during the 2000s was caused by the combination ofthe government’slarge borrowing

needs, and its citizens’ insufficientsavings.

How canGreece repay its debt? Some commentators have argued that Greece cannot repay

its debt, and that it should restructure it or default altogether.

How can it accomplish

that objective?

Repaying the debtrequires,first of all,to reduce the deficit. Recallthatthe deficitisthe

government’s expenditureminusitsrevenue, and one source of expenditure isthe interest

paid on debt. The component of deficitthat does notinclude interest payments on debtis

known asthe primary deficit. A zero primary deficitmeansthatthe government breaks even

in the absence ofthe debt burden bequeathed to it by previous governments. A positive

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primary deficitmeansthatthe government creates a new debt burden.

In 2009,Greece’s primary deficit was 8.5%. Clearly, with a primary deficit, and ofsuch large

magnitude, it will be impossible to ever pay back the debt. The debt can be paid back only if

the governmentstopsrunning a primary deficit, i.e., does not create a new debt burden

each year. The governmentmustrun a primary surplus.

Howmuch of a primary surplusis needed? Ifthe primary surplus exceedsthe interest

payments on debt,the (total) deficit will be negative, and the debt will decrease. Ifthe

primary surplusis equalto the interest payments on debt,the deficit will be zero, and the

debt willremain constant overtime.

While a negative deficitis effective in reducing the debt, even a zero orslightly positive

deficit can suffice. Thisis because the relevant quantity is not debt, but debtrelative toGDP.

IfGreece’sGDP doubled overnight, without any change in the public debt,Greece would

have amuch smaller debt problem. Indeed, paying forthe debt by, e.g.,raising taxes would

becomemuch easier. Therefore, a zero orslightly positive deficit can suffice in reducing the

debtifGreece can grow itsGDP quickly overthe next decade.

Greece can achieve and sustain highGDP growth ifitmakesits economymore competitive.

Gainsin competitiveness are allthemore important because ofGreece’slarge external

debt. Indeed, a country can repay its external debt by exportingmore than itimports. Since

Greece is currently importingmore than it exports, large gains in competitiveness

are necessary so that exports overtake imports.

Greece’s current problemisthe combination of high debt, high deficit and low

competitiveness. Itis because ofthis combination thatGreece could only borrow at very

high interestratesin financialmarkets. Markets were not conspiring againstGreece;they9

weremerely reflecting economic reality‐‐‐as well as protecting the interests ofthose who

had lenttheirsavingstoGreece.

To repay its debt,Greecemustsucceed on two fronts. First,the governmentmustimprove

itsfinances and turn a significant primary surplus. Second,the economymust becomemore

competitive. Success on each frontrequiresimportantreformsthat we outline in Sections 2

and 3,respectively. Reformstargeted towardsthe government’sfinancesinclude austerity

measures,such astax increases and cutsin pensions and public servants’ wages. The

hardship caused by austeritymeasures will bearfruit only ifthesemeasures are

accompanied bymore radicalreforms designed tomake the public sectormore efficient and

the economymore competitive.

The reformsthatGreece has agreed on with itslenders(EU/IMF) aimat enabling itto repay

its debt. Some reforms contribute to that goal by improving the government’sfinances,

while otherreforms aimatraising competitiveness and growth. Many ofthe reforms are

necessary and overdue, as we explain in Sections 2 and 3, and should be supported. Atthe

same time, itisimportantto go even beyond these reforms and thinkmore generally how

to raise the growth ofGreece and the incomes ofits citizensin the long run. The reforms

thatGreece has agreed on with itslenders do notfocus on the long run, e.g., none concerns

education or basic research, both of which have a significant effect on a country’slong‐run

growth. Thisis natural: a comprehensive long‐run reformoftheGreek economy is notthe

job ofthe EU/IMF but ofGreeksthemselves. Some ofthe reformsthat we outline in this

article concern the long run, andmore attention should be given to reforms ofthattype.

2. TheGovernment’s Finances

• Whatisthe main source ofGreece’s deficits?Government expenditure is

comparable to the EuropeanUnion (EU) average, butrevenue is well below

because oftax evasion. In thissense,tax evasion isthe main source ofGreece’s

deficits.

• Tax evasion: what are its costs and how to fightit? Tax evasion preventsthe

governmentfrom providing a high quality of public services, introduces unfairness

into the tax system, and subsidizeslow growth activities atthe expense of high

growth ones. Tax evasion is common inGreece not because itisin the genes of

Greek citizens but because not enough incentives are in place to discourage it.

• Should the public sector be made smaller?Greece’s main problem is notthatthe

public sectoristoo large, butthatthe money isspentinefficiently. Thatis,the

quality of public services can be improved and money can be economized atthe

same time. This money can be used to pay for other public services, which are

currently under‐provided but are importantfor competitiveness, e.g., investmentin10

infrastructure and human capital. Productivity in the public sectorshould be

measured, asis done in any private firm, and public agenciesshould be evaluated

based on how they meet explicit productivity targets.

• How to fight corruption in the public sector?As with tax evasion, corruption is

common inGreece because not enough incentives are in place to discourage it. In

particular, penaltiesfor corruption should become much tougher, accounting

practicesshould be modernized,the institutionalframework that governsthe

interactions between government and citizensshould be simplified, and these

interactionsshould become more anonymous.

• Why isreform ofthe pension system essential?Untilthe recentreform,Greece’s

pension system had some ofthe most generous provisionsin the EU, and wasill‐

suited to cope with population ageing.Had it been left unreformed, it would have

created an additional deficit of 12% ofGDP by 2050. Paying forthat deficitwould

have required,for example, cutting completely spending on education and health

combined. While the currentreform is an improvement,there isscope for a more

radicalredesign that can renderGreece’s pension system both more efficient and

fairer.

Whatisthemain source ofGreece’s deficits? Tables 5 and 6 reportthe revenue and

expenditure,respectively, ofGreece relative to the EUaverage, in 2007.4

For brevity, we

report only themain items.

Table 5:Governmentrevenue (Source: Eurostat)

Totalrevenue as

% ofGDP

Indirecttaxes

(VAT) as % of

GDP

Directtaxes as

% ofGDP

Social

contributions as

% ofGDP

Greece 39.7 12.5 7.9 13.4

EU27 average 44.9 13.5 13.4 13.5

Table 6:Government expenditure (Source: Eurostat)

Total

expenditure

as % ofGDP

Intermediate

consumption

as % ofGDP

Compensation

of employees

as % ofGDP

Interest as %

ofGDP

Social

benefits as %

ofGDP

Greece 45 5.7 11.2 4.4 17.6

EU27

average

45.7 6.4 10.4 2.7 19.1

4

Unless we explicitly state otherwise, EUrefersto the EU27. The numbers are similarif we limit ourselvesto

the Eurozone.11

Tables 5 and 6 indicate thatthe key difference betweenGreece and its EUpartnersliesin

the revenue ratherthan in the expenditure.While expenditure is comparable to the EU

average,revenue is well below. Moreover,the discrepancy in revenue liesmainly in the

government’s ability to collect directtaxes, i.e.,taxes on income. Indeed, in the average EU

country,the government collects 13.4% ofGDP fromdirecttaxes, while inGreece it only

collects 7.9%. This discrepancy does not arise because tax rates on income are low in

Greece‐‐‐they are comparable to other EUcountries. The discrepancy arisesinstead because

oftax evasion: ifthe government had been able to collect directtaxesin line with the EU

average, it would have had no deficitin 2007. The same statement cannot bemade for

2010, partly because the globalfinancial crisis has had a negative effect on government

finances around the world. Yet, eliminating tax evasion would restore a primary surplusin

2010.

Tax evasion: what are its costs and how to fightit? Fighting tax evasion should be a top

priority forthe government. Indeed, ifthe government had been able to collecttaxesfrom

all citizens according to their actual incomes, deficits would have beenmuch smaller, and

Greece would not be having a debt problemtoday.Of course, deficits would have been

smaller even in the presence oftax evasion, ifthe government had cut down on its

expenditure. Yet,the expenditure oftheGreek governmentis not high by EUstandards, and

key areassuch as education and health are underfunded. In summary,the first and big cost

oftax evasion isthatit worsensthe government’sfinances, and preventsthe government

fromproviding a high quality of public services.

A second, and equally important, cost oftax evasion isthe unfairnessthatitintroducesinto

the tax system. A key objective ofthe tax systemisto redistribute income fromthe rich and

more fortunate to the poor and lessfortunate. Thisis done by collecting highertaxesfrom

the rich and using the proceedsto provide public servicesthat benefitrich and poor alike.

Tax evasion underminesthis objective because itis donemainly by the rich:the taxes

evaded byGreece’s high‐income households are greaterthan forlow‐income households.

not only in absolute terms but also as a proportion ofincome (Flevotomou and Matsanganis

2010).

