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FACTDROP: UPD - Austerity Measures: ‘Causes and Possible effects on Greek society’


UPD - Austerity Measures: ‘Causes and Possible effects on Greek society’

This is just a simple glance on the effects of the rapidly implemented austerity measures and on the allegedly causes of the huge debt of Greece that brought it to the bridge of default rendering possible the exit from Eurozone or even EU. Being far from comprising a scientific research this article should urge the specialists to focus on producing relevant and impartial studies which could shed some light on the dark future of Greece and on the implications of the present crisis to the EU.

“Austerity not the way to go for Europe”

In a recent article titled “Austerity not the way to go for Europe” the well Known economist Stiglitz commenting on the Eurozone crisis stated that “I think there is a reasonably good chance that a year from now you would find the Eurozone smaller than what it is today”. Concerning Greece he noticed that “It's not inevitable that will default if they come forward with enough assistance for it to grow. It has enormous growth potential, so if Europe comes up with enough money, it will grow and that will enable it to manage its debts”.

Nevertheless, except the apparent slowdown of the country’s development, austerity measures could prove to have crucially negative effects on corruption, income inequalities and wealth distribution.

Recently, Greece was to be blamed from different directions for it’s lazy, overspending, tax evading and corrupted citizens. More interestingly, last week’s PM Papandreou’s proposal for a referendum on the last economic “savior” agreement with it’s European counterparts, triggered an immediate collision. In the G20 conference the duo: Merkel-Sarkozy threatened Greece, by both pointing to the same direction: Europe’s Exit Door.

The assumption of the Greeks sharing pleasure and luxury, drinking coffees on the sunny cafés while their European counterparts are working hard seems to be invalid. The same applies to the ‘wealthy’ Greek pensioner. According to “20 Popular Fallacies Concerning The Debt Crisis” published by the Rosa Luxemburg Foundation “The (Greeks’) actual weekly working hours – minus lunch breaks – before the crisis were 44.3 hours according to Eurostat. In Germany, this figure was 41 hours and the EU average was 41.7 hours”, “ Greek employees have a right to 23 days holiday leave on average per year. The Germans are in the lucky position of being able to enjoy 30 days holiday leave – a figure that is right at the top in Europe”, “ The wage level in Greece is only 73% of the Eurozone average “, “a quarter of all Greek employees earn less than 750 euros per month” (a figure that is now changed due to the austerity measures), while “the average pension in Greece is about 55% of the Eurozone average, that amounted to 617 euros in 2007. Two-thirds of Greek pensioners had to survive on less than 600 euros per month”.

Bankrupted Greece is the first loud “emergency alarm” inside Europe’s spaceship. Functioning as a paradigm of what will happen to next similar cases, Greece is unfolding an unknown path of the future. So, we can see why it is treated with a beneficial manner on the haircuts of the loans while on the other hand is threatened with the harshest punishments. Greece in fact represents only the 2,5% of the Eurozone's GDP and just 3% of Eurozone’s public debt.

The implications of the duo’s threats were dramatic. Next day Papandreou scraped the referendum while accepted to resign in favor of a new unity government. He ascribed this U-turn to the ND’s opposition leader Samaras, who for the first time hastily backed the agreement for the new loan. Liana Kanelli, a Greek Communist MP, on a Channel 4 interview denounced the referendum – though for years her party steadily promoted a proportional representation voting system– and asked for elections. The formation of the unity government which will sign the pending agreements underlines the unwillingness and incapability of the political parties to bare the responsibility for the future. Notably Papandreou have unsuccessfully tried to convince Samaras to include members of his party into the “cooperation government” – as coined by the PASOK party – which Samaras prefers to name as a “transitional government”. It seems like under the duo’s pressure the whole parliament resigned.

On Thursday Lucas Papademos was chosen as the new PM of the unity government which Angela Merkel and Nicolas Sarkozy think is the sort of hard-line technocrat with whom they can do business. Now he is going to sign the new bailout loan set up, which includes a write-down on their Greek government bond holdings of 50 percent, a fact for he was recently warned that in reality, less than half of Greece's debt would be beneficially open to restructuring, stating that “The potential economic benefits of a debt restructuring will be much smaller than what is frequently forecast and the procedure entails important dangers for Greece and the euro-zone".

