In life there is the golden rule that prevention generally costs less than the cure. But prevention requires a mindset of systematic care, a quality that does not characterize contemporary Greeks either as individuals or as a country. I will refrain from giving examples in this regard so that I may focus on the sharp downturn of Greece’s state finances. Unfortunately the arguments I and a few other Greek economists put forward in the last three decades to put our house in order were denigrated by politicians of all persuasions and now we have reached the brink of bankruptcy, which has become quite imminent due also to the on going global economic crisis. Personally I have strong reservations whether Greek politicians realize how from the proclamation that “Greece belongs to the Greeks”, of Mr. Andrew. Papandreou back in the early 1980, we have come to the “Greece belongs to her lenders”, of Mr. George Papandreou. But now all margins to hide the gross mismanagement of the economy from Europe and the international markets have vanished and it is time to assume full responsibility for the mess our leaders have created and reach out frankly and openly for help. So the question that arises is from whom we can expect and what kind of help. My answer is as follows.
As correctly pointed out a few days ago by the Chancellor of Germany Mrs. A. Merkel, Europe has a huge responsibility in the case of Greece. I do not know what exactly she had in mind. But from my point of view Europe is responsible because it tolerated for too long the transgressions of Greek governments. The usual argument is that Greek governments misled the supervisory authorities of the European Union (EU) by submitting stabilization programs that they did not intend to apply in the first place and that the national income statistics that they reported were consistently and intentionally diluted. However, this argument is trivial and it is not worthy of any consideration. The EU agencies knew or had the capability to know what was happening in Greece in the last three decades. But they did nothing to avert the uncontrollable growth of corruption that accompanied the public management of the huge transfers of financial aid from European coffers. Perhaps this oversight transpired because dominant in the minds of European leaders were the political criteria of the Union and the false hope that in the vast European area the Greek political system would return gradually to the virtuous cycle of economic policies. However, the truth of the matter now is that Europe has an obligation to help Greece. But for God’s sake, not with further financial aid, because the current crisis constitutes for Greeks an excellent opportunity to put our country right.
The help Greece needs from Europe is twofold. On one hand, the European leaders must convince international markets that Greece will not be allowed to default on its debt. This will provide the Greek government with enough time to enact appropriate policies and leeway for these policies to yield the expected results. On the other hand, the same leaders must make clear in unequivocal terms that their above commitment is subject to the immediate adoption of drastic policies in the following directions:
1. All public expenditures should be treated as downward elastic. The claims that one hears frequently in Greece that particular public expenditures are rigid and cannot be adjusted downwards are hypocritical because they are intended to perpetuate the hold on power by the two major political parties. On the contrary, all public expenditures, including the salaries and the number of public servants are flexible and they should be reduced immediately.
2. The classes of citizens that evade taxation and other financial obligations to the state are well known and the available technology makes it feasible to increase public revenues right away, without increasing tax rates and thus running the risk to hurt the economy. The lack of trust in the government and the rampant state promoted corruption are social phenomena that can and should be confronted now, not in the future, because they give rise to extreme individualism that undermines social cohesion.
3. At the very least education and health services should be distributed according to the principle of selectivity. This means that, apart from the category of those citizens who are considered as “have-not on the basis of their total wealth”, all Greeks should bear the costs of public services they enjoy.
4. Granting of public subsidies should be subject to the principle of substitutability. This means that if the government decides to subsidize a particular public service or class of citizens, the cost of subsidies should be offset by equal reductions in other public expenditures.
5. The State’s obligations to various public insurance schemes should be limited to a minimum guaranteed pension for all, and the responsibility for additional retirement supports should be transferred to citizens themselves.
6. In state enterprises the government should exercise its rights as a key stockholder, but stop interfering in their day-to-day operation. In other words, the government should stop guaranteeing the loans of these enterprises and their supervision should be transferred to pertinent independent regulators.
7. In the private sector the government should eliminate all taxes on behalf of third parties, open up all closed professions, etc, so as to enhance competition and stimulate entrepreneurship.
If by using appropriate policies of “carrot and stick”, i.e. on the one hand providing moral support and cover from the risk of bankruptcy, and on the other by applying pressure to introduce the necessary structural reforms, the Greek government does not respond in the next few months, the EU should leave Greece to default for two reasons. First, to protect the credibility of the euro, and, second, to warn credibly other member countries, which are close or in the region of defaulting, My expectation though is that under constant pressure from EU, this time the Greek government will respond.