The unfairnessthattax evasion introducesinto the tax systemhas an important

political consequence: it underminessocial consensus and inhibitsthe ability ofthe

governmentto undertake painfulreforms. Indeed,reforms are perceived as harming the

low‐income households, who also feelthatthey are carrying a disproportionate share ofthe

tax burden.

Tax evasion has an additional costthatislittle noticed but asimportant asthe othertwo: it

subsidizeslow technology and low growth activities atthe expense of high technology and

high growth ones. Indeed,the formertypically require low investment and are performed at

a smallscale, e.g., by the self‐employed or very smallfirms, where tax evasion is hard to

detect. Conversely,the lattertypically require high investment and are performed by larger

firms, where tax evasion can be detectedmore easily. Tax evasion by the self‐employed and12

very smallfirmsforcesthe governmenttomaintain a high tax rate,so to collectthe taxes

fromlargerfirms, which cannot evade themas easily. This discouragesthe creation oflarge

firms, as well asthe high growth activities and well‐paying jobsthatmany ofthese firms are

associated with.

Tax evasion is deeply engrained in theGreek economy and cannot be eradicated easily. At

the same time, one ofthemain reasons why tax evasion is deeply engrained isthat not

enough incentives are in place for citizensto pay theirtaxes. Strengthening these incentives

can reduce significantly tax evasion. We recommend the followingmeasures:

• Audits ofindividuals and firmsshould become regular and be based on profiling of

evaders and randomselection. Profiling willfocus attention on types ofindividuals

and firmsmostlikely to evade. Randomness will imply a chance to be audited even

forthose not having the profile oftax evaders. The key difficulty isto organise audits

that are beyond corruption.One way of achieving thisisto pursue the entire process

by correspondence, where audited individuals and firms have to provide the

required evidence withoutmeeting the tax officials. The tax officials handling the

case should remain anonymous and all correspondence signed by someone with

overallresponsibility but without directinvolvement. Penaltiesshould be

proportionate to the offence and serious offendersshould be prosecuted in the

criminal courts. Lessserious offendersshould be fined in proportion to the tax

evaded.

• Cross‐referencing between expense claims and tax declarationsshould become

automatic. For example, all expense claimsthatindividuals declare relating to a

specific doctorshould be automatically added up and checked to see iftheymatch

the doctor’stax return. Even better: when a doctor presents a receipt,thisshould be

automatically registered to histax account, verymuch like individualsalaries.

Moreover,to reinforce the role ofreceiptsin improving tax revenue itis worth

considering increasing the tax deductibility of certain expenses even atthe cost of

some tax revenue so asto change the culture to one where itis naturalto provide

receiptsforservices and declaration oftaxes.

Fallacy no 1: Tax evasion stimulates growth because firms pay low taxes and hence

have higherincentives to invest. Firms that manage to evade taxes are typically small

and in low technology and low value‐added sectors(e.g.,restaurants and night‐clubs).

To

make up forthe lostrevenue fromthese firms,the government hasto collectmore taxes

fromthe firmsthat cannot evade them, which are typically large and in high technology

and high value‐added sectors. This discouragesthe creation ofsuch firms, and has a

negative effect on economy‐wide growth.

Paymentsformanymedicalservicesshould take place not between a doctor and a

patient, but directly through the patient’s health insurance fund or company.

Evading taxes on paymentsmade through the latter channel ismuchmore difficult.

Should the public sector bemade smaller? Itis often claimed thattheGreek public sectoris

very large and consumes a vast amount ofresources. The total wage bill in theGreek public

sectorisindeed higherthan the EUaverage:for example, in 2007Greece spent 11.2% ofits

GDP to pay public servants, while the EUspent 10.4%. Butthis difference issmall when put

in broader context. For example, Sweden spent 15% of itsGDP to pay public servants.

The relevant question is not whetherthe total wage bill in theGreek public sectorisslightly

above orslightly below the EUaverage, but whetherthe public sector’s productivity is high

orlow. Thatis, are the resourcesthatthe government putsinto the public sectorspent

efficiently? Ifresources are spentinefficiently,the quality of public services can be

improved andmoney can be economized atthe same time.5

Productivity ismeasured in every private firmand should bemeasured in the public sector

as well.Of course,the public sector differsfroma private firmbecause its objective is notto

achieve a high profit, butto provide servicesthat benefitsociety, e.g., education, protection

ofthe environment,security against crime, protection against externalthreats. Moreover,

measuring the quality of public servicesis harderthanmeasuring profits. Yet,measures of

quality can be computed, and public agenciesshould be evaluated in terms ofthe quality of

servicesthey provide given the resourcesthey are allocated. More generally,the notion

thatthe public sectoristhere to serve society, and do so in a cost‐efficientmanner,should

enterthe culture oftheGreek public sector. The public sectorshould be viewed as an

efficient provider ofservices and not as ameansto provide employmentto political

favourites.

Measuring productivity in theGreek public sectoris challenging because data on resources

spent and on quality ofservices provided are generally not available, unlike inmany other

EUcountries. For example, itis hard to find data even on the total number of public

servants.

One area in which data are available is education. We focus on that area solely because of

the availability of data, and not because we intend to suggestthat productivity in education

islowerthan in other areas ofthe public sector.6

We should add that our productivity

measures are imperfect and can certainly be improved.Ourmain goal in computing these

5

The productivity question isrelevant not only forthe central government, butfor alsomunicipalities and local

governments, where inefficiencies appearto be even larger.

6

Indeed, productivity appearsto be especially low in areassuch as health care, public transportation and

defence.14

measuresisto emphasize thatmeasurement of public‐sector productivity is possible and

should be carried outmore systematically.

TheOECDmeasuresthe quality of primary and secondary education through standardized

testsin reading,mathematics and science (known as PISA tests), offered to children aged

15. Table 7 reportsthe performance ofGreece relative to theOECDaverage in themore

recenttests, performed in 2005. Fortertiary education, we considertwomeasures of

quality, one emphasizing research and one teaching. The firstmeasure isthe ShanghaiJiao

Tong (SJT) annual world ranking, where universities are ranked based on the quality ofthe

research they produce. Table 7 reportsthe number ofGreek universitiesin the top 500, and

compares with the total number of EUuniversitiesin the top 500, adjusting forthe relative

GDP ofGreece within the EU(i.e.,multiplying by the fraction ofGreekGDP relative to total

EUGDP).

The secondmeasure is graduation rates, defined asthe percentage of 18‐year olds

who entertertiary education in a given year and eventually graduate,relative to the total

number of 18‐year oldsin that year. Table 7 reports graduation ratesinGreece relative to

theOECDaverage in 2007 (OECD2009a).

Table 7: Measures of outputsin education (Source:OECD, SJT annual world ranking)

PISA score,

reading

PISA score,

mathematics

PISA score,

science

Number of

universities

in SJT top

500

Graduation

rates

Greece 460 459 473 2 29.8

EU27 or

OECD

average

492 498 500 4 48.1

Qualitymeasures at all levels of education are significantly lowerforGreece. TheGreek

average score in the PISA testsis worse than that of all 30OECDcountries, exceptfor

Mexico and Turkey. And whileGreece hastwo universitiesin the top 500, itshould have

four according to itsGDP within the EU. Moreover, none ofthe two universitiesisin the top

100, while countries with comparableGDP and/or population asGreece (Finland, Sweden,

Denmark,Netherlands) have one ormore universitiesin the top 100. Finally, graduation

ratesinGreece are significantly lowerthan theOECDaverage.

The under‐performance oftheGreek educationalsystemis amatter ofserious concern.

Providing quality education to the next generation is not only amoral imperative, but also

brings an important economic benefit: a highly educated workforce contributesto an

economy’s competitiveness. We return to competitivenessin Section 3, butfor now we

focus on productivity: are the resourcesthatthe government putsinto education spent

efficiently to provide the outputsin Table 7?15

Table 8 comparesGreece to the EUaverage in terms of expenditure in differentlevels of

education, and ratio ofstudentsto teachersin primary and secondary education. The

expenditure data are from2005 and the student/teacherratio data from2006 (OECD

2009a).

Table 8: Measures ofinputsin education (Source:OECD)

Expenditure in

primary and

secondary

education as %

ofGDP

Expenditure in

tertiary

education as %

ofGDP

Ratio of

studentsto

teachersin

primary

education

Ratio of

studentsto

teachersin

secondary

education

Greece 2.7 1.5 10.6 8.2

EU19 average 3.6 1.3 14.5 11.9

Tables 7 and 8 suggestthat expenditure in tertiary education isinefficient:Greece’s

expenditure is comparable to the EUaverage, butthe outputs(top universities and

graduation rates) are significantly lower. The picture for primary and secondary education is

less clearcut.Greece underspendssignificantly relative to the EUaverage,so the lower

outputs(PISA scores) could be reflecting the lower expenditure. Atthe same time,there is

an inefficiency becauseGreece is achieving the lower outputs by employingmore teachers

perstudentrelative to the EUaverage.We should note thatGreece’slower expenditure in

primary and secondary education despite the higher number ofteachersis not because

teachers are severely underpaid; itismainly becauseGreece spendslittle on education

infrastructure (e.g., buildings and teaching equipment) and on pre‐school education.

