Greece’s fiscal emergency is a most mystifying crisis. At one level, it is the most serious test of the eurozone’s unity since the launch of the euro in 1999. Unless correctly handled, the problem with Greece’s public finances could shake the foundations of Europe’s monetary union.
At another level, however, Greece itself seems to be getting off remarkably lightly. Germany suffered a 5 per cent slump in gross domestic product last year; Greece is expected to have suffered a fall of about 1.1 per cent. Spain has a 19 per cent unemployment rate; Greece’s rate is only 9 per cent. The Irish government is imposing extreme austerity measures on its citizens to protect Ireland’s eurozone membership; Greece’s government is, so far, doing nothing of the sort. No wonder Greece’s 15 eurozone partners, the European Commission and the European Central Bank are furious with the political classes in Athens.
How can one explain the Greek anomalies? Two important factors are Greece’s huge shadow economy and its bloated public sector. Unlike Germany, which was hit particularly hard by the collapse in world demand in 2008, Greece does not depend on the export of manufactured goods for its prosperity. Unlike Spain, Greece does not have a labour force with millions of temporary and part-time workers who are easy to get rid of when economic times turn bad.
Unlike Ireland, Greece has an inefficient, oversized, overpaid public sector. According to a study last year by the Organisation for Economic Co-operation and Development (OECD), eurozone government wage expenditure as a percentage of GDP drifted from 11 per cent in 1995 to just above 10 per cent in 2008. But in Greece it rose from 10 per cent to over 11 per cent. To cap it all, Greece has a terrible track record in collecting taxes. The OECD pointed out that uncollected government revenues amounted to 13.6 per cent of Greek GDP in 2007.
The lesson from the Greek crisis is that it takes many years of grossly inadequate policymaking for a problem to achieve the dimensions that it has in Greece. This is not an emergency created by the 2007-08 financial crisis. It is an emergency caused by a very long period of mismanaged public finances: too much spending, too litte tax revenue, and the political manipulation of statistics.
Of course, the truly incredible thing is that other European Union countries allowed Greece to adopt the euro in 2001 when they cannot have been under any illusions about Greece’s weaknesses. They even failed to spot, until it was too late, the falsification of Greek public finance data in which the authorities in Athens engaged in order to qualify for eurozone membership.
On that final point, let me observe that falsification of data can work both ways. Ten years ago, the figures were understated so that Greece could join the eurozone. Today, it is perfectly possible that the Greeks are overstating the figures when they say that their budget deficit last year was 12.7 per cent of GDP. By exaggerating in this way, they will make it easier to reach the 8.7 per cent deficit target that they have set themselves for this year.
Meanwhile, the measures that are really needed in Greece – above all, a clampdown on the public sector wage bill – remain to be taken.
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