Greece: misjudgment to breakdown

A series of conversations with young Athens professionals convinces Daniel Nethery that Greece's problems are more complicated than easy diagnoses often allow.
Daniel Nethery
28 February 2012

The flight from Berlin to Athens is only a few short hours. At the airport I step into a modern metro system and emerge not far from the Acropolis. The sunlight on my face is glorious, but the glare is blinding. This is almost the shortest day of the year, and the muscles in my eyes seem to have grown lazy with the dim German winter. It takes a whole afternoon of wandering through the hilly, citrus tree-lined streets of Athens for my eyes to adjust.

I meet my friend Stathis outside the building where he works as a risk analyst. We wander past what he calls "some ancient stuff" - the Temple of Olympian Zeus - and come upon a monument to more recent history: a burned-out office block. Then we reach Syntagma Square, the centre of Athens, overlooked by the Greek parliament.

For over three months in 2011 the square and the streets around it were full of protesters. "I was working with a consulting firm on a project for the Greek National Bank," Stathis says, pointing to a building that fronts onto the square. "I could see everything from my office." He witnessed the clashes with the police, but he also saw many positive things. "People set up tents and began to live here. Community projects started up. There were even yoga classes. There were direct democracy parliaments, like in the ancient times - people sitting around in a circle and talking. Motions were voted on, passed, and published on the internet."

The protests failed to prevent parliament from enacting a severe austerity package, the impact of which is very real. When we have dinner that night in a Cretan restaurant, the owner tells Stathis that he has many friends in Melbourne who have for many years been encouraging him to move there; now he is thinking of taking their advice. When the bill comes, I understand why: the value-added tax on restaurants has risen from 13% to 23%. Eating and drinking out in Athens is twice as expensive as it is in Berlin.

At the same time, public-sector salaries have been cut significantly. School teachers, for example, have had their pay reduced by 30%. A teacher new to the job now takes home a monthly €670 ($900), after tax. For those with over five years of experience, the amount is €850. For an experienced schoolteacher it sounds pretty meagre, especially when the prices of many things - food, drinks and transport - are comparable to countries where salaries are far higher.

And yet the standard explanation of the Greek crisis points the finger squarely at a bloated public sector whose employees, rather than doing their job, engage in corrupt activities to supplement already exorbitant incomes. Many of the articles about Greece I’d read before leaving Berlin claimed that public servants here are paid more than private-sector workers. The example of schoolteachers suggests that this isn’t straightforward. What is true is that public-service salaries start relatively high, but then increase very little over the course of a career.

The role of corruption may also have been overemphasised. Corruption is undoubtedly a problem in Greece, and a journalist need spend only a day or two in Athens to collect enough anecdotes to fill a feature-length article that would be as amusing as it is shocking. But corruption is a convenient explanation because, by definition, there are no robust statistics on its true economic impact. Joseph Stiglitz, whose economic credentials include a Nobel prize, recalls that when the east Asian economic crisis erupted in 1997, corruption was singled out as a cause. This troubled Stiglitz, who knew from his experience of working in the region that the problem lay elsewhere.

With all this in mind, I was interested to hear what Greeks had to say about the crisis, and in Athens I found that people were only too willing to talk.

An almost country

Stathis arranges for me to speak with Alexandra, a principal in a top consulting firm whose career, touching on many sectors of the Greek economy, has given her an insight into how the crisis developed. I email her to suggest that we meet near her office, but she isn’t sure that this is a good idea. "If you want an authentic experience of life in a country where the infrastructure is almost in place," she replies dryly, "you should try using public transport to come to this part of the city." My sense of adventure fails me, and we arrange to meet closer to where I’m staying.

