While Greece is teetering at the edge of chaos, Michael G Jacobides argues that neither Greek parties nor the EU or the IMF are focusing on the real problem.
With Greece about to implode, it is time to do away with misleading generalisations. Speaking of the “European Periphery”, implicitly assuming that Portugal, Ireland, Italy, Greece and Spain (the “PIIGS”) have a common set of problems is not only wrong – it is dangerous. While Ireland and Spain are living through the hangover of an asset price and construction bubble, Greece is living through the collapse of an unsustainable economic model and a crumbling administration. The Greek problem is idiosyncratic, yet it has been treated as an “ordinary” case of macro-economic imbalance.
Expenditures vastly exceeding fiscal receipts and an inefficient public administration are the current problem, and Greece has been pushed to restore fiscal balance. But the true underlying issues are a crumbling public administration and a political system where a few beneficiaries distort economic flows in the country, stifling development and depleting state resources.
While such structural problems have been noted for a while, their magnitude seems to have been underestimated. The true Greek tragedy is that a country, which could potentially be on a solid growth trajectory is instead facing chaos because of the way the public sector (and its associated political system) interferes with the use of public resources. The Greek press has been part of this corrupt system, impeding the understanding that would help resolve the issue. More consequentially, it has proved convenient for the stakeholders in the crisis – in particular the European Union – to avoid confronting the real nature of the problem. Doing so would require the sort of far-sighted action and pragmatic leadership that is -- perhaps understandably -- lacking from politicians concerned with re-election and administrative units vying for relative power.
As a result, kicking the can down the road has become the de facto solution, in the hope that things get better. The EU and the IMF have been treating a cancer with patches and aspirin. They have been busy addressing symptoms of the sickness, without daring to address the underlying cause. The EU task force, for one, has neither the skills nor the mandate to engage in the massive change management needed.
The true problem in Greece is three-fold. First, the public sector has proven to be a woeful manager of its own resources. The Greek public administration lacks accountability as well as a stable backbone of senior civil servants. It relies on formalistic rules to guide every step of the operation of public administration, as opposed to focusing on how it can substantively serve its purpose. These personnel issues, along with poor information and management systems (or data of any sort), mean that the public output related to expenditure is disappointing.
Serious problems exist at the top of the structure. The political system is highly influential and self-serving; its beneficiaries are able to carve out excessively compensated positions within the broad public sector, which means diverting funds from where the needs exists – including Greeks living below the poverty line and increasing criminality. Finally, an extremely important problem in Greece is tax avoidance -- Greece has only 30 per cent of its GDP as tax receipts; the EU average is 37 per cent. The inability to tax fairly has hit not only public finances, but has also created a sense of unease and social discomfort with taxation, especially under conditions of duress.
Second, the interface between the private and the public sector has seriously skewed the productive tissue in Greece. The Greek state has been a purchaser of services for construction, armaments, technology, and more mundane goods and services. Side-payments are often inherent to such procurement, as the scandal with PASOK’s former strong man Akis Tsochatzopoulos, now behind bars, showed. Exposed to a corrupt system, many Greeks have shown initiative, adaptability and drive but, sadly, this has further increased the incidence of corruption. Entrepreneurial drive and corruption have created a vicious circle which is amplified by the political system, but one which is not desired by most Greeks.
Third, the state distorts the functioning of the private sector. “Closed” or regulated professions which have given birth to local monopolies; a loose competition policy which does not really promote competition; and most importantly, a bewildering set of regulations, all deter entrepreneurial activity and private investment. Capricious taxation and unpredictable authorities add to the problem of a malfunctioning justice system, with long delays and inefficient procedures. All of this means that reduced Greek labour costs have yet to translate into reduced prices and productive investment has all but stopped.
Greek voters showed their anger. Yet populist party leaders do not offer alternatives that can work, let alone any indication of how to fix the administration. The EU and the IMF have also failed to convincingly show how they can help turn around part of the administration. It is time for Greece’s creditors to focus on the underlying causes, as opposed to the symptoms alone. And it is time for a frank discussion of alternatives looking forward for Greece, well before the fresh set of elections.
The shock to the system from Sunday’s elections will either herald the beginning of the end for the Euro and the collapse of Greece, or offer an opportunity for yet another political reversal in the next elections, in a few weeks’ time. Anger may give way to concern about future plans, not retribution, if the choices are made clear to the Greek electorate. And the press has an important role to play in shaping public perception of what are the pragmatic options ahead.