Sunday, 21 February 2010

Let`s Not Follow Greece

Let`s Not Follow Greece

21st February 2010

The Malta Independent on Sunday

Alfred Mifsud

Why have the Greeks found themselves in the financial mess they are in? Was not the euro supposed to save them from their own indiscipline? Is there a risk that we could find ourselves in the same mess, euro and all?

The answer to the first question needs elaboration. The answer to the second and third questions could be simply yes and yes, but some elaboration would not hurt.

Greece never captured the true spirit of EU and euro membership. Unfortunately, they equated EU membership to opportunity to salt away EU funds for regional development and euro membership to opportunity to continue to spend and borrow at cheap rates as if there is no tomorrow.

Their economy was never re-structured to remain competitive within the framework of open trade and a monetary union. Their civil services remained over-manned, inefficient and corrupt. Stories that bureaucratic applications for routine government services do not get processed unless accompanied with a thick brown envelope abound.

Their pension system remained over-generous with retirement age at 61 and early retirement on flimsy excuses as common as in Gozo.

Their tax-collection system remained inefficient and tax evasion, a national past time fuelled by conscience whitewashing that it is almost criminal to pay taxes for the government to waste in useless expenditure.

Hand in hand with all this, Greece lost competitiveness as wages increased beyond anything justified by efficiency gains.

Unavoidably, deficits grew and grew even when the world economy was feasting and they blew up during the international financial crisis causing increased expenditure through auto- triggering of social expenditure stabilisers and collapse in tax revenues.

But everything got over-complicated by the fact that Greece had made it a habit of hiding its financial misdemeanours by submitting inaccurate, sometime false, statistical data to avoid triggering imposition of external discipline and escape corrective measures from the EU and euro central authorities. It is now resulting that Greece also played financial tricks to artificially slim down its budget deficit and total debt during the process of accession into the euro monetary system. Had this financial trickery not been conducted through complicated financial derivatives, with the help of major international banks like Goldman Sachs and J P Morgan, Greece would never have had the credentials to join the euro.

In short, Greece is not only guilty of financial recklessness but also of wilful misrepresentation and outright cheating. These failings are prejudicing the credibility of the euro monetary system and putting other euro countries in a situation of having to choose between a rock and a hard place.

If they bail out Greece they would be rewarding cheating and indiscipline, offering an open invitation for other members to rely on bailouts rather than painful but effective structural adjustments, as Ireland is currently undergoing. If they do not bail out Greece they will either see it default on its bonds or pushed into the hands of the IMF for a sovereign financial rescue. Either would be a humiliation for the Euro monetary system and would weaken its credentials as a reserve currency alternative to the US dollar.

The new Greek socialist government is now obliged to sort out this financial mess inherited from a supposedly conservative predecessor. Strange Greek world!! Conservative governments are supposed to balance their budgets and socialist governments are supposed to spend their way to high deficits. But since George W. Bush drove a horrifying hole in US public finance from the surplus he inherited from liberal President Clinton, this world has been turned upside down, including two huge financial bubbles in a decade. Conservative governments are being forced to adopt Keynesian policies to avoid a depression, and a socialist Greek government is being forced to right-wing Washington Consensus style of savage adjustment to avoid total financial collapse.

Can you recognise some local traits in the Greek tragedy? I certainly can, though in a much more contained degree, at least so far.

We are losing our international competitiveness too, and like the Greeks we no longer have an exchange rate adjustment tool to bring about an instant correction. Our wages continue to grow in a manner unrelated to productivity. Our public sector remains over-manned, inefficient and overpaid when considering the benefits and security of their job tenure.

Our social services remain unsustainable, and the universally free public health system will sooner or later, probably much sooner than government thinks, bankrupt the country. Our pension system has thankfully been adjusted to bring retirement age to 65 over a protracted period but even this may not be enough.

Our tax collection system remains ineffective. Tax evasion, if not a national past time, is by no means uncommon. The final withholding tax on property sales has been a retrograde step in efforts to close the tax net on evaders through electronic checks among government’s three main sources of current revenues, income tax, VAT and excise/import duties. The culture of tax evasion remains well rooted.

Where our position remains much stronger than Greece is our ability to finance our own deficits. Greece has a poor government but quite affluent citizens who however prefer to keep their riches out of their taxman’s reach and invest them outside their country. On the contrary, while our government is similarly poor and our citizens may not be as affluent as the Greeks, we generally keep our savings invested in the local economy so that government need not seek foreign banks or foreign investors to finance its needs or excesses.

We should however steer clear of Greek practices to hide our deficit. Hidden problems are more difficult to solve as they get neglected till they explode in full force.

So I am scared stiff by the government’s declared intention to finance infrastructural non-revenue generating projects like City Gate through off-balance sheet securitisation. I am miffed by government nonchalance in funding off-balance sheet social capital expenditure like school development by FTS and ‘investment’ to buy the licenses of transport operators, be they bus owners, hearse operators or taxi licensees.

There is a limit to how much we can abuse the thrift culture that makes financing easy. Let’s not follow Greece.

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