She has no trouble spotting me in an otherwise empty cafe, and we begin by talking about the protests. Alexandra shuffles my cup, with its residue of Greek coffee, her teapot and some sheets of paper on which I’ve been taking notes, into a plan of the parliament and Syntagma Square. "The protests began as something like what was happening in Spain," she says, "but then they went Greek." She traces political faultlines, describing how the extreme right took up position before parliament house, "with their flags and their very specific idea of what Europe should be," while the leftists filled out the street and the square. The problem with the protests, according to her, was that because nobody really understood what the crisis was about, nobody knew what to ask for.

Listening to Alexandra talk about the economy reinforces the strong impression that her remark about Greece’s being a country where the infrastructure is almost in place applies to more than the transport network. The incentives in the system might almost work in ideal circumstances, but at the moment they are pulling in the wrong direction. In a country with high unemployment, for instance, young people may find the security offered by a government job very attractive; the relatively high starting salary is more than enough, according to Alexandra, to draw talent away from the private sector.

Workers on an average salary also face frighteningly high tax rates. An average income is taxed at a rate of around 15%, on top of which a 13% social-security contribution must be paid. That doesn’t sound too bad, until the value-added tax is brought into the equation. In total, people on average incomes lose 28% of what they earn and 23% of what they spend. On top of that, employers in Greece are required to pay a 22% social-security contribution for each worker directly to the government. Faced with such high tax rates, small-business operators may simply choose to conduct a lot of their business off the books.

The situation is not helped by aspects of the system which are almost in place. The social-security contribution, for example, can only be described as a misnomer in a country without an effective social safety net: unemployment benefits are simply not enough to live on. The healthcare system is good, but doctors who feel they are not being paid enough may supplement their income by asking for "the envelope" from their patients. The sums of money handed over to ensure the best care can amount to several months of an average salary.

Alexandra doesn’t downplay the importance of issues like tax avoidance and corruption, particularly to the extent that they pose enormous difficulties for policy-makers seeking a solution to the debt problem. But she does see another narrative of the Greek crisis that puts these issues in an economic and historical context, one that takes into account the effects of the decade of accelerated economic development since the entry of Greece into the eurozone.

She begins by sketching, in demographic and economic terms, Greece as it was ten years ago. "The economy could best be described as communal," she says. About 40% of the population had less than six years of schooling, the agricultural sector still employed 13% of the workforce, and there were very few large companies. The main unit of the economy was still the family, in the very broad, Greek sense of the word. It was this country that joined the eurozone, adopting a common currency with Germany and France, two of the most advanced economies in the world.

In economic terms, what happened next was tantamount to an attempt to impose democracy on a country without any tradition of democratic governance. Large amounts of funding were made available to enable Greece to "converge" to the standards of its eurozone counterparts. The government played its role in fostering growth by stimulating the construction sector, particularly in the lead-up to the Olympic Games in Athens in 2004. Education also became a focus: today, of the cohort of Greeks aged 25-34, around 30% have tertiary qualifications, double the rate of their parents’ generation. The government encouraged this increase by providing students with free textbooks, subsidising what already was, and remains, a free education system.

This largesse, funded through budget deficits, was part of the Greek government’s bid to catch up to its eurozone counterparts. There were certainly cases of irresponsible spending: the public sector was used as a source of job creation, and some overly generous family policies linked to education were introduced. More serious than the waste of public money, however, was the lack of reforms in the economy and government. Good economic conditions should have made it possible for the government to make some unpopular changes. The problems were longstanding, as were plans to deal with many of them. Alexandra mentions a report on the tax system commissioned by the Greek government in 1934, the recommendations of which remain, in her eyes, sadly pertinent today. The tax system continues to emphasise penalties rather than incentives, and the social safety-net is in tatters.

The most significant gap in the Greek economy were export-based activities. There was nothing to drive growth if the government returned its budget to a neutral setting and funding from the European Union dried up. The dilemma here, however, was in identifying export industries that could develop in an unprotected market that includes an economy like Germany’s. "The problem with an accelerated economic development trajectory is that ‘one-shot’ solutions become the only viable ones," says Alexandra, "and in the Greek case, none of them have delivered results."

