[Aristides N. Hatzis] Lessons from Greece

For the past 18 months Greece has been the epicenter of the European sovereign debt crisis. Its enormous national debt (127 percent of GDP before the first bailout in May 2010, reaching 160 percent by the end of 2011) and its ever-expanding deficit (14 percent before the austerity measures) were so scary that nobody really cared about what led Greece to this. Nobody was really interested in this monster-making machine which gave birth to both, more widely known by the euphemism “Greek Government.”

Make no mistake: In Greece, government is not only the problem; it’s also the guarantee that no solution can be successful. The Greek debt is the worst case of government debt, accumulated to these gargantuan proportions during some 30 years of irresponsible spending. How could you spend so much money?

Up until the late 1970s Greece was still considered a miracle economy since for most of the period between the mid-1950s and the mid-1970s its economic growth could be compared only to Japan. Its accession to the then European Communities as its 10th member (even before Spain and Portugal) was not only a magnanimous political decision; it was also based on this impressive growth spurt.

However this historic moment for modern Greece did not become the starting point for more economic and institutional development but the beginning of a 30-year journey down the abyss. The map for this journey was sketched by the Socialists who seized power for the first time in 1981 but it was followed religiously by the “socialists of all parties” who have governed Greece since then.

Even the conservative government which governed Greece from 2004 to 2009 managed to surpass socialists in spending and borrowing. As Thomas Friedman aptly put it in New York Times, “Greece, alas, after it joined the European Union in 1981, actually became just another Middle East petro-state ― only instead of an oil well, it had Brussels, which steadily pumped out subsidies, aid and euros with low interest rates to Athens.”

Of course, only a small portion of these funds were used efficiently in order to boost growth, invest in public goods and create an adequate social welfare net. Even though the Greek government spent nearly half of its budget on social benefits the result was a low-quality (sometimes third world country-level) welfare state. It is no coincidence that the efficiency of social welfare spending in alleviating poverty was the lowest in EU.

The inefficiency was not only the result of a bureaucracy of Kafkian proportions but also the deliberate “spillovers” of these benefits to the government “middlemen” (e.g. corrupted tax collectors) and interest groups with the power to pressure for redistribution in their favor (e.g. closed professions).

The unaccountable welfare state, the widespread tolerant attitude toward corruption in combination with an inefficient legal system, extensive tax evasion, “captured” regulatory agencies and politicians and political parties elected to serve the rent-seekers led to a textbook example of prisoner’s dilemma, typical in a Hobbesian world.

Nobody wants to abandon these kinds of privileges now and so the only way for the Greek government to enforce austerity measures for the past 18 months was to tax the small minority of Greek citizens and firms who are either law-abiding or just can’t evade taxes and to put most of the burden of the economic depression on private sector employees.

This deplorable situation led to the movement of the so-called “outraged citizens” against the current political system. However their outrage is both justified and hypocritical. They are justified because Greek politicians failed them miserably and Greece is now at the edge of a catastrophe. They are also hypocritical because they don’t want to realize Greece’s problem. This is a clear case of denial.

They are outraged with the politicians, not because politicians spent irresponsibly for decades but because they can’t spend any more. If someone were to visit Syntagma Square in Athens’ center, he would find signs asking for more benefits, asking for the status quo to remain the status quo, cursing politicians for the wrong reasons and at the same time a lot of nationalistic, fascist, antidemocratic and crazy leftist stuff.

Nevertheless, I am not going to underestimate the responsibility of the Greek political parties. Their behavior is deplorably opportunistic and this crisis demonstrated the low quality of Greek political personnel. I hope that the Greek people realize this but also I hope that they don’t let themselves to be allured anymore by populist demagogues.

The only solution for Greece now (a solution that has eluded most of the commentators and opinion makers) is the creation of wealth through the market. Greece is not a free-market economy, despite appearances. It’s a typical example of crony capitalism with a low-quality institutional framework, a highly regulated economy and at the same time a paradise for corruption and cartels.

If more spending was the solution (as some Keynesians would argue) Greece wouldn’t be in this place. We are great spenders, as you know. Unfortunately irresponsible spending was the problem in the first place for Greece and it still is. We don’t need more spending. We need less taxes, a less regulated market, the abolishment of closed professions, less impediments to transactions, enforcement of legal rules and a credible antitrust policy.

And this is the most important lesson one can get from this sorry situation.

By Aristides N. Hatzis

Aristides Hatzis is an associate professor of legal theory and law & economics at the University of Athens. He manages the blog GreekCrisis.net and is an associate fellow with the Center for Free Enterprise in Seoul. ― Ed.