In the bottom line, the recent “referendum versus eurozone” controversial approach mirrors a European Union that has always had problems with democracy, a messy process that can interfere with the grand designs of people at the top who know best, namely the Frankfurt Group, an unelected cabal made of up eight people: Lagarde; Merkel; Sarkozy; Mario Draghi, the new president of the ECB; José Manuel Barroso, the president of the European Commission; Jean-Claude Juncker, chairman of the Eurogroup; Herman van Rompuy, the president of the European Council; and Olli Rehn, Europe's economic and monetary affairs commissioner.

Corruption and shadow economy in Greece

Back in 2006, Stavros Katsios of the Ionian University presented a paper titled the “The Shadow Economy and Corruption in Greece”, in which analyzes the main reasons triggering and sustaining the corrupted status of Greece. Katsios concludes that “Greece shows profound signs of a transition country in terms of the high level of regulation leading to a high incidence of bribery and a large shadow economy”.
Concerning the “Tax Reformation” the following table summarizes the key points:

Austerity measures admittedly is having serious negative effects on:
  • “Greater growth and higher incomes” (obvious)
  • “Greater tax visibility so that the people can measure the cost of the government” (nobody Knows how many taxes are going to pop-up in the near future)
  • “Fewer and slow-growing tax bases to control better the overall tax burdens” (obvious)
Additionally, it is well-known that one of the greatest failures of the government is that it was incapable of reducing effectively the tax evasion tuning the gunpoint on the middle and lower classes. Not need to say that nothing was done on “equal treatment of citizens”, “equal treatment of industries, assets and investments” and “reduced time and expense for administration, planning and enforcement”. Katsios referring to higher tax rates states that “Greek politicians seem to ignore the research findings that higher tax rates are associated with less unofficial activity as a percent of GDP and that corruption is associated with more unofficial activity.

Entrepreneurs go underground not to avoid official taxes, but to reduce the burden of bureaucracy and corruption. As a result, only relatively honest governments can sustain high tax rates.” The Greek governments are far from being the “relatively honest governments” and as we’ll see, Transparency International in Greece (TI-Greece) emphasized the importance of upgrading the Elections Committee along with reinforcing the procedure of politician’s asset declarations. Nothing have been done.

Back in 2010 (TI-Greece) published its Annual Survey on Corruption in the country covering the period between July and December. It estimated that bribery cost Greece €632 million in 2010 (US$837 million). Although down from a high of €787 million (US$1.09 billion) in 2009, this was mainly due to a reflection of the effects of the financial crisis and the shrinking size of the Greek economy. On average more than one in ten people report having to pay a bribe for some kind of service, predominantly to public sector institutions.

TI has submitted a series of recommendations to the government:
  • On political financing, it wants the Elections Committee upgraded, parties to comply with accounting requirements, and the procedure of politician’s asset declarations to be reinforced.
  • On the tax system, a TI conference in Athens identified the need for a codified, unified set of tax regulations which would not include the formalities and excessive red tape in the current tax code and the permanent abrogation of tax settlements (where unpaid taxes are resolved with a once-off payment).
  • On public contracting, it wants the government to implement Integrity Pacts – a tool for keeping public procurement clean (the Integrity Pact is an agreement between a government or a government department (at the federal, national or local level) and all bidders for a public contract that neither side will: pay, offer, demand or accept bribes; collude with competitors to obtain the contract; or engage in such abuses while carrying out the contract. Transparency International has used Integrity Pacts for ten years in hundreds of contracts in over 15 countries, which shows that practical solutions can make a difference if the political will is there).
The all growing number of impoverished and unemployed citizens (16%) it will arguably add water in the tank of the “less privileged” which according to Katsios are “the ones who are not willing, cannot afford or have no connections to central or local government bureaucrats” and “are systematically choosing the dark (shadow) side of the economy as a substitute for corruption (bribery), making the shadow economy complementary to a corrupt state”.

Therefore the combined unwillingness of the governments and politicians to fight corruption in their own ranks, with the increasing number of pushed low-income population, the growing insecurity related to possible new austerity measures, the political and economic instability and foremost the feeling of injustice on the distribution of the economic burdens will ultimately ease the path of the increment of the corruption and especially of the shadow economy even if its overall value will be diminished due to the shrinking size of the Greek economy. It must be underlined that a main trigger of tax-evasion, although unmentioned, remains the distrust between the citizens and the governors as history is abound in corrupted contracts on every public project making the tax-payer to believe that his money go to some private pockets and not invested properly for the society’s benefit. The Olympic Games, a huge public project that was accomplished by direct award contracts has left us with about 15 billion euros debt and a Siemens scandal, for which nobody was ever punished while many of the involved persons remain at large in the Parliament ‘striving’ to save Greece from the cliff where they have admittedly pushed it.