In summary,the data suggestthatthere is ample roomforincreasing productivity in

education: itshould be possible to improve the quality oftertiary education while also

economizing on expenditure, and to improve the quality of primary and secondary

education while also employing fewerteachers.We should emphasize thatthe low

productivity is not a reflection only on the teachers; it concernsthe entire educational

systemof which the teachers are only one part.

How to raise productivity in the public sector? All employees, whetherin the public orin the

private sector, aremore productive when they are given incentives based on their

performance, i.e., good performers are rewarded with highersalaries and better promotion

opportunitiesthan bad performers. Such incentives, however, are largely absentin the

Greek public sector. In fact, a pre‐condition forsuch incentivesisthatindividual

performance ismeasured (fairly and accurately), butsuch evaluations are not common.

Returning to the area of primary and secondary education, promotion islargely based on a

teacher’slength ofservice, and not on the teacher’s performance in the classroom, or on

whetherthe teacher has attended on‐the‐job training (OECD2009b).

Measuring and

rewarding individual performance would lead to significant productivity gains.16

Performance‐based incentivesshould be given not only atthe level ofindividuals, but also

atthat of organizational units. For example,the performance of each school and university

should bemeasured, andmore resourcesshould be allocated to top performers. Together

with this greater accountability, organizational unitsshould be given greater autonomy. For

example,schools and universitiesshould be givenmore freedomon which teachers and

professorsto hire, and how to allocate their budgets.

The productivity gains achieved through performance‐based incentivesshould be

complemented by rationalizing the resources allocated to specific activities. For example,

employmentlevelsseemto be excessive in some activities,such as primary and secondary

education, and should be reduced. Such a reduction could partly be achieved through

redeploymentto other activities ofthe public sector. By rationalizing resources, it would be

possible to free up resourcesfromactivities where spending isinefficient, and redeploy

themto activities where spending is currentlyminimal, but which are importantfor

competitiveness. Examplesinclude education infrastructure and pre‐school education, basic

research, labourmarket programmes and assistance to the unemployed,transportation

infrastructure, etc.

How to fight corruption in the public sector? The issue of public‐sector productivity is

related to that of corruption. Indeed, one reason why productivity islow isthatsome ofthe

money allocated for public‐service provision ends up in the pockets of corrupt public

servants. Corruption is amajor probleminGreece: in 2009, Transparency International

rankedGreece asthemost corrupt ofthe 27 countries ofthe EuropeanUnion,together with

Bulgaria and Romania.

Corruption hassevere costs. It preventsthe governmentfromproviding a high quality of

public services because some ofthemoney allocated for public‐service provision is diverted

away. Itforcesthe governmentto impose highertaxestomake up forthe lostmoney‐‐‐and

these taxes discourage productive activities. Corruption also taxes citizens and firmsmore

directly since theymust bribe corrupt public servantsto be served efficiently by them. Last

but notleast, corruption causes citizensto stop trusting their government and respecting

the law. The costs of corruption are, inmany ways,similarto those oftax evasion: in both

cases,money thatshould be collected by the government and spentfor public services ends

up instead in the pockets of private citizens.

Corruption is deeply engrained in theGreek economy and cannot be eradicated easily. But

as with tax evasion, one ofthemain reasons why corruption is deeply engrained isthat not

enough incentives are in place to discourage it. We recommend the followingmeasuresto

fight corruption:17

• Penaltiesfor corruption should bemademuch tougher. For one,there should be no

statute oflimitations. Moreover, corrupt public servantsshould be punished by the

withholding oftheir pension as well as by imprisonment.

• Accounting practicesshould be broughtin line withmodern internationalstandards.

Expenses of public agenciesshould be recorded in realtime in a centralized

computersystemhoused atthe Ministry of Finance.Overrunsfromagencies’ annual

budgetsshould be followed up with prompt audits.Underthe currentsystem,

overruns can take yearsto discover.

• Performance‐based incentivesshould be introduced. Indeed, one source of

corruption isthat public servants hold up normal work untilthey are bribed. Well‐

designed performance‐based incentives will induce public servantsto work harder,

and this willreduce the need for bribes.

• The institutional framework that governsthe relationship between individuals and

firms on one hand, and the state on the othershould be simplified andmademore

transparent. Complicated bureaucratic hurdles provide fertile ground for corruption

asindividuals and firms have an incentive to bribe to get around the hurdles.

• The interaction between individuals and firms on one hand, and the state on the

othershould become anonymousto amore significant extent, as we already

emphasized in the case oftax audits. Simplifying procedures andmoving to online

and postaltransactionsis an importantstep in that direction.

One area where corruption and waste are rife is healthcare. The notorious brown envelopes

are a fact oflife and tax themost vulnerable. Moreover,the quality of healthcare provided

in the public sectoris generally low, withmany ofthose who can afford itswitching to

private care.Here we need radicalrethinking. We need a systemthat will extend the same

quality of healthcare to all income groups, willrecognise the need to subsidise the less

wealthy, and atthe same time will bemanaged efficiently. The systemthat we advocate

consists of (i)selling the public hospitalsto the private sector,(ii)setting up a

comprehensive andmandatory health insurance system, where all individuals are required

to have insurance, and insurance companies are not be allowed to exclude anyone, and (iii)

using publicmoney,subsidize the insurance premia forlow‐income individuals. Thissystem

can bring large gains overthe existing one, as we will explain inmore detail in a follow‐up

article.

Fallacy no 2: Corruption and tax evasion cannot be eradicated because they are an

integral part ofGreek culture. Corruption and tax evasion have become part ofGreek

culture because not enough incentives are in place to discourage them. In particular,

accountability in the public sectorislow and penaltiesto offenders are lenient.No

culture‐‐‐includingGreece’s‐‐‐isimmune to corruption, which can only be eliminated by

healthy and accountable institutions.18

Why isreformofthe pension systemessential? A drastic reformofGreece’s pension system

hasrecently been voted through Parliament. Such a reformwas essential: according to

estimatesfromthe European Commission in 2009, ifGreece’s pension systemhad been left

unreformed, it would have created an additional deficit of 12.5% ofGDP by 2050 (OECD

2009b).

Thisis higherthan whatthe entire deficit(including pensions) has been on average

over each ofthe pastthree decades. Itis also higherthan spending on education and health

combined.

Greece’s pension systemwasin dire need ofreformbecause ofitsmany generousfeatures.

Table 9 reportstwo key features:the official age ofretirement and the average pension

(where the average is across all employees)(OECD2006, 2009c).

Table 9: Retirement age and level of pensions(Pre‐reform. Source:OECD)

Officialretirement age Average pension as % of

average life‐time earnings

(replacementrate)

Greece 58 95.7

OECD 63.2 60.8

EmployeesinGreece could retire at 58 years with full pension, provided thatthey had

completed 37 years of work. The retirement age of 58 wassignificantly lowerthan theOECD

average of 63.2 years. Moreover,the average pension wassignificantly higherthan the

OECDaverage: it was 95.7% of an employee’s average life‐time earnings(evaluated atthe

time ofretirement by adjusting for economy‐wide earnings growth), against anOECD

average of 60.8%.7 8

Thatthe pension systemwas unsustainable can be seen by the following back‐of‐the

envelope calculation. The social contribution thatthe governmentreceivesfromthe

average employee is 44% ofthe employee’s gross earnings, with 28% paid by the employer

and 16% by the employee (OECD2009d).

About 60% ofthis goesto pensions, and the

remainder goesto othersocial benefitssuch as health insurance.9

Suppose thatindividuals

7

Pensions are often expressed as a percentage of earnings during the last year of one’s work ratherthan as a

percentage of average life‐time earnings. This yieldssmaller numbersthan in Table 9 because earnings

increase with age. The numberforGreece is 70‐80% (OECD2009b).

8

In addition to its generous provisions,Greece’s pension systemhasmany adverse incentive effects builtin.

For example, itmakes early retirement attractive because this yields a pension thatis notmuch lowerthan the

income earned while working. Moreover,the provision that pensions depend on one’s wage during the last

five years of work ratherthan overthe entire life‐time encouragestax evasion: neither young workers nor

their employers have any incentive to declare the full wage.