She cites the various plans to exploit natural resources in the Aegean Sea, projects that remain caught somewhere between myth and reality. She refers to a €20 billion solar-energy investment project with the potential to create 30,000 jobs, the funding for which would mostly be used to import technology. She mentions the case of a Greek software company, probably the largest employer of engineers in the country, which shrank after being unable to keep up with competition from IT firms in other EU countries. "We need plans that will produce value, but the Greek contribution to these projects needs to involve more than labour. We need sound technological capabilities, and these take time to develop."

If the Greek economy was so relatively underdeveloped, if it still needed protection to foster its own industries and develop systems that its citizens saw as legitimate, then why has Greece always been included in the vision of a united Europe? Greece became a part of the European Union before Spain, and it became one of the eurozone countries a year before the euro was adopted as a common currency. Alexandra suspects sentimentality on the part of European policy-makers, a predisposition to include the country to which the foundations of the modern conception of Europe - democracy, science, myths - are ascribed. "There was probably a feeling," she says, "that the eurozone would be large enough to sustain the Greek economy if things didn’t go to plan." It’s too early to say whether such assumptions, if they were part of the thinking of European policy-makers, were entirely ill-founded.

A machine on standby

Athens surprises me with its very human scale. There is no cluster of glittering skyscrapers; even at the city’s core the buildings are at most only six or seven storeys high. Nothing challenges the ascendency of the Acropolis or, for that matter, the visual opulence of the Aegean Sea. Athens reminds me more of Tunis and other cities on the southern Mediterranean coast than anything I have seen in Europe.

On Saturday night, Stathis takes me to streets lined with trendy bars serving very expensive alcohol. All of them are brimming with people; the whole of Athens seems to be out. There is no crisis here on a weekend evening.

In one bar I get talking to a young economics graduate, Athanasia, and I ask her for her interpretation of events. She launches into a thorough dressing-down of the Greek character. "Look around you," she says. "We Greeks would rather party than work." She follows up with stories of corruption and excessive public spending. Then, without warning, the conversation veers off into an attack on German hypocrisy and self-interest. I try to draw a link between the two parts of the conversation, searching for a middle ground, but even in the eyes of an economics graduate, it seems, the crisis is the result of some astrological configuration of a poor Greek work ethic and German meddling. "So what are you doing to help?" I ask. She pauses. "I pay my taxes." But she also tells me that she’s planning to leave Greece, and soon. There is simply no work for her in her field of environmental economics, and her prospects in other European countries are good.

That night I also speak with Kostas, a plumber, whose fortunes have mirrored those of the Greek economy in the decade since the country adopted the euro. From a very young age he began to work for his father, also a plumber, after school, but it was always understood that he would go to university. His grandfather was a public servant and wanted his grandson to follow in his footsteps. Kostas puts it very simply: "My grandfather grew up under the German occupation of the second world war. People were hungry back then. When he found a job in the public service, he was able to eat."

Kostas chuckles sheepishly when he admits to having studied mathematics at university. Once he’d graduated, the lure of the abstract gave way to the lure of the concrete - or, in his case, of copper. He set himself up as a plumber in 2003 at the height of the construction boom that preceded the Olympic games. Two years later, business had quadrupled. Today, he is back to where he started, except that now he struggles to make ends meet.

When I ask him whether he declares his income, he says no without hesitating. When I ask him why, he says that if he did, it wouldn’t be worth his while getting up in the morning. He emphasises, however, that he did the right thing when it came to insuring his workers. It turned out to be a costly gesture. "I was audited," he says, "by the tax office. They found a ‘problem’ with my accounts which did not exist." He was fined €50,000. He claims that had he not insured his workers, the "problem" with his accounts would have cost him only €3000. I shake my head, perplexed. Kostas simply shrugs. "There is a lot of freedom here in Greece, but not a lot of justice. I don’t think the two things go together."