One other aspect of the corruption is tied to the adverse effects in terms of horizontal and vertical equity, as well as in terms of efficiency. In the following, we will discuss the Distributional Implications of Tax Evasion in Greece referring the findings of the Hellenic Observatory and LSD paper, written by Manos Matsaganis and Maria Flevotomou back in 2010. By that time, the study estimated the income under-reporting at 10%, resulting in a 26% shortfall in tax receipts. Tax-evasion has wider implications as it “ violates notions of fairness and equal treatment, and undermines the idea of reciprocity which lies at the heart of the social contract between taxpayers and the state”. The key findings are that “Predictably, in terms of income source, farming or self-employment incomes are more likely to be under-reported in tax returns: average under-reporting rates for these two sources are 53% and 24% respectively, while reported incomes from wages and salaries or pensions are nearly identical to survey incomes. In terms of region, under-reporting appears to be most pronounced in Southern Greece - Central, Western and Peloponnese - (16%) and least so in Greater Athens (less than 6%)”. In the following table we can see the tax-under reporting related to the income.

It is evident that tax-evasion is increased in the three lowest deciles remaining though close to the average rate of -10% (the first three of the table). In the last decile (the reach) it is greater as increased to –14,7% toping at the richest 1% where the difference between the survey and tax reported income is up to –23,6%. This highlights effectively the distortion of the unequal distribution of the unjustly imposed austerity measures that target mainly the middle and lower incomes resulting to a much greater inequality and poverty reducing tax progressivity.

The same argument is indirectly backed by another resent study, titled “Inequality and poverty in Greece: Myths, realities and the crisis”, written by Chrysa Leventi (Athens University of Economics and Business), Manos Matsaganis (Athens University of Economics and Business), Theodore Mitrakos (Bank of Greece) and Panos Tsakloglou (Athens University of Economics and Business & IZA). For the period 1974 – 2008 the study states that “unlike what was observed in most OECD and EU countries, during the period under consideration inequality and poverty were declining in Greece. However, various international comparisons show that even after these decreases the levels of inequality and (relative) poverty in Greece are substantially higher than in most developed countries”. In the next table you can see the estimated situation after the adoption of the austerity measures in 2010.

Overall the study implies that the effects of the austerity measures were neutral. “Between 2009 and 2010 the average (equivalised) disposable income of all deciles declined substantially. In absolute terms the decline was close to 2000 euros per capita for the top decile, but less than 200 euros for the two bottom deciles. In proportional terms the decline in the income of the top decile was close to 5% while the corresponding figure was less than 3% for the three bottom deciles”.

Well, if we consider the preview table and count in the tax evasion percentages of the lowest and highest deciles (-9,9% and –14,7% respectively) we can roughly conclude that the impact of this difference on the real income decline (2%) is rather over-inflated.

The study underlines the poverty issue stating that "when the poverty line is fixed at its 2009 level in real terms,
there is a substantial increase in poverty from 20.1% to 25.1%, while considerable changes are observed regarding the structure of poverty".

Additionally, we should consider the last wave of taxation that included a dramatic decrement on the lowest year income that is exempted from taxation (from 12,000 it will reduced to 5,000 euros by 2012), new taxes on houses and fixed extra taxation on the self employed combined with a substantial increment of his self-insurance cost.

It seems that the austerity measures while render growth impossible, boost poverty, unemployment and consequently corruption, and the shadow economy though especially black labor and black market which unfortunately will serve as a relief valve to the all growing pressure.

On October, the Lancet medical journal study stated that Greece's economic crisis is taking a huge toll on the country's health, with an increase in suicides, risky behavior, and a decrease in the number of people seeking medical help. Predicting a 52 percent rise in AIDS cases this year because of prostitution and unsafe sexual practices, the authors said that overall, they are concerned about the health picture in Greece, stating that ordinary people are losing access to health care and preventive medical services as the government tries to finance its debt.

Causes of the Greek crises

The present crises is attributed in different causes as it is actually a multi-factor and complex phenomenon. On 18th August, the Congressional Research Service analyzed the situation in a paper titled “Greece’s Debt Crisis: Overview, Policy Responses, and Implication”. The main causes are described in the following table:

The main features are an overgrown State overwhelming the private sector and a remarkably overspending on the public sector wages and social benefits. Although the 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 quality of the services are superior”. Other main causes are corruption, clientelism, tax evasion, and a partially favorable complex tax code, which grants exemptions to numerous professions and income brackets and the shadow economy (30% of the GDP). In my opinion the public and private sector – that is in fact a welter of oligopolies consisting an elite which backs and is backed by the political family dynasties – are the interlacing branches and the main guilty party in the process, functioning without any transparency behind closed doors, a fact that was correctly described as a systemic crisis back in 2009 in the International Journal of Inclusive Democracy.