9

This can be seen fromthe factthat pension contribution revenues are 7.5% ofGDP (OECD2009c), while

social contributions are 13.4% ofGDP (Table 5).19

live exactly up to theirlife expectancy, which is 80 yearsforGreece, and suppose thatthere

is no population growth. Ifindividuals work for 37 years and retire at 58,thisleaves

37/22=1.68 employeesto pay for each pensioner. Therefore, a pensioner can receive

1.68*44%*60%=44.5% of his gross earnings atretirement. Thisislessthan half ofthe 95.7%

figure in Table 9. Thus, if a reformdesigned to renderthe systemsustainable were to leave

the retirement age unchanged, it would have to reduce pensions bymore than 50%. The

recentreformreduces pensions by about 30%, but also raisesthe retirement age.

Note that a smallerreduction in pensions could be achieved by raising social contributions

beyond 44%. Social contributions, however, are already the second highestin theOECD.

Raising themfurther willmake firms even less willing to hire, and raiseGreece’s already high

unemploymentrate. Thus,social contributionsshould not be raised.

The sustainability problemofthe pension systemhad becomemore acute in recent years

because ofthe combination oftwo demographic forces: life expectancy has been increasing,

while population growth has been decreasing, almostto zero. Low population growth

impairssustainability because fewer employees are available to pay for each pensioner.

A reformreducing pensionsshould accountfor poverty in old age, which is higherinGreece

than the EUaverage. Thisshould be done by cuttingmainly the larger pensions. More

generally,reformshould addressthe unfairness ofthe pension system, whereby some

individualsreceive pensionsthat are large relative to theirlife‐time contributions, atthe

expense of otherindividuals who receivemuch smaller pensions. We nextsketch amore

radicalredesign ofGreece’s pension systemthat can renderit bothmore efficient and

fairer.

Greece’s current pension system(pre‐ and post‐reform)is pay‐as‐you‐go, where those

currently employed pay the pensions ofthose currently retired. An alternative is a funded

system, where those currently employed save fortheir own pensionsinstead of paying the

pensions ofthose currently retired. A funded systemhasmany advantages over pay‐as‐you‐

go. First, itistransparent and easy to administer. Indeed, individuals are allocated personal

retirement accounts, whose balance they can observe at anymoment. Moreover,

contribution and investment decisions aremade by the individualsthemselvesratherthan

by a time‐consuming and expensive bureaucratic process. A second and related advantage

of a funded systemisthatindividuals are in better control oftheirretirement:they can

decide how long to work and howmuch to save to achieve their desired pension. In this

sense,the systemisfair: individuals’ pensions depend on how thrifty they were when

young. A third advantage of a funded systemisthatitisimmune to the risk that population

growth slows down, while pay‐as‐you‐go imposes a large burden on public finances. Finally,

under a funded system, individualssavemore (since thisis how they can accumulate their

pensions), and these savings help finance productive investment.20

A funded systemmustinclude an element ofsocial insurance to protectthose who had bad

luck in the labourmarket, e.g., were unemployed forlong periods oftime.Unfortunately

bad luck is hard to distinguish froma choice notto work.However,the governmentshould

guarantee aminimumbasic pension payable starting at 65‐68 to anyone who has worked

for aminimumnumber of years, e.g., 10‐15. By carefully calculating the amount ofthis

pension and the age at which it will be payable, incentivesto work can be preserved.

A funded systemmustinclude some degree of protection not only against adverse

outcomesin the labourmarket, but also in the capitalmarket. Thisis because themoney

held in retirement accountsisinvested in financial assets, whose prices can drop. Individuals

can protectthemselves againstsuch drops by holding well‐diversified portfolios, and by

investing in bonds, which are saferthan stocks. Atthe same time,the government could

reinforce this behaviour by restricting individuals’ choicesto a set of well‐diversified

portfolios, and requiring thatthe allocation to bonds exceeds aminimumlevel, which

increases with age. The government could also impose a cap on allowable returnsso asto

fund aminimumreturn. For example,the cap could be 6%, and any excessreturns could be

saved in an independenttrustfund to pay forthe pensions ofthose age cohorts who

achievemuch lowerreturns.

MostOECDcountries aremoving towardsfunded systems with characteristicssimilarto

those described above. Such reformsinvolve delicate transition issues because they impose

large burdens on those currently employed, whomustsave fortheir own pensionsin

addition to paying forthose currently retired.Despite these issues, we believe thatmoving

towards a funded systemwith elements ofsocial insurance isthe right direction forfuture

pension reforminGreece.

3. Competitiveness

• Why is competitivenessimportant? Competitivenessis what allows a country to

enjoy prosperity on a sustainable basis.During the 2000s,the average income of

Greek citizensrose significantly. Thisrisewas unsustainable, however, because it

wasfinanced by external borrowing.Now thatGreece can no longer borrow, it

facesthe risk thatthe process willrun in reverse, i.e., incomes willshrink. The only

Fallacy no 3: The state must be the main provider of pensions. Basing pensions on

individualsavings allowsindividualsthe flexibility of when to retire and howmuch to

save to fund thisretirement. It also removes a potential burden on the public finances,

as well as an instrumentthat politicians can use tomanipulate the electorate’s

affections. By a suitable design,risks can beminimised and the unlucky poor can also be

supported.21

way to avoid this, and to ensure thatincomes can rise on a sustainable basis, isto

raise the competitiveness oftheGreek economy‐‐‐which currently isthe second

lowest among the 27 countries ofthe EuropeanUnion.

• How can theGreek economy be made more competitive? The governmentshould

provide a stable institutionalframework that promotes competition, investment

and entrepreneurship. Thisinvolves not as much creating new regulations as

abolishing many existing ones.A comprehensive regulatory reform alone can raise

the competitiveness oftheGreek economy‐‐‐and ultimately the incomes ofGreek

citizens‐‐‐by more than 15%,thusreversing most ofthe negative effectsthatthe

crisisis having on incomes. The government can furtherraise competitiveness by

increasing itsinvestmentin the education and human capital ofGreek citizens.

• What key reforms are needed in the product market? Regulationsthat prevent

entry into many industries and professionsshould be abolished.Abolishing such

regulations will promote investment much more effectively than through

investmentsubsidies. Monopoly practicesshould be prosecuted more vigorously

and the Competition Commission should be strengthened.

• What key reforms are needed in the labour market? Regulationsthat make it

difficultforfirmsto fire workersshould be loosened. This will ultimately benefit

workers becauseGreece will attract more investment and well‐paying jobs.

Mobility of workers acrossfirms and industriesis a sign of a healthy economy, but

mobility inGreece isthe lowestin theOECD.

Why is competitivenessimportant? ForGreek citizensto have accessto well‐paying jobs and

high incomes, and thisto happen on a sustainable basis, itis necessary thatthe economy is

competitive. Ifthe economy is not competitive and yetincomes are high,thismust be

becausemoney isflowing in fromabroad in the formoftransfers(e.g.,fromthe EU) or

external borrowing. In both cases,the high incomes are unsustainable: EUtransfers do not

lastforever, and external borrowing comes atthe expense oflow incomesin the future.

Greece’s performance during the last decade illustratesthe importance of competitiveness.

Table 10 reportsthe average growth ofrealGDP during 2000‐8,the change in

unemployment during that period, andGreece’s competitivenessin 2002 and 2008. Real

GDP isGDP adjusted forinflation, i.e., asif pricesin 2008 were the same asin 2000.

Competitivenessismeasured by the number of EU27 countries whose World Economic

Forumindex of competitivenessis above that ofGreece.

Table 10:Growth and competitiveness during the 2000s(Source: Eurostat,OECD, WEF)22

Average growth

ofrealGDP,

2000‐8

Change in

unemployment,

2000‐8

Competitiveness

rank among

EU27 countries

in 2002

Competitiveness

rank among

EU27 countries

in 2008

Greece 3.9% ‐4.0 17 26

EU27 average 2.0% ‐2.2 14 14

During 2000‐8,Greece grew itsGDP twice asfast asthe EU27 average, and reduced its

unemploymentrate by twice asmuch. The high growth translated into high incomes:

incomes grew fasterinGreece than inmost other EUcountries. Yet,this growth was

unsustainable‐‐‐as became painfully evident during the current crisis‐‐‐because it was not

driven by improvementsin competitiveness. Indeed,Greece’s competitiveness, which was

already among the lowestin the EUatthe beginning ofthe last decade, decreased even

further during that decade. For example, in 2002,there were eight EU27 countriesless

competitive thanGreece, and in 2008 there was only one (Bulgaria).

Growth and job creation during 2000‐8 weremainly driven by themoney thatthe

government was borrowing fromabroad and pumping into the economy. For example,the

governmentspentsome ofthemoney on public infrastructure, causing activity to increase

and jobsto be created in the construction sector.Growth and job creation propagated

throughoutthe economy, asthose whose incomesincreased spentmore on other goods

and services. For example,those working in the construction sector could spendmore on

holidays, causing activity to increase and jobsto be created in the tourismsector, and so on.

