Greek Tragedy: Act II

Source: www.businessinsider.com
Source: http://www.businessinsider.com

Greece is the birthplace of democracy, Olympic Games and now has created a cocktail of the two namely ‘games in democracy’. Pawan Gopalakrishnan and Anuradha Saha explore how the recent European Union episode offers an opportunity to contemplate on how to not be the next Greece.

Greece’s high debt to GDP ratio was not its only problem (see World Bank indicators for the debt to GDP ratio). Data suggests that in recent times, Greece’s debt to GDP ratio was negatively correlated with the Corruption Perception Index in the country for the period 1996-2013. This negative correlation, which was equal to -0.14, suggests that higher debt to GDP numbers correspond to a lower corruption perception index, which implies an increase in corruption in Greece. Thus, as the debt to GDP ratio rose, the perception about corruption in the country rose. It is well known in the public economics literature that high corruption causes high public debt in most countries (see Tanzi and Davoodi (2002), González-Fernández and González-Velasco (2014), and Kaufman (2010). In addition, Greece’s GDP growth rate was negative during recent times (see World Bank Indicators for the GDP growth rate). In a school paradigm, Greece was behaving like a student who was not scoring well in class and his naughtiness was perceived to be the trouble-making kind. Given this, Greece attracted the attention for some serious correction, which when did not work resulted in threats of severe punishment.

Greek lifestyle is both notorious and jaw-dropping. One of the finest examples of Greece’s over-spending issues is the sphere of pension schemes where a hair-stylist in Greece is considered to be in a hazardous profession and is entitled to enjoy full retirement benefits after the age of 50! Every working professional in a similarly hazardous industry, be it a coal miner or  a bomb disposal officer or a radio presenter, or for that matter a musician who blows into a wind instrument, all of them qualify for early retirement benefits — something that is enviable and baffling at the same time.

Add to this the fact that corruption and tax evasion in Greece traces way back to the 15th century Ottoman rule. One of the most important traits of the Ottoman rule was that it institutionalized bribery, which got passed on to the elites and the bureaucratic officials in Greece, and this survives even as of today. Bribing officials to expedite paper work, also known as ‘Fakelakia’ (literally translated as little envelopes), is a rampant issue. In fact it was hoped that the debt-restructuring of 2012 which induced Greece to take austerity measures would cleanse the system but the problem has only worsened. With massive austerity measures like cuts on public health, pensions, and education, the only way the lower ranked government officials could continue providing an elitist lifestyle for their family is by letting those little envelopes to circulate.

In the European Union, small countries like Greece, Portugal, and Cyprus have outsourced their monetary policy to the monetary union. So when any external crisis, like the US sub-prime crisis pushes these countries into a pothole, they do not have instruments of monetary policy to get themselves out of the mess. To top this, if problems like tax evasion and corruption co-exist, which makes fiscal policy ineffectual; a country is basically laying down a red carpet for recession.

So it’s just not Greece’s “need” for good living that is the cause for its problem. Greece’s “denial” to correct its faults and “inability” to generate jobs and output has also led to its current crisis. High debt to GDP ratio is not a recent phenomenon, nor a Greece-specific problem. While developmental activities can be a source of high debt, Greece’s high debt was interpreted as irresponsible borrowing. Amongst developed countries, countries like Cyprus, France, Greece, Iceland, Ireland, Italy, Japan, Lithuania and Portugal, have a debt to GDP ratio of over 100. Of these countries, the debt to GDP ratio is positively correlated with the perception of increasing corruption (or negatively correlated with the Corruption Perception Index)  for seven countries: Cyprus, Greece, Iceland, Ireland, Italy, Lithuania and Portugal (see table below). In addition to Greece, other countries like Cyprus, Iceland and Portugal continue to exhibit a negative growth rate. In our opinion, these countries are possibly on the road to trouble.

Corruption Perception

In a globalized world, responsibility towards electoral constituencies needs to be balanced with responsibility towards international trading partners. Within the European Union, this translates into a balance between a country’s sovereignty and empathy for other members. The empathy and solidarity between EU members for Greece is heartening. It is now up to Greece to reciprocate it with the needed structural transformation in its system. Countries like Cyprus and Portugal are moving in the right direction by cutting down their expenses and restructuring the economy. Growth is mandatory to pull an economy out of recession, but exhibiting willingness to be prudent in bad times wins benefactors and friends who help you in this arduous task. Amongst several tough measures, Greece especially needs to extend the retirement age, cut down red tape to facilitate competition and hence job generation. Like cats, Greece seems to have many lives. Let us hope that Greece capitalizes this latest opportunity.  For the other debt-ridden, growth-stagnant countries, our prayers are that thou shalt be prudent and thou shalt not covet thy neighbor.

Pawan Gopalakrishnan is Senior Research Associate at the OP Jindal Global University and Anuradha Saha is Assistant Professor at Ashoka University

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