With friends like these (once more on Greece)

Michael Burke13/02/2010

Michael Burke: There are widespread reports including here, that the meeting of European Finance Ministers will agree to a series of measures aimed at preventing a deepening of the financial crisis as it affects Greece, and threatens to engulf a number of EU countries.

The terms of the bailout and its extent are unclear. But what is clear is that Greek workers will not be enjoying a bailout of any kind. Along with the lowest paid and those dependent on public services, Greek workers will bear the brunt of the 'adjustment process', through wage and welfare cuts, pension reductions, an increased retirement age and other austerity measures.

It is noteworthy who will not be targeted. Greece has one of the lowest tax takes in the Euro Area. In the 15 years to 2006, Greek total general government revenues as a percentage of GDP were 37.9% compared to an average rate across the Euro Area of 45.3% (and 36.3% for Ireland)*. This low level of taxation was, in the Greek case, the source of long-standing deficits which were hidden from a gullible EU (or Eurostat) inspectorate over a number of years. Greece taxation is also a long-standing burden borne by the poor. The FT reports that, according to tax returns, there are only literally a handful of Greek citizens who earn more than €1mn per annum, and that the Greek shipping magnates and others are registered as 'non-domiciles' in Britain, and consequently pay tax nowhere.

Greece has been in the firing line because of its high level of government debt, which existed long before the current crisis. Greek government debt as a percentage of GDP has been hovering close to 100% of GDP in all the years of this century, and is forecast by the EU to rise to 125% of GDP. The bond market fear which has pushed Greek yields higher was exacerbated by the decision of the European Central Bank in effect to remove Greek government bonds from the list of assets it would hold at the end of this year. A reversal of that announcement alone would transform the attitude to Greek government debt, but has not been forthcoming. Likewise, a genuine transformation of the tax system in Greece, as well as rigorous clampdown on tax evasion by the wealthy, would have a dramatic impact on the deficit.

Instead, it seems as if the European institutions are intent on acting as a quasi-IMF, with any support conditional on a deepening of current austerity measures. This is no more likely to be successful in Greece than it has been in Ireland. Greece is actually experiencing a mild recession compared to most industrialised countries. GDP is expected to fall by just 1.4% over 2009/2010. Yet investment is expected to decline by 25.5%, having started to fall a year earlier. It is this investment slump which has caused tax revenue to decline by 8.8%, which in turn is the source of the rise in the deficit. By contrast, the recession-related rise in government spending over the same two years has been just 3.5%.

The austerity measures foisted on Greece stand in sharp contrast to the reflationary measures adopted all across the Euro Area, and led by Germany (with the stark exception of Ireland). German reflation has amounted to 4% of GDP. The measures could have been better-targeted. But despite a stagnant Q4, forecasts for Germany's growth and its deficit are both on an improving trend. The question is therefore posed, why is a reflationary recipe that clearly works for 'core' Europe deemed unsuitable for Greece? Why can government investment work for Germany, France, Belgium, and so on, but is ruled out in the case of Greece?

The answer may lie elsewhere, in the countries of Eastern Europe. There, a number of countries had been hoping to benefit from further EU enlargement, which now seems postponed. Prior to enlargement, the EU demanded continual reform of the Eastern European economies – including further privatisations, liberalisation of the labour markets and a reduction of social spending.

The privatisations facilitated the arrival of Western European and US telecoms, agribusiness and other firms, but above all banks and financial firms. The drive to lower wages and social spending allowed a cheapening of labour, to be exploited by Western firms, and led to widepsread emigration. The removal of local producers expanded the market for Western goods.

This sounds like the package of 'reform measures' to be demanded of Greece in return for any loans. Greece may soon find that, while all members of the EU are equal, some are more equal than others.

* All data from the EU Commission Area Report, Winter 2009, Statistical Anne, unless otherwise stated.

Posted in: EconomicsEconomicsEuropeFiscal policy

Tagged with: deficitreflationDeflationGreece



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