External borrowing is no longer possible forGreece;Greecemustinstead pay back its debt.

Thisraisesthe alarming prospectthatthe process described in the previous paragraph will

run in reverse, i.e., jobs and incomes willshrink overmany yearsto come.Negative growth

has already begun:for example,realGDP shrunk in 2009.

The only way to avoid a protracted crisisinGreece and to ensure thatincomes can rise on a

sustainable basisistomake the economymore competitive. The brightside aboutGreece’s

abysmally low competitivenessisthatthere ismuch roomforimprovement, and so high

potentialfor growth and prosperity. We next explain how this potential can be realized.

How can theGreek economy bemademore competitive? An economy is competitive ifits

firms and workers can achieve a high level of productivity. When productivity is high, jobs

pay well and incomes are high. Moreover,the economy can attractinvestment by foreign

firms, which createsmore jobs and furtherraisesincomes.

Themain determinant of competitivenessisthe set ofrulesthat govern the operation of

markets. These rulesshould promote competition, investment and entrepreneurship. Rules

that are well designed and enforced vigorously canmake a country competitive and

prosperous.23

Greece’slow competitivenessis not due to a lack ofrules. Indeed,theGreek economy is

one ofthemost heavily regulated (i.e.,tightly controlled by the state)in theOECD:the

product(i.e., goods and services)marketisthemost heavily regulated of all 30OECD

countries, and the labourmarketisthe fifthmostregulated (OECDproductmarket

regulation indicators 2008,OECDemployment protection indicators 2008).

Many ofthe

regulations create serious obstaclesfor competition, investment and entrepreneurship, and

should be abolished. Atthe same time,the few regulationsthat promote the good

operation ofmarkets are not enforced vigorously enough. Thatshould change as well.

Because theGreek economy is heavily and inefficiently regulated,there are large benefitsto

reap fromregulatory reform. According to theOECD(Scarpetta and Tressel 2002) a

comprehensive regulatory reformalone can raise the competitiveness oftheGreek

economy‐‐‐and ultimately the incomes ofGreek citizens‐‐‐bymore than 15%. This can

reversemost ofthe negative effectsthatthe crisisis having on incomes.

Ifregulatory reformcan yield large benefits, why hasn’titmaterialized yetto a significant

extent?One reason isthe political pressure byminority groups who would stand to lose

fromspecific reforms. For example,regulationsthat prevent entry into an industry or

profession, and so impair competition, benefitthe firmsin thatindustry orthemembers of

that profession because they enable themto charge high prices. Therefore,the industry or

profession representativeslobby politicianstomaintain such regulations.

An additionalreason why regulatory reformhas not been high up on the political agenda is

thatthe general public has notfully grasped its benefits. Indeed,there is a widely‐held belief

thatmarketsshould be heavily regulated because they produce undesirable outcomes when

leftto operatemore freely. This beliefis partly justified given the public’s experience:

marketliberalization inGreece has often resulted in higher prices. Atthe same time,the

beliefis erroneous becausemarkets weremade free only nominally but notin substance:

regulations preventing entry by new firms were leftin place and “freedom” pertained only

to the ability ofthe existing firmsto raise their prices.Notsurprisingly, pricesincreased, and

thisreinforced the public’ssuspicion offreemarkets.Had instead entry been liberalized at

the same time as prices, prices would have decreased, andmarketliberalization would have

benefited the public.

Fallacy no 4: Prices of many goods are affordable only because the governmentis

imposing price ceilings; if markets are liberalized, prices will go up. Markets are truly

liberalized when regulatory obstaclesto entry are removed. Such obstacles are imposed

by the government, often because of political pressure by incumbentfirms and other

vested interests. Removing theminduces entry, and thisresultsin low prices withoutthe

need to impose price ceilings. Regulationsthat control directly the level of pricesshould

be used sparingly, when themarketistoo smallto sustainmany firms.24

In addition to sound rules governing the operation ofmarkets, competitivenessrequires a

highly educated workforce:thismakes existing firmsmore productive and helps attract new

firms, especially those engaged in high technology and high growth activities. As we

showed in Section 2,Greecemust performbetterin the area of education: both by

allocatingmore resourcesto it and by ensuring thatresources are usedmore productively.

Itshould also investmore in research and development(R&D), an area which currently

receives very few resources. For example,Greece invested only 0.6% ofitsGDP in R&Din

2007. The average acrossthe 30OECDcountries was 2%, withGreece scoring the third

lowest.

Improvementsin education will not bearmuch fruit unlessthey are combined with

regulatory reformthatmakesit easierforfirmsto operate inGreece. Indeed, in the absence

ofregulatory reform, high technology and high growth firms will not come toGreece, but

instead educatedGreeks willmigrate abroad. Because regulatory reformwill induce such

firmsto come, it will not only stemGreece’s brain drain, but will also induce educated

Greeks whomigrated abroad because of betterjob opportunitiesto return home.

What key reforms are needed in the productmarket?One key reformisto reduce

drastically the regulatory obstaclesthat prevent entry intomany industries and professions.

Reducing these so‐called “barriersto entry”makes an economymore competitive fortwo

reasons. First,the new firms entering an industrymight bemore productive than the

existing ones because they have bettertechnologies orideas. Thisraisesindustry‐wide

productivity. Second, even ifthe new firms are equally productive asthe existing ones,

competition becomesmore intense because there aremore firms. Thislowers prices, and

benefitsfirmsin otherindustriesthat use asinputthe output ofthatindustry. The costs of

these firms decrease and their productivity increases.

Tomake thingsmore concrete, we use an example that has been in the newsrecently:road

transportation. Firmsthat wantto enterthisindustry are currently required to pay a high

licence fee, which can be up to 200000 Euros pertruck. Reducing this barrierto entry will

enablemore firmsto enterinto the industry and will lower prices. Lower prices will, in turn,

raise the productivity of firmsin otherindustriesthat depend on road transportation, e.g.,

agriculture, construction, etc. For example, iffarmers can transporttheir productsmore

cheaply and tomore destinations,they will have an incentive to producemore and to invest

inmore efficient productionmethods. The productivity gains are large: according to IOBE

(2007), eliminating the licence fee, and so liberalizing road transportation, will lower

transportation prices by 20% and raiseGreece’sGDP by 0.5%.

The gainsinGDP achieved by liberalizing road transportation willtranslate to a higherreal

income forthe average citizen. Indeed, citizens will pay lower pricesifthey need tomove

homes and transporttheir belongings. They will also pay lower pricesfor goodsthat depend

on road transportation,such as agricultural products. Finally, jobs will be created and

incomes willrise in industriesthat depend on road transportation.Of course, not everybody25

will benefit: holders oftransportation licences will lose. These losses, however, will bemuch

smallerthan the gainsfor everyone else, and could be compensated to some extent by a

time‐limited tax credit. Losses will additionally be compensated by the factthat holders of

transportation licences will benefit, as consumers,fromthe lower prices achieved by

reducing entry barriersinto otherindustries.

Regulatory barriersto entry can takemany forms. Some are due to regulationsthatlimit

entry explicitly, asin the case ofroad transportation. Such regulations have been abolished

in some industries during the last decade, partly because of pressure by the European

Union. Those thatremain should also be abolished.

Other barriersto entry are due to bureaucratic hurdlesthatthe governmentimposes on all

firms and citizens. For example, a new firmthat wantsto build a factorymust obtain an

array of permitsfrommultiple authorities, which require ittomeetmany complicated legal

requirements. This providesfertile ground for corruption. Indeed, a firmhas an incentive to

bribe corrupt public servantsso to get around the bureaucratic hurdles and enter an

industry. And existing firmsin the industry have an incentive to bribe so that entry can be

prevented.

Reducing the bureaucratic barriersto entry requiressimplifying and clarifying the

institutional framework which governsthe establishment and operation offirms. For

example,the absence of clearzoning laws creates complexity and ambiguity for obtaining a

permit by the urban planning office, and is a source of corruption;thisshould change. A

simple and transparentinstitutional framework will not only encourage entry and

investment, but also reduce corruption in the public sector as we emphasized in Section 2.

Moreover,the beneficial effect on investment will bemuch largerthan that of direct

investmentsubsidies, which are also subjectto favouritismand corruption.

The bureaucratic barriersto entry are especially importantforforeign firms, which are not

familiar withGreek laws and culture. And indeed,foreign directinvestmentinGreece is

extremely low: between 2003 and 2008 it was only 1% ofGDP. The average acrossthe 30

OECDcountries was 4.1%, withGreece scoring the fourth lowest.

