Wednesday, 4 February 2015

Does Greece deserve more debt relief?

The growing consensus in parts of the British Press and global business media is that Greece should be released from much of its US$272 billion sovereign debt in the interests of ending the country's obvious social pains and restoring its economy to health, and by extension preserve the economic equanimity of Europe but is it a wise course of action, given the risks of contagion down the line and the likelihood that Greece will not take on board the absolute necessity for good political and economic governance?

The country's record of financial governance does not inspire optimism. Over the last 200 years Greece has defaulted on its sovereign debt obligations at least five times and the first recorded debt default goes back to the 4th century BC when 13 Greek city states borrowed money from the Temple of Delos, which ended with the temple nursing an 80% loss of principal. Clearly, Greece is a recidivist debt welcher of the first magnitude. Much of this malfeasance derives from the Greek psyche that drives the population to think it is their God-given right to evade taxes at all cost, thus forcing the Government to borrow ever-more huge amounts, which is not then spent honestly and wisely.

In terms of Government spending, for example, pensions are a good case in point. Although the official Greek retirement age is 65 early retirement is widespread and the average age of labour market exit is 62.4 years for men and 60.9 years for women. An OECD 2009 report discusses the early retirement problem in Greece by asserting: "The comparatively lax conditions to qualify for a minimum pension tend to increase incentives for early retirement. Despite their low level minimum pensions they are relatively generous in relation to the contributions paid by their beneficiaries which creates perverse incentives for certain workers to retire early without any reduction in benefits." These perverse incentives for workers to access early retirement schemes even included bizarre cases. For instance, pensions were given by the Greek State to daughters of military officers and various civil servants if they were not married!

The ubiquitous tax dodging problem is even more disturbing. Greece has suffered serious weakness in tax collection because of its large shadow economy and the real loss from tax evasion can hardly be calculated. One analysis, however, based on prestigious American institutions, suggests Euro28 billion in lost tax revenue in 2009 just from the self employed.  The highest tax evaders are doctors, lawyers, accountants, engineers, private tutors, artists and journalists.

There is no denying the enormity of the unprecedented shrinkage of the Greek economy, which has shrunk 25%, perhaps the worst in modern times, but neither is there any gainsaying of Greece's colossal economic mismanagement, corruption, cronyism, damaging labour restrictions and ineffectiveness at righting these parlous proclivities, which has brought it to its current parlous state. It is true that Greece has cut bloated pensions and raised taxes but their attempts to institute the bailout conditions from foreign creditors are evidently failing, though it seems that the Greek economy has started to grow again, albeit very feebly.

The public sector suffers substantial integrity gaps in both law and practice. A 2010 report, for instance, showed that only 2% of misbehaved civil servants were subjected to disciplinary procedures. A poor system of tax collection, helped by an opaque tax code, allows individuals and companies to bribe tax inspectors and evade taxes. According to a 2011 survey the cost of bribing tax inspectors to "arrange" tax audit activities is reported to range from Euro 100 to Euro 20,000. In such a climate as this it is hardly surprising that Greece is the lowest scored country in Europe for corruption in 2013. A global corruption index of 176 countries placed Greece at 94th position, with one being the cleanest and the 176th the foulest.

In support for the case to forgive a significant slice of Greek sovereign debt, perhaps one third to a half, the point is made that there are plenty of historical precedents for relief on such a scale. Most notably, Germany is cited after World War 2, when in 1953 Germany's creditors recognized that full payment of the country's debts would make revival harder and could destabilize all Europe. Consequently the creditors wrote off half of Germany's debts and made the rest contingent on economic performance. Such debt relief was in all parties' best interests but the comparison of Greece today with Germany after World War 2 is a crass one. The fact is, Germany's industries were shattered, its cities laid waste by war, and given its pre-war position in Europe as an economic power house it was absolutely essential to help Germany back to health. Germany's post war recovery proved an economic miracle, not least because of its business drive from a people imbued with an industrious spirit and respect for clean government and economic good governance. Those key attributes are still lacking in Greece, and without them any more debt relief on top of the billions of Euros already written off by private creditors and banks, would almost certainly be throwing more good money after bad.

Ireland and Finland have already voiced their concerns that Greece should not receive any more debt write-offs and it is plain to see why. Ireland received a bail out and endured much austerity for years as a pre-condition for loans. By following those conditions Ireland is now well on the road to economic recovery. Spain, too, has taken its medicine and is showing good signs of recovery. If Greece were let off scores of billions it would set a dangerous precedent. Other countries in the Mediterranean sphere, like Spain, Italy Portugal and even France whose economic integrity has left much to be desired, could clamour for similar relief, and that could herald the irremediable collapse of the Eurozone currency, and much worse.

This is not to argue that Greece should no longer he helped. There is a good case for extending the loan repayment periods and even, perhaps, suspend interest payments for a few years. But Greece should also help itself, but how? Greece has many islands in a balmy, desirable location. It could, for example, let these islands on 99-year leases, with favourable tax incentives, which alone would bring in billions of Euros in the short term. Longer term, Greece could make better use of its inexhaustible free sunshine by harnessing solar energy to supply the energy-hungry countries to the north. The infrastructure could be paid for by the energy importing countries like Germany provided the energy charges were low enough long term to justify the investment. It would also provide a much-needed boost to employment.

All efforts to help Greece back to prosperity and growth will, however, fail unless Greece is prepared to burn the canker of lousy governance from its soul forever. Perhaps the country would do well to learn a lesson from British history concerning the need to pay their taxes in full. From the late 17th century Britain had two key assets in its empire-building clashes with much larger empires: its system of Government credit, rested on confidence, and a fair tax burden, leading to a remarkably high level of compliance -- a situation that did not exist among England's enemies and so led to their downfall.

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