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Analysis/Comment Last Updated: Jun 23, 2011 - 8:56 AM


Should corrupt Greece be ejected from Eurozone if it rejects reform?
By Michael Hennigan, Founder and Editor of Finfacts
Jun 22, 2011 - 5:43 AM

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It may eventually be both best for the Eurozone and Greece to part ways if there isn't an interest in seriously reforming a deeply corrupt system.

The Greek government on Tuesday night survived a confidence vote, and Prime Minister George Papandreou said Athens confronts a “moment of truth” in its debt crisis.

At the end of a three-day debate with thousands of protesters thronging Athens' main public square, Papandreou told MPs: “The impression the political class in this country gives is that it hasn’t understood the seriousness of the crisis.”

Last week the Financial Times in an editorial said:
"The crisis...represented a once-in-a-generation opportunity for Greek politicians, business leaders, trade unionists and the general public to join together in cleaning the putrid Augean stables of the modern Greek state.

Hidebound vested interests mass in defence of archaic privileges that are incompatible with participation in European monetary union over the long term. Myopic politicians, in government and opposition, trade accusations over trivialities and pay lip service to the cause of reform. The public, suffering its third successive year of economic recession, is by turns angry, desperate and drained of hope."

The Irish also show little enthusiasm for reform but after 30 years, we have a credible tax collection system and in contrast with Greece, corruption never reached the scale of the system in that country.

The latest austerity measures agreed with the EU/ECB/IMF provide for public sector job cuts of 150,000 in coming years.

It's not that civil servants are overpaid but the public payroll had become a massive instrument of patronage.

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.

Nevertheless, an EU report shows that private tuition in Greece was estimated at more than €950m per year, which is equivalent to 20% of government expenditure on primary and secondary education.

The current PM’s father Andreas, a former economics professor, had worked with his father George in the 1960s and saw at first hand how his father as prime minister had been thwarted by the forces of the Right led by the young gullible king and that period was followed by a military dictatorship.

Andreas was determined on winning power in 1981 to help his supporters by introducing a welfare state and providing an opportunity to move into the middle class through public sector jobs.

In Ireland, a few years previously, another economics professor had tried a more limited form of the same experiment and the Irish public pay bill jumped by 34% in 1979.

Greece like Ireland, also had the legacy of a bitter civil war.

In 1981, the Greek public debt as a ratio of gross domestic product (GDP) was 25%; it is now heading fro 160%.

George Papandreou said in an interview with Der Spiegel magazine in Feb 2010: "In a study done last year, the OECD described government-run Greek hospitals as deeply corrupt. It concluded that we could save 30% of the costs, which is enormous. The hospitals generated a deficit of €7bn last year.

Imagine what an unbelievably large amount of money we could save by simply introducing computers into hospitals. Until now, there has been far too little control over the purchasing of medications and equipment. In Germany, a stent for heart operations costs about €500. In Greece it costs €2,000 to €2,500. The fault lies with corruption."

Doctors take a cut from equipment suppliers and they also collect bribes from patients to gain priority on hospital waiting lists.

The Prime Minister told the Brookings Institution in Washington DC in March 2010 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 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 Wall Street Journal quoted a senior government official that some tax offices operate a "4-4-2 system," a reference to football strategy. If an individual or company owes €10,000 in taxes, it slips €4,000 to the inspector, keeps €4,000, and pays €2,000 to the state.

A survey published by the anti-corruption group Transparency International in March 2010 said 13.5% of Greek households paid a bribe in 2009 - - €1,355 on average.

Daniel Kaufmann, an economist at the Brookings Institution, wrote last year: "International Financial Institutions, such as the IMF, need to refocus (as they did a decade ago) on the serious challenges of corruption that afflict a number of its borrowers, undermining the country’s macroeconomic stability. Also, these global institutions ought to review afresh the distortive tax, public expenditure and public indebtedness regimes in many countries and their links to governance.

Merely focusing on crisis coordination and externally funded bailouts, or demanding statutory tax hikes - -  rather than expanding the tax base and cutting “pork” - - is unlikely to lead to sustained improvements. Global economic and financial institutions increasingly shy away from addressing governance and corruption issues. This can be explained by the political sensitivities associated with these, as well as the perverse incentives for many government leaders to mask such problems in their midst. Yet the cost of preventive inaction on governance issues is enormous and far beyond the confines of the misgoverned country, as illustrated in recent financial crises."

If there is no support in a bankrupt country for reforming broken systems, then full sovereignty should be restored and the other members of the European Monetary System should facilitate a departure from the group.

It's not uncommon for reform to be only embraced after a total collapse of an economy.

It's of course the poor who would be the biggest victims in such a failed state.

I suggested at the outset that a rupture could also benefit Greece but that is only in the context of reality dawning in the birthplace of Western civilisation, when there is nobody else to blame.

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