Fallacy no 5: The bestrecipe for growth isforthe governmentto identify promising

industry sectors and subsidize investmentin them. More often than not, investment

subsidies end up in the pockets of politicalfriends and are wasted. Those best qualified to

determine promising industry sectors are not public servants but private entrepreneurs

who investtheir ownmoney. The bestthatthe government can do isto provide a simple

and stable institutionalframework in which firms can operate‐‐‐which in the case of

Greecemeans dismantlingmany ofthe existing regulations and ensuring thatthe few

which are useful are enforced vigorously.26

Even ifthere were no regulatory barriersto entry,some industries could support only a

small number offirms because the size ofthemarketissmallrelative to the size at which

firms can operate profitably. For example,there are fewer airlinesthan road transportation

firms because the former can operate profitably only at a large size. An industry that can

support only a small number offirmsis prone tomonopoly practices, e.g.,firmsforma

cartel and charge high pricesto consumers. Regulation in such industriesshould aimto

monitor and prosecutemonopoly practices. InGreece,this activity is performed by the

Hellenic Competition Commission (HCC).

While theHCC hasmade some stepsforward in the

last decade, itlagsin efficiency relative to its counterpartsin otherOECDcountries. Firms

that engage inmonopoly practices are often not prosecuted, while firmsthat do not engage

in such practices are occasionally prosecuted because of political or other considerations.

TheHCC should strive to implementthe law in a transparent and consistentmannerthat

adheresto the best practicesin the EU. This will yield significant benefits: prices will

decrease inmany industries, and economy‐wide employment and productivity will increase.

TheHCC should be strengthened in terms of human resources, independence fromthe

government and accountability.

What key reforms are needed in the labourmarket?One key reformisto loosen the

regulationsthatmake it difficultforfirmsto fire workers. Themain such regulations concern

severance paymentsthatfirmsmustmake to workers who they fire, and limits on the

number of workersthatfirms can fire in any givenmonth. A reformthatlowersseverance

payments and raiseslimits on collective dismissals hasrecently been voted through

Parliament. It goesin the right direction, although the regulationsshould be loosened even

further.

Reducing firms’firing costsisin the bestinterest not only of firms but also of workers:this

may appearsurprising, butistrue as we explain below. Butfirst, itis usefulto clarify for

which workersfiring regulationsshould be loosened.Greece has a large informal economy,

which accountsfor 25‐30% ofGDP (Katsios 2006) and where employment protection is

minimal‐‐‐in particular,firing is unregulated. These workersshould be broughtinto the

formal economy and provided with employment protection. Additionally,firing regulations

for blue‐collar workers aremuch looserthan for white‐collar. Firing regulationsshould be

the same for all workers, and thisshould be accomplished by loosening those for white‐

collar.

How can reducing firms’firing costs benefit workers? First,firms will be better able to

survive a downturn andmore eagerto hire again when business picks up. Indeed, a firm

thatis unable to reduce sharply its workforce in a downturn faceslarge costs and possibly

even bankruptcy. Low firing costs can prevent bankruptcy, and so allow atleastsome

workersto keep theirjobs. Moreover, low firing costs willmake the firmmore eagerto hire

again when business picks up because it knowsthatit can reduce its workforcemore easily

in the next downturn.27

Perhapsthemain benefit oflow firing costs‐‐‐and offlexible labourmarketsin general‐‐‐ is

thatthey attractmore investment, including by foreign firms. As already emphasized,

foreign directinvestmentinGreece is very low because foreign firms are reluctantto enter

intoGreece’s heavily regulatedmarket. Making the labourmarketmore flexible,together

with the additionalreforms discussed earlier, will bringmore investment and well‐paying

jobs.

Finally, low firing costs(and lighterregulationsin general) will bringmore activity fromthe

informalto the formal economy: one reason why activity becomesinformal isthe high

regulatory burden. The beneficial consequences will be that workersin the informal

economy willreceive employment protection, and the government will collectmoremoney

in taxes and social contributions.

A reformthatlowersfiring costs will generate some losersin the shortrun:the workers who

will lose theirjobs as a consequence. But once the reformprocessis well underway and the

Greek economy picks up, everybody will benefit asmore and better paid jobs will become

available. Those currently unemployed, a disproportionate fraction of whomare young, will

particularly benefitsince they will be able to find jobsmore easily.Opposing labour‐market

reformserves only to protectthe short‐run interests of only a fraction of employed workers

(white‐collar), withoutregard to the remaining workers and the unemployed‐‐‐and without

regard to the long‐run benefitsthatthe reformwill bring to all workers.

Some have argued thatreducing firing costsisirrelevant because these affect only large

firms, which are not prevalentinGreece. For example,firms with fewerthan ten employees

are notsubjectto any limits on collective dismissals, and they constitute 98% of allGreek

firms. This argument, however,serves only to reinforce our point: one ofthe reasons why

Greece does not have large and dynamic firmsis because ofitsstrictlabour‐market

regulations, which discourage foreign directinvestment. Loosening these regulations will

affect not asmuch the firmsthatGreece currently has, asthose thatit does not have and

should aspire to have.

Fallacy no 6: Regulationsthatrestrictseverely firms’ ability to fire workers are good

for workers. Tightfiring regulations discourage job creation because ofthe potential

costs of adjusting the workforce in a downturn. Youth, who are inexperienced and

untried, are particular victims ofsuch policies as evidenced by the huge youth

unemploymentratesinGreece and other countries with tightlabourmarketregulations,

such as France and Spain.28

A second key reformisto decentralize labour negotiationsto the level ofindividual firms.

Wages and working conditions are currently agreed on atthe national orindustry level, and

firms are required to conformto the agreements whether or notthey are represented in

the negotiations. Many issues, however,should be leftfor negotiation between individual

firms and their workers. Thisis because differentfirmsface differentmarket environments,

and requiring thatthey all offerthe same wages or working conditions damagestheir

productivity. For example, a firmfor which overtime work is valuable could negotiate a

lower compensation for overtime with its workersin exchange for a higher overall wage.

Such flexibility is not available in the currentsystem.We recommend that negotiations at

the national orindustry level concern onlyminimumlevels of wages and working

conditions, leaving significantroomfortop‐upsto be negotiated atthe firmlevel.

A flexible labourmarketshould be accompanied by a well‐developed unemployment

insurance system.Greece hasrelied on firmsto insure workers against unemployment,

through severance payments and otherrestrictions on firing. Thisisinefficientforthe

reasons discussed earlier.Unemploymentinsurance should instead be provided by the

government, and in a way to avoidmoral hazard, i.e.,make unemploymenttoo attractive an

option. We recommend amodern contributory unemploymentinsurance system. In such a

systema basic component comesfromthe generaltaxpayer and an additional componentis

tied to individual contributions. Individuals can accumulate contributionsin an

unemploymentfund, which they can run down during spells of unemployment. Thissolves

the insurance problemand atthe same time keepsmoral hazard to aminimumby linking

the amount of unemployment benefitsto the level of contributions;thissoundslike

compulsory savings, which itis. The pointis preciselymoral hazard, because ifindividuals

know thatthe government will pick up the bill when they are unemployed they will notsave

enough.

Conclusion

The economic policies ofthe lastthree decades have broughtGreece close to bankruptcy.

Reformsthat other countries undertookmany years ago were postponed over and over

again, leavingGreece with an unproductive public sector, an unfair and inefficienttax

Fallacy no 7: Tightlabour marketregulations do not matterifthe economy has a

vibrantinformalsector, where these regulations can be circumvented. Firmsin the

informal economy are typically small and in low value‐added sectors. Large firms, which

are typically in high value‐added sectors, cannot operate in the informal economy. Tight

labourmarketregulations(and tightregulationsin general) discourage the creation of

large firms,thussubsidizing low value‐added sectors and low skill labour atthe expense

of high value‐added sectors and high skill labour.29

collection system, an unsustainable pension system, and a heavily regulated economy

whose competitivenessislow and declining.

The lack ofreforms has been especially costly forGreece’s young. The education thatthe

state is providing themwith lagsrelative to internationalstandards.Once they finish their

studies,they find it hard to enterthe labourmarket because strictregulations discourage

firmsfrominvesting and creating jobs. When the young will eventually find jobs,theirtaxes

will be high to repay the debtthat previous governments have accumulated, and so will

theirsocial contributionsto pay forGreece’s generous pensions.UnlessGreece reformsits

economy rapidly, itrunsthe risk thatthatmany ofits young (and especially themost

creative and entrepreneurial ones) willmigrate abroad.

The brightside aboutGreece’s currentsituation isthatmuch improvementis possible.