To this end, justice had to be vestigial and ineffective as the governments used to promote their own people in the judicial system that left them at large and unpunished. The lack of quality of the expensive public services combined with the low level of the wages and of the average pension in Greece – as described at the beginning of this article ( “20 Popular Fallacies Concerning The Debt Crisis”) - point to a heavy discrimination between the low-middle and low incomes and the rest. Beyond this conventional painting of Greece’s situation there are other views more dynamic.

On April 2010, the Gardiff Business School presented a report titled “ The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes” which attributes the crisis mainly to the following three reasons:
  • Deteriorating macroeconomic fundamentals over the period 2001-2009, mirrored in an external competitiveness deficit coupled with an un-sustainable path for fiscal finances.
  • A shift in market expectations pricing a possible exit of Greece from the EMU, mainly due to the lack of commitment of Greek authorities to undertake unpopular structural reforms.
  • The pricing by markets of a (previously nonexistent) default risk that follows the withdrawal of an implicit guarantee on Greek debt by other EMU countries (mainly Germany).
The pivotal point of the crisis happened in 2010 when by “the exceedingly cautious, under the circumstances, proposed 2010 budget submitted to the European Commission in mid-November 2010” the markets “interpreted the revealed unwillingness, or inability, of two successive Greek governments from both sides of the political spectrum to address unsustainable fundamentals as new information regarding the arithmetic of Greece’s loss function. In response, for the first time in the crisis they started questioned Greece’s commitment to the euro”. Another crucial factor in the process was the German’s “constructive ambiguity” towards the Greece’s bail-out which “would be seen as a shift in long-standing Germany policy, causing moral hazard discouraging Greece and other countries from pursuing reforms, thereby intensifying the present crisis and making future crises more likely.

This was a fully plausible analysis which, however, now seems to have been wrong. It turns out that markets had never believed the no-bail-out clause and had been pricing, even well into the crisis, Greek and other EMU bonds assuming a bailout. Hence, from the markets point of view, a bailout would not be news and thus would not destabilize the Eurozone further; instead the news was that there was to be no bail-out. All in all, the German-led policy of “constructive ambiguity” seems to have backfired: The withdrawal of the fiscal guarantee not only contributed to the collapse of the Greek bonds’ market, thus escalating the crisis it was meant to contain, but may have also sown the seed of contagion to the markets for other EMU periphery bonds, also operating hitherto under the assumption of a German fiscal guarantee”. Indeed, EU was not equipped with the appropriate tools to deal swiftly and effectively with the crisis.

The report finally proposes the creation of a “low euro” currency used by the “periphery” for a suitable period while “the hard euro will be maintained by the core EMU members”. “All existing debts will continue to be denominated in strong euro terms. The plan involves a one-off devaluation of the weak euro versus the strong one simultaneously with the introduction of far reaching reforms and rapid fiscal consolidation in the periphery EMU countries. We argue that due to enhanced market credibility the plan will have a realistic chance of success, maintaining the project of European monetary integration and leaving the door open to the periphery countries for a return to the strong euro”.

Interestingly, on July of 2010 the Defense Academy of the UK published a report in the Balkan Series, written by Mr. James Pettifer titled: “The Greek Crisis – A Pause”. The reader gets a good idea of the writer’s conception of Greeks in the opening of the report where at the header reads: “The second common meaning of the word ‘Greek’ which developed during the sixteenth century, was based upon the opinion of Greek wickedness, rather than of Greek dissoluteness. A ‘Greek’ meant what we should call a ‘twister’, that is, a sharper, a cheat, a crook, any kind of confidence trickster.......this popular usage received full encouragement from learning and literature” (Terence Spencer, ‘Fair Greece, Sad Relic- Literary Philhellenism from Shakespeare to Byron’, Athens, 1954 , P.37). In the following you can see the key findings:

Besides the causes that already mentioned the report underlines the inability of Greece to devaluate – as being member of the EMU - resulting to a sharp rise on it’s prices on transportation, hotels and food, that consequently caused a remarkable fall of tourism which was estimated up to 15-20% in 2009. To this I would add the adaptation of the agricultural sector to the EU’s needs which resulted in a more expensive product along with a much lower quality (mutant seeds). Additionally, investments like the Olympic Games and Athens Metro have significantly increased the burden of the debt, – one can recall Mr. Simitis’ (that brought Greece inside the Eurozone by secretly borrowing loans from the Goldman Sachs) motto by this time: “Powerful Greece – Powerful economy”… – or the “grandiose border posts where there is hardly any traffic, and major new roads, even motorways, in northern Greece where in many cases existing roads were quite adequate.

