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News : EU Economy Last Updated: Apr 19, 2010 - 7:36:02 AM

Bribery, patronage and other public corruption costs Greece 8% of its GDP or more than €20bn annually
By Michael Hennigan, Founder and Editor of Finfacts
Apr 16, 2010 - 7:12:38 AM

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Greek Prime Minister George Papandreou (l) with European Commissioner for Economic and Monetary Affairs Olli Rehn, in Athens on Monday, March 01, 2010.

Bribery, patronage and other public corruption costs Greece 8% of its GDP (gross domestic product) annually or more than €20bn according to a forthcoming study.

The Wall Street Journal reports that a forthcoming Brookings Institution study, which examines the correlation between corruption indicators and fiscal deficits across 40 developed or nearly developed economies, highlights how corruption has hurt public finances in parts of Europe, especially in Greece and Italy, and to a lesser extent in Spain and Portugal.

"And we know Greece faced not only a fiscal deficit, but I would call it a credibility deficit," Greek Prime Minister George Papandreou said in a speech at the Brookings Institution, in Washington DC in early March."As a matter of fact, I call that the biggest deficit we had as a result of the fabricated budget figures our predecessors had published. So our partners in the European Union were understandably skeptical about our promises to rein in the deficit and crack down on issues such as corruption, but today we are demonstrating the decisiveness of Greece."

The Prime Minister said that at the top of his list of priorities was tax evasion. "To give you just one measure of the scope of that problem, fewer than 5,000 Greeks declare incomes of €100,000 or more (in a developed country of 11m people), and that pattern must end, and it will end. We will be prosecuting offenders, no matter how rich or powerful, to show that we mean business. The rule of law means that the law applies to all. Such changes, we are sure, will bring in billions of unpaid taxes and help underpin our return to fiscal health.," he said.

A government survey in 2009 of 150 doctors in Kolonaki, a wealthy Athens suburb, showed that half of the doctors said they were earned less than €30,000 a year. Thirty said they made less than €10,000 - - it seems like Ireland in the 1970s.

Greece’s revenue from income tax was 4.7 % of GDP in 2007, compared with an EU average of 8% according to Eurostat statistics. Tax revenue fell by 2.5 percentage points of GDP between 2000 and 2007 to a Eurozone low of 32% even as economic growth averaged 4.1% a year.

The Greek shadow economy, which is made up of unreported income, was 25.1% of GDP in 2007, according to Friedrich Schneider, a professor at Johannes Kepler University in Linz, Austria. The shadow economies of Spain, Portugal and Italy were all around a fifth of GDP. That compared with just 11.8% for France and 7.2% for the US, he said.

Prof. Schneider says that one-quarter of all taxes owed in Greece aren't paid. He estimates that around one-third of that is due to bribery. "You split your tax payment with the tax inspectors, and you get a discount," he says.

The Journal reports that a senior government official says some tax offices operate a "4-4-2 system," a reference to football strategy. If an individual or company owes €10,000 in taxes, they slip €4,000 to the inspector, keep €4,000, and pay €2,000 to the state.

A survey published by the anti-corruption group Transparency International in March said 13.5% of Greek households paid a bribe in 2009 - - €1,355 on average.

Greece has 180,000 teachers and one of the world's best teacher-student ratios but 20,000 teachers "work" in administration because there are no classrooms for them.

This week, a 44-year-old former director of marketing at the subsidiary of US healthcare group Johnson & Johnson, was sent to prison for 12 months by a judge at London's Southwark Crown Court, despite requests from the prosecution and the defence for a suspended sentence.

Robert Dougall, a former executive of DePuy International who turned whistleblower, paid £4.5m of bribes to Greek state surgeons in the period 2002-2006.

Greece requested official talks on its economic program with the IMF and EU Thursday in a move that could lead to the debt-laden country accessing bilateral funding. Linda Yueh from Oxford University has analysis:

Ready to activate bailout?

Greece is under pressure to cut its budget deficit by 4.0% of GDP this year to 8.75% and on Thursday it asked for more talks about the financial rescue plan agreed by Eurozone countries and the International Monetary Fund (IMF).

Earlier on Thursday, interest spreads on Greek 10-year bonds over German bunds reached 426 (4.26%) basis points - - more than double the German base level of about 3.10%.

Greece's finance ministry said that asking for talks on the rescue deal did not mean it would draw down the money.

On Sunday, Eurozone finance ministers agreed on a one-year €30bn loan scheme with an additional €15bn coming from the IMF.

The package, to be drawn on only as a last resort, was designed to bolster confidence in the financial markets, where Greece is raising billions of euros to pay off its debts.

The finance ministry today wrote to the European Commission, European Central Bank, and IMF to discuss a "multi-year" programme of economic policies.

The ministry said this did not mean it was about to call on the loans.

In a statement, the ministry said: "With this letter, Greece is officially starting discussions about specifying the terms of the mechanism [of the aid package].

"The letter is not the activation of the aid mechanism."

The IMF's managing director, Dominique Strauss-Kahn, responded to the letter, saying he would send a team to Athens on Monday to begin negotiations.

The EU and ECB were not immediately available for comment.

Letter from the Ministry of Finance to the European Commission, to the European Central Bank and to the International Monetary Fund:

The Ministry of Finance sent to the European Commission, to the IMF and to the European Central Bank the following letter:

Mr. Olli Rehn,
Commissioner on Economic and Monetary Affairs
European Commission

Mr. Jean-Claude Trichet
European Central Bank

Mr. Dominique Strauss-Kahn,
Managing Director

Dear Sirs,

In accordance with the statement of 11 April 2010 on the support to Greece by euro-Area Member States, the Greek authorities are requesting discussions with the European Commission, the ECB and the IMF on a multi-year programme of economic policies building on the Ecofin conclusions of February that could be supported with financial assistance from the euro-area Member States and the IMF, if the Greek authorities were to decide to request such assistance. 

Yours sincerely,

George Papaconstantinou

A group of German professors is preparing to challenge the EU-IMF rescue plan for Greece at Germany's constitutional court as soon as the mechanism is activated. They believe that it violates the 'no-bail-out' clause of the EU Treaties. Professor Karl Albrecht Schachtschneider from University of Erlangen-Nürnberg has more:

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