Greece: what went wrong?

Today, the Greek economy is sinking into a deep recession following great cuts in wages and pensions while economists and politicians debate

George Papandreou: can his successors achieve where he failed? (Photo credit: francediplomatie)

George Papandreou: can his successors achieve where he failed? (Photo credit: francediplomatie)

A few years have passed since George Papandreou, until recently the Prime Minister of Greece, announced that the country would be asking for a rescue plan to pull it out of its debt crisis. Today, the Greek economy is sinking into a deep recession following great cuts in wages and pensions, while economists and politicians debate whether the measures implemented by the troika of the IMF, European Union and European Central Bank are going in the right direction.

However they have forgotten another major aspect that directly affects the implementation and effectiveness of the measures: regardless of their political persuasion, the country’s politicians have failed to make serious structural changes. This is perhaps less surprising when one considers that they were elected by a core of people who, following the elections, received a guaranteed job in the public sector and, in many cases, a pension of €2,500 per month from the age of 50. Unfortunately, no one really cared to ask where this money came from and whoever tried to was just ignored.

In the 1980s, when countries like the UK and the US were passing laws to promote deregulation and give rise to the private sector, Greece was entering an era of inflated wages, pensions and tax cuts. When the EU granted the country subsidies for infrastructure improvements they provided the basis for Greece’s public sector binge. The socialist government also nationalised the most successful heavy industry companies, which often ultimately led to their closure as the government took on more debt in order to hire more workers. For instance in 1984 the country’s biggest textile producer, Peiraiki-Patraiki, was nationalised, and twelve years later was forced to close with debt having tripled.

Partly as a result, Greece became a country with low national production. Nationalisation, high bureaucratic barriers and corruption all served to deter private investors, and by 2008 imports amounted to 39% of GDP. Today, the combination of cuts to private sector wages and pensions, as well as heavy taxes, have brought the economy to its knees. Yet the public sector is experiencing zero transformation at a time when politicians would do well to draw inspiration from the likes of Mario Monti’s Italian government.

Italy and its newly formed technocratic team has taken immediate actions against tax evasion as well as lowering the barriers for new investment and attempting to open up so-called ‘closed professions’. Greece now has to choose. Either it can pursue a path of real change in its structure and its functions or it can leave the euro and default, keeping its internal state of corruption and bureaucracy and preventing any kind of major investment in the country.

One thing is for certain: Greece cannot continue its current policy of avoiding any kind of major restructure by implementing more horizontal cuts and tax burdens that will not lead to growth. This Sunday’s elections will show whether the people have decided it is time for real change. The question is, will those elected be prepared to act?

One comment

  1. Very accurate comments. I totally agree that these elections will change things in Greece. As to which direction we will all soon find out. Lets just hope for the best.

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