Indeed,there exists a clear path ofreformsthat can helpGreece recovermuch ofthe lost

ground. The reforms agreed betweenGreece and itslenders go in the right direction, and

should be supported:for example,the reformsrecently voted through Parliament

concerning the pension systemand the labourmarket are necessary and overdue. This

article explains why such reforms are necessary, and outlines a broaderlong‐run reform

programme fortheGreek economy

The reforms outlined in this article will benefitthe economy and raise the income ofthe

average citizen. Atthe same time, aminority will lose fromeach reform. For example,

lowering regulatory barriersto entry into an industry will benefit consumers and will

increase employment, but will hurt existing firmsin the industry. Those who lose fromone

reform, however, will benefitfrommany others, and once enough reforms are implemented

almost everybody will have gained. Reaping these gainsrequiresthatreforms are

implemented successfully and without delay.

References

Cabral, R.(2010), “The PIGS’ ExternalDebt Problem”, VoxEU.org, 8 May.

Flevotomou, M. and M. Matsanganis(2010), “Distributional Implications of Tax Evasion in

Greece”, LSEHellenicObservatory Working Paper.

Katsios, S.(2006), “The Shadow Economy and Corruption inGreece”, South‐Eastern Europe

Journal of Economics, 1:61‐80.

OECD(2006), Ageing and Employment Policies, Paris.

OECD(2009a),HighlightsfromEducation at aGlance, Paris.

OECD(2009b),OECDEconomic Survey:Greece, Paris.30

OECD(2009c), Pensions at aGlance, Paris.

OECD(2009d), Taxing Wages, Paris.

Rapanos, V. (2009), “Μέγεθος και Εύρος Δραστηριοτήτων του Δημόσιου Τομέα”,

Foundation for Economic&Industrial Research (ΙΟΒΕ) Working Paper.

Scarpetta, S. and T. Tressel(2002), “Productivity and Convergence in a Panel ofOECD

Industries:Do Regulations and Institutions Matter?”OECDEconomicsDepartmentWorking

PaperNo 342.

Review of l iterature

The Build-Up to Greece’s Debt Crisis

The Greek government has a long history of problems with its public debt—it has spent more

than half the years since 1832, in default, when it gained independence from the Ottoman Empire.

Economists point to several deeply entrenched features of the Greek economy and Greek

society in general that have prevented sustained economic growth and created the conditions

underlying the current crisis. Chief among these are pervasive state control of the economy, a

large and inefficient public administration, endemic tax evasion, and widespread political

clientelism. An influx of capital at low interest rates during the 2000s and the

global financial crisis of 2008-2009 further exacerbated these problems, straining public finances

to an unsustainable degree.

Selected Features of the Greek Economy Underlying the Crisis

As recently as 1990, the Greek state controlled about 75% of all business assets in the country and tightly regulated

other sectors of the economy. The state reduced its stake to about 50% by 2008. Nonetheless, according to the

Organization for Economic Cooperation and Development (OECD), much of the private sector continues to “suffer

from weighty and complex regulations and from the lack of a coherent and systematic approach to rule-making.”

In the decade before the crisis, a significant portion of rising government expenditures was allocated to increasing public

sector wages and benefits. As recently as 2009, Greek government expenditures accounted for 50% of GDP, with

75% of (non-interest) public spending going to public sector wages and social benefits. According to the OECD, while

spending on public administration as a percentage of total public expenditure has been the highest in the OECD,

there has been “no evidence that the quantity or quality of the services are superior.”

Analysts often point out that Greek politicians have traditionally viewed the provision of public sector jobs and

benefits as an important way to grant favors and thereby secure electoral support. Among other things, this tendency

appears to have helped politically influential public sector unions consistently negotiate generous wage and pension

agreements.

Clientelism may also be an important factor behind pervasive tax evasion and a complex tax code that grants

exemptions to numerous professions and income brackets. According to Greek government officials, until the debt

crisis, the state taxed only one-third of officially declared income, at an average rate of about 30%. This excludes

profits from an unrecorded economy that some value at upwards of 30% of the official GDP.

Most analysts view tax evasion and deeply rooted political clientelism in Greek society as symbolic of a broader

distrust of state institutions. In its 2010 Corruption Perceptions Index, Transparency International ranked Greece as

the most corrupt country in the EU, just behind Bulgaria and Romania.

As Greece prepared during the 1990s to adopt the euro as its national currency, its borrowing

costs dropped dramatically. Interest rates on 10-year Greek bonds were dropped by 18% (from

24.5% to 6.5%) between 1993 and 1999

Investors believed that there would be widespread

convergence among countries in the Eurozone. This belief was reinforced by the policy targets,

called convergence criteria, that countries had to meet in order to be eligible to join the Eurozone.

Additionally, the common monetary policy was to be anchored by economic heavyweights,

including Germany and France, and managed conservatively by the ECB. EU member countries

were also to be bound by rules in the Stability and Growth Pact that limited government deficits

(3% of GDP) and public debt levels (60% of GDP).

These limits were to be enforceable through

fines of up to 0.5% of GDP.

All of these factors created new investor confidence in Greece and

other Eurozone member states with traditionally weaker economic fundamentals compared to, for

example, Germany.

The influx of capital and pursuit of meeting convergence criteria did not result in a fundamental

change in how the Greek economy was managed or in investments that increased the

competitiveness of the economy. The Greek government took advantage of greater access to

cheap credit to pay for government spending and offset low tax revenue. The government also

borrowed to pay for imports from abroad that were not compensated by exports overseas. Government

budget and trade deficits ballooned during the 2000s and borrowed funds were not

channeled into productive investments that would generate future growth, increase the

competitiveness of the economy, and create new resources with which to repay the debt.

Instead,

the inflows of capital were used to fund current consumption that did not yield streams of revenue

with which to repay the debt.

EU policies that had been put in place to provide a check on the accumulation of public debt

failed to do so. Since 2003, the EU has initiated more than 30 cases against members in violation

of the fiscal rules set out in the Stability and Growth Pact, including Greece. Through this

process, EU institutions have reprimanded member states in violation of the deficit and debt

limits and pressured them to consolidate public finances. However, It has never imposed a financial sanction against a member state in violation of these limits.

.

7

Global Financial Data.

8

Resolution of the European Council on the Stability and Growth Pact, Amsterdam, June 19, 1997, Council Regulation

(EC) 1466/97, and Council Regulation (EC) 1467/97, http://ec.europa.eu/economy_finance/sgp/legal_texts/

index_en.htm.

9

Daniel Gros and Cinzia Alcidi, “Adjustment Difficulties and Debt Overhangs in the Eurozone Periphery,” Center for

European Policy Studies, Working Document No. 347, May 2011. Greece’s Debt Crisis: Overview, Policy Responses, and Implications

Congressional Research Service 4

Figure 1. Greece’s “Twin” Deficits: Budget and Current Account Deficits, 1999-2009

Source: International Monetary Fund, World Economic Outlook, April 2011.

Notes: Budget deficit and government debt for all levels of government (local, state, and central governments).

Public debt levels is for gross debt (total financial liabilities), rather than net debt (total financial liabilities minus

total financial assets).

The Triggers: Global Financial Crisis and Revelations of MisReported Data

The Greek government’s reliance on borrowing from international capital markets to pay for

budget deficits and trade deficits left it vulnerable to shifts in investor confidence. If investors lost

confidence in the Greek government’s ability or willingness to repay its debt, they would stop

lending to the government or charge interest rates that were higher than what the Greek

government could afford. Lack of access to new funds would make it difficult for the government

to borrow to repay existing debt as it became due (called rolling over its debt), meaning that the

government would have to implement austerity measures quickly or risk defaulting on its debt.

Starting in 2009, investor confidence in Greece’s ability to service its debt dropped significantly.

The global financial crisis of 2008-2009 and the related economic downturn strained the public

finances of many advanced economies, including Greece, as government spending on programs,

such unemployment benefits, increased and tax revenues weakened. Greece’s reported public

debt rose from 106% of GDP in 2006 to 126% of GDP in 2009.

Additionally, in late 2009, the new government, led by Prime Minister George Papandreou,

revealed that previous Greek governments had been under-reporting the budget deficit. The new

government revised the estimate of 2009 budget deficit from 6.7% of GDP to 12.7% of GDP.

This was shortly followed by rating downgrades of Greek bonds by major credit rating agencies.

The Greek governments had attempted to obscure debt levels through complex

International Monetary Fund, World Economic Outlook, April 2011. Debt for all levels of government (local, state,

and central governments), and is gross debt (total financial liabilities), rather than net debt (total financial liabilities

minus total financial assets).

11 “Is Greece Heading for Default?,” Oxford Economics, January 29, 2010.