The background to this goes back a long time and is ultimately linked to Athens Right wing government’s perceptions of the national security issues. At the end of the Civil War in 1949 much of northern Greece was in an economically ruined state. The communist KKE still had strong and genuine popular support in many places, particularly Macedonia, even though their Democratic Army had been defeated in the Civil War. Insecurity remained. The northern border was a long boundary with either belligerent Hoxhaist Albania, Yugoslavia, Warsaw Pact member Bulgaria and always difficult Turkey in Thrace”.

Accordingly, there are other reasons without a particular order of importance: “… the centrality of a few political extended families within the political elite- the parataxis of the families of both major party leaders the
strength of Marxist and quasi-Marxist ideology and political parties, the political and economic influence if not direct unmediated power of the Greek Orthodox church, high defense expenditure caused by poor relations with Turkey, the virulent anti-Americanism among very large sections of the educated population caused by US policies in the junta period, the fiscal burden of the Olympics and Bush administration international politics,
massive on-costs for the state caused by the fragmented landmass and islands and the dependence on external finance for much infrastructure construction since the end of the civil war in 1949”. The report states that even that the reform of the Greek state have been an uncontroversial demand, it is extremely difficult as the major parataxis – families “would destroy their own political bases in so doing”.

The report foresees that there will be a great resistance on the public spending cuts that demanding external players as these “often do not always appreciate the very poor wage and salary levels of many people in Greece such as schoolteachers, let alone unskilled workers. The fact that in some parts of Athens and Thessaloniki as many as twenty per cent of the vote in the 2009 national elections went to the Marxist parties to the left of PASOK is an indicator. In the cafe climate of Greek politics, there is fertile ground for the argument that the whole crisis is a product of the greed of Anglo-American bankers, Jews, local monopolists and their own expatriate rich. Public attitudes to the Euro are hard to evaluate and often contradictory. When Greece finally became a member in 2001 there was widespread national satisfaction that the country had seemed to have overcome the burden of the conflicts of the past and had become a respectable mainstream European nation. But, within a year, food and daily living costs were rising rapidly because of the Euro and tourist decline had significantly set in seriously. The end of the drachma was widely regretted, particularly by small business”. One more cause of Greece’s failure is the “social change and population movement in Greece in the last generation has emptied much of the mountain and rural hinterlands and brought a new consumerist middle class in and around Athens into being. The overconsumption patterns of this social orbit are a major cause of the current crisis, irrespective of whether those involved are in the public or private sector”.

The report implies that the exit of Greece from the euro was faced like a taboo inside the country and outside, while Mr. Provopoulos, governor of the Bank of Greece, “set out a cogent position for Greece remaining in the Eurozone” while admitting that the euro “has caused Greece, a major loss of competitiveness since 2001”. But challenging his opinion it states that his “nightmare picture of the role of drachma devaluations is likely to be unconvincing”, “particularly to older Greeks, who saw the social and economic progress of the late 1970’s and 1980’s and 1990’s under the Karamanlis and Papandreou governments”.

As said in the beginning of this article it is just a glance to the present unprecedented economic crises. Regardless the path that Greece is going to follow, any solution will prove to be inadequate if it fails on these three key factors: Informed citizens and not ignorant tax-payers, transparency in every process and justice in the distribution of economic burdens.

Finally, as beyond numbers, statistics and analyses there is experience that underlines the grave symptoms of the present economic crisis I will close this post with a little event I happened to hear from a 21 years old girl. She was coming back home in a taxi from a Saturday party when three armed Pakistani stopped the car under gunpoint. They forced them out, took their money and vanished in the dark streets. But this was not what really shocked her as when they got back in the car the driver told her: “I am sorry, but I can’t drive you back home as you don’t have money any more”, and left her there all alone.

Apart from this profound change of social behavior two persons that I know – brother and sister – both disabled, saw their pensions lowering from 800 to 600 and from 600 to 400 euros respectively. The mental disordered that had a helping 300 euros pension every two months now they are supposed to pay with that for their medicines. Sorry, I forgot that they were overspending all this years and who knows maybe they do have a secret pool in their family home after all.

For an updated study on the subject see:

1 comment:

  1. good point of view, here other point of view about Greek crisis