For a business-minded person like Kostas, the crisis is the result of bad management. The cause is simple: too many public servants being paid too much. "Look up the statistics," he says to me. "Greece has more public servants than any country in the world." This is another myth in wide circulation. By OECD standards, the size of Greece’s central public service is modest. What does set Greece apart is government control of many activities that in most developed economies are run by the private sector.

Kostas believes that the debt situation can be fixed, and quickly, if only someone were willing to do it. I ask him what he would do. He doesn’t have to think for very long: take Greece out of the eurozone; punish those who’ve engaged in corruption; and admit not one new person to the public service until its staffing levels return to "normal." I push him on the second point. If everybody, including him, is avoiding tax, then who should be punished for breaking the law? He accepts the logic of my argument, but stands by his claim that the answer is simple. "Greece is a machine waiting for somebody to turn the key," he says, voicing an opinion undoubtedly shared by many. When I ask him how the machine will ever start if nobody has confidence in the people holding the key, he has no answers. "Look," he says, "when you get tired of this problem, you understand that you have to make your own rules. You have to decide what you know and what you don’t. That’s what the smart people in Greece will do. The rest will just sit back and curse."

A fragile treasury

The policeman on duty out the front of parliament house isn’t sure whether tourists can visit the building. He directs me to a gatehouse at the side of the grounds where a burly guard tells me that no, it’s not possible. The Greek parliament house sits above Syntagma Square, the shutters of its windows down, its doors closed to the public.

Policy-makers probably had little choice when formulating the details of the austerity package. Raising taxes, cutting public sector salaries and laying off public servants are no doubt the obvious ways to address the debt crisis in the short term. The severity of the measures, however, risks throwing the Greek economy into a protracted recession. The uncertainty is considerable. Stathis, speaking about his work in risk management, sums it up succinctly. "Public sector salaries fell by 30% this year," he says, "so what would you assume would happen next year? A return to trend wages growth? How can a business make even the most basic plans for the year ahead in these conditions?"

Another risk is that the austerity plan could further erode what economists call "social capital," the glue that holds an economy together. To give a simple example, people are more likely to pay tax if they trust the system to provide for their needs. But funding those services will require collecting more tax revenue, and designing a set of incentives to bring people into the tax system is a very complex technical and social problem. For now, it’s difficult to imagine that raising tax rates will do anything other than make the grey economy a more attractive option for those who can, or already do, avoid tax.

Perhaps the most contentious measures in the austerity package involve the privatisation of public enterprises. Given all that has been said and written about corruption in Greece, this suggestion should set alarm bells ringing. Experience in other countries indicates that mass privatisation, particularly when carried out hastily, can go disastrously wrong. Joseph Stiglitz devoted a chapter of his book Globalization and Its Discontents to an analysis of Russia’s transition from a communist to a market economy, and much of his criticism was directed at how privatisation was carried out.

Stiglitz argues that privatisation can only lead to positive outcomes if certain necessary conditions are met. These conditions are broad, ranging from good corporate governance laws to a free, effective media. In Russia, none of these were in place, and so insiders benefited stupendously. Rather than boost economic performance, privatisation increased income and wealth inequality markedly. Stiglitz warns that failed mass privatisation can "undermine confidence in the government, in democracy, and in reform." Greece is not Russia, but neither is it a country with all of the safeguards of a developed economy.

On my last morning in Athens I visit the Acropolis. I am the first tourist through the gate when it opens, and I wander up a rocky path onto the plateau where the Parthenon stands. A massive restoration project is under way, funded partly by the European Union. It makes for a fascinating construction site. Bits of marble lie about on makeshift benches all over the plateau, every fragment identified and inventoried. Where a piece of marble is damaged, a new one is fashioned to fit in perfectly with the stone that can still be used. It is painstakingly precise, patient work, but the result will be priceless.

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