20In Greece, there is no globally competitive industry to speak of.According to Lynn (2011), Greek industry remains stuck in the past andlargely unable to compete in the modern world. Greece’s railway industryloses more money than any other transportation system in Europe. In total,the railway industry was estimated in 2010 to be costing Greeks between 2million and 2.5 million euros per day. Lynn speculates that the railwayindustry is not meant to be profitable. Instead it is meant to preserve the jobs for its 6,500 workers, half of whom are over 50 and will collectinggenerous pensions soon (Lynn 2010).Only Manolopoulos (2011) writes about how Greece’s accession to theeurozone in 2001 actually accelerated the demise of its manufacturingindustry. In effect, adopting the euro has made Greek exportsuncompetitive, thereby contributing to its uncompetitive economy.Understanding this dynamic is crucial to recognizing the underlying factorsthat led to financial crisis. This notion will be further discussed in anothersection of this paper.

Progressive Tax System

The Greek tax system has been criticized for being too progressive,where a small proportion of the wealthy population pays the vast majority of income taxes, and the average-income family pays no taxes at all.According to Mitsopoulos and Pelagidis (2011), higher income earners bearthe highest tax burden, yet there are not many of them. The vast majority of the Greek population declares a low-enough income to effectively make

21them exempt from taxation. This is because Greece has a very low tax-freethreshold in which workers earning less than 12,000 euros per year do nothave to pay any income tax. There is a strong incentive for Greek to cheaton their taxes and declare a much lower income than they actually make. The Greek income tax system effectively encourages tax evasion.Mistopoulos and Pelagidis (2011) explain how Greek politicians enablethis sort of tax evasion. Politicians do not try to force the vast majority of citizens to pay income tax because that would be the end of their politicalcareer. It is a matter of votes. The politicians do not make the middle andlower income earners pay taxes because they represent a large voter base.Instead the politicians make the much smaller voter base of the wealthy andhigh-income Greeks pay the majority of taxes. It is thus more rational forGreek politicians to allow the majority of people to evade taxes, and force asmall minority to pay the lion’s share of the taxes. Manolopoulos (2011)supports this claim when saying, “The authorities hound the honest few, andlet the thousands of high income individuals escape with impunity.”Not paying taxes is a traditional way of life for middle and lower-income Greeks (Stelzer 2010; Malkoutzis 2011a; Lewis 2010).

According toManolopoulos (2011), “Tax avoidance…is a national pastime in Greece”(O@103).

Or as Michael Lewis (2011) from the Vanity Fair explains, “It hasbecome a cultural trait…The Greek people never learned to pay their taxes.And they never did because no one is punished. No one has ever beenpunished. It’s a cavalier offense–like not opening a door for a lady”.

22 The rampant tax evasion in Greece is a cultural tradition that datesback to Greece’s subjugation by the Ottoman Empire for over 300 years. Awhole way of life emerged among the Greeks that grew up around survivaland resistance from the Turks. At this time, Greeks were expected to pay a“haratzi” or an Islamic poll tax levied on Christians. Greeks also had to carrya receipt certifying their payment of taxes at all times or face imprisonment. Thus, Greeks made it a point to not pay taxes to signify a resistancemovement. After Greece won its independence, tax evasion continuedbecause many of the politicians that took control after the Ottoman Empirewere former tax collectors. Greek citizens continued to avoid paying taxesto these politicians. The culture of evading taxes has persisted forgenerations of Greeks (Manolopoulos 2011).

Tax evasion exists on such a large scale that there are in effect twoparallel economies: the formal and informal, i.e., black economy(Manolopoulos 2011).

The formal economy obviously refers to the legitimatetax system where taxes are paid to the state such as sales tax. The informaleconomy exists to avoid paying sales tax and due to the rampant briberyand kickbacks that are expected when obtaining services within the Greekeconomy. According to Transparency International, the black economyaccounts for around 40 percent of GDP annually. Bribes are paid in everysector of the economy, for example, to doctors for preferential treatment, toobtain building permits, and to tax inspectors who turn a blind eye to fudgedreturns (Lynn 2011).

According to Lynn (2011), to jump to the top of a

23waiting list for an operation in the state hospital costs about 2,500 euros. Toget your car through a vehicle-emissions inspection would cost around 300euros. It has been estimated that the average Greek family pays about1,500 euros in bribes every year. The clear problem with the black economyis that none of these funds can be collected by the government and utilizedto pay back its debt

Conclusion

To sum up; Greece has been spending beyond its means for 15 years. It now owes 150% of its GDP, which in real terms means it owes one and a half times its country total output per annum.

This debt to output ratio is rising all of the time. The reality is that it was fighting to pay down its deficit prior to entering into a deep and prolonged recession which made its position further untenable. It has borrowed so much money that it can only afford to pay off the interest on the sums borrowed and that too they can only pay off that part with borrowed money, so its caught in a trap. Having passed the much dreaded additional austerity measures the harder part will be the implementation, which however you look at it will damage the economy further making it even more difficult to repay the loans.

As Greece cannot and will never be able to pay down the capital sum it is inevitable that it will default at some point in the future. This is the point. The question is not whether Greece defaults but when it will default. The markets have quite rightly responded positively. There are two trains of thought: One, we see them default now. This is what the markets want to avoid. If Greece defaulted now, it would mean the European Central Bank (ECB) and many international Banks (including UK banks) losing significant sums of money at a time when many of them are still rebuilding their balance sheets after the last crash and also fighting to increase internal liquidity to meet new capital adequacy requirements imposed on them by the regulatory authorities. The markets would push up the interest rates on other debt such as Ireland, Portugal, Italy and even the UK, though this is less likely.

This would likely mean another Credit Crunch as the banks would not be able to lend and the negligible increases in domestic lending would be wiped out; the economy could well slide back into a shallow recession and all that comes with that. This is what the markets pretty much expect. This whole process has been about buying time and pushing the eventual fall-out to a time when the economy is more affluent. If they continue to default further down the line when the global economy can absorb such an impact contagiousness is a lot less likely. The idea is that further down the line the banks will be in a better position to allow a structured default. I.e. they will be able to part write-off some of the loans to allow Greece to reduce the capital sum. This could be a loan for 50 years or so. At the moment they are not able to do this as the banks can’t afford to.

A summary of the Greek crisis and people’s attitude

Contrary to what you may believe, Greece is quite a wealthy country, considering it’s wealth (private+state assets over 2 trillion euros) and low population (11 million).

However, since the aftermath of WW2, it is also a country which has been exclusively controlled by the west, through puppet governments.

These puppet governments, and especially those who reigned from 1981 to 1993, took the debt from 25% and skyrocketed it to 115% relative to the GDP. They also de-industrialized the country, enlarged the public sector and generally cultivated a culture of corruption. However, the main problem was the huge debt. Also worthy of mention was the looting of pension funds – insuring that the state will have the pay for this missing money in the future (cost: hundreds of billions of euros).

Looting of the pension funds took place in the 80s, 90s and 2000s through various forms like forcing the pension funds to deposit their money with 0% interest (!) when inflation was running at 20-25% rates, buying stocks when the stock market was at high levels (consequently losing a lot of money), toxic bonds etc.

In the 90s, the puppet governments started privatizing state wealth either wholly or through the stock market. This includes most prior state monopolies like banks, the telco, the energy company, water companies, gambling company / casinos, refineries, gold mines, postal service, airways, roads etc. It was done slowly, and through carefully orchestrated social engineering, so as not to cause uprising. For example the enlargement of the public sector was blamed as THE cause of the economic failure and thus the solution was presented in the form of government shrinking. While government size was a very large problem due to their expenses, it was not the non productive office employees who got sacked, it was the profitable state companies which were privatized by using this social consensus. And thus the government had even less income to pay the ever increasing number of public sector employees (which are increasing steadily since 1981).

So no government actually wanted to rationalize the public sector – they just wanted to “shrink” the profitable assets – but to do this they first created a consensus in the form of “big government”.

Anyway, the debt situation was further escalated by the reduction of corporate taxes (it led to over 40 bn euros in losses these last 10 years) and the non-utilization of natural resources like oil, gas, precious metals, industrial metals etc which are worth hundreds of billions of euros. These assets would ensure positive budgets (and debt repayment) however, the governments, being controlled from the globalists, did not touch those assets so as to be used for later – when increased debt is accrued and becomes non-viable. Then, these assets can be used as “repayment”. It’s an economic slavery condition.

When the new puppet government came to power in October 2009, it implemented a plan of quickly putting the country into IMF custody through manufacturing a false borrowing crisis that peaked at the dilemma of bankruptcy vs austerity and IMF aid.

Most Greeks do not understand this whole picture. However, they do understand this: Something wrong has happened with fiscal management, and it’s the government’s fault, not their fault. They’re working harder than any other European (over 2100 work hours per year compared to around 1500 hours for central-Europeans), they’re overtaxed and they get the blame for everything. Media will try to spin this back to the people for tax-evading or being corrupt, however in the 70s for example, people were paying less taxes than what they’re paying now – yet the state was booming and debts where minimal (