As Greece draws breath after voting for a new package of austerity measures likely to pave the way for another loan agreement with the European Union and the International Monetary Fund, this might be an opportune moment to identify one of the key faults with the first memorandum signed last year. Because, like a Hollywood sequel which follows a dire original, Memorandum II is likely to make us want to look away in horror.
There is plenty in the medium-term fiscal plan, or MTFP as it’s known in sequel speak, about reducing public spending. Greece plans to save more than 14 billion euros by 2015. This means, among other things, that the public sector wage bill will be cut by 770 million euros this year, 600 millon in 2012, 448 million in 2013, 300 million in 2014 and 71 million in 2015.
A large chunk of the plan is dedicated to tax increases: 14 billion euros more will be raised through taxation by 2015. One of the ways this will be achieved is by lowering the tax-free threshold for income tax from 12,000 to 8,000 euros. Tax experts estimate that a Greek earning 20,000 euros gross annually will pay an extra 800 euros in tax each year as a result of the latest measures.
Add to this the supposed 50-billion-euro privatization plan and you have figures that would put a summer blockbuster to shame. But as we move from Memorandum I to its potentially scarier successor, it still doesn’t appear to have sunk in either at home or in Brussels, Frankfurt and Washington, where the decision makers of the European Commission, European Central Bank and the International Monetary Fund reside, that all the slashing of public expenditure and hiking of taxes is not going to solve Greece’s problems.
In fact, the Memorandum is content to tackle the surface problems without delving into the murky depths of the Greek narrative to truly change the country’s fortunes. We are making fiscal adjustments instead of rewriting the script. Undoubtedly, if Greece wants to set itself on the road to ultimate salvation, it has to put its public finances in order. After running a public deficit for years on end, it can no longer continue consistently spending more than it earns and expect the Greek taxpayer to pick up the bill for the interest on the loans needed to bridge this gap.
Some 70,000 jobs in the public sector have disappeared since last year. Another 150,000 civil servants are due to be made redundant over the next three years. This should bring the number of bureaucrats, previously close to 800,000, down to more manageable levels for a country of Greece’s size. Cuts will also be made to health, defense, social and education spending. But this is by no means the end of the problem.
In fact, when compared to other European Union countries, Greece’s public expenditure is hardly as extravagant as is often made out. The 2011 Index of Economic Freedom compiled by the Heritage Foundation and the Wall Street Journal indicates that Greece’s government expenditure is 46.8 percent of GDP. It’s high but still below countries such as the UK, Austria, Denmark and France, where it reaches 52.8 percent.
To achieve a more efficient public sector, you need to do more than cut salaries and empty out offices. It requires retraining, restructuring and a reconceptualization of the role of the civil service. Anything less and Greece is doomed to throw good money after bad and repeat the mistakes that have stunted its economic and social development all these years. The Memorandum and the austerity measures it encourages offer a useful starting point but it falls well short of being the roadmap that Greece truly needs. It does not address any of the underlying structural woes that have led the country to near-ruin. The Memorandum is a guide to how to make the public sector smaller and cheaper but it does not address the inefficiency in much of the country’s public administration.
Tax offices are overwhelmed, town-planning offices are one of the greatest sources of corruption in the country, the judicial system is slow and complex, hospitals do not have computerized records, legislation for setting up a business is unnecessarily complicated, the performance of civil servants has never been assessed and there is little esprit de corps within ministries and the broader civil service. These — and more — problems relating to public administration have to be addressed if Greece is going to become a fully functioning state that allows itself a chance of success.
If taxes are collected, legal cases are processed, expenses recorded and a consistent ethos established, then the country’s public finances can be brought under control, entrepreneurs have a chance of flourishing, jobs can be created and Greeks can have a sense that fairness is being restored.
The great injustice that the state’s inefficiency creates should not be underestimated. It’s a brake on Greek society’s progress. It allows corruption, in both the public and private sectors, and tax evasion to thrive while consistently placing the burden for replenishing public coffers on only part of the population. It also means that those who do pay their taxes don’t get the service they’d like. For example, as many children in Greece are born in private maternity hospitals as at state-run ones despite the substantial costs involved. Also, Greek families spend almost 1 billion euros a year on private tuition for children that attend public schools, which is roughly the same as in Germany, which has a population eight times larger.
We’re almost two years into this government’s reign and it’s only beginning to address these problems now. The Finance Ministry, for instance, is examining using private companies to collect taxes and complete the land registry, while an evaluation process is to be introduced in the civil service. But this is hardly comprehensive or quick enough. In fact, it raises the question of whether this government has the will or the way to tackle this issue, especially as it’s coming up against vested interests. After all, if you’re a notary, a lawyer, an engineer, a judge or some other public administration official and your fees or wages are guaranteed under the current medieval system, what’s your incentive for change?
This raises the question of whether Greece will have to turn to the EU or the IMF for practical assistance. It’s in their interest too for Greece to move up a rung or two on the efficiency ladder. Calling on expertise from abroad will raise concerns about loss of sovereignty, which might make the government balk… if it hadn’t already asked for such assistance.
When Prime Minister George Papandreou met the head of the Eurogroup, Jean Claude-Juncker, on June 3, all eyes and ears were trained on what the two leaders would say about a possible second bailout — our old friend Memorandum II — and hardly anyone paid attention to what Papandreou tagged on to the end of his statement after the pair had met.
“One of the major issues we have had in the implementation of our program is the capacity of our civil service to make such deep and profound changes and reforms,” said Papandreou. “And what I have asked Jean-Claude and what I have asked a number of member states, and will be asking all our member states and the Commission, is to set up agreements, bilateral agreements but also agreements with the European Union Commission, for capacity building in the civil service, whether it’s from privatization to health, from education to e-governance, doing business easily in Greece, cutting bureaucracy, all the way to revamping and strengthening our tourist industry.”
There will be those that will argue relying on foreign know-how is an unacceptable surrendering of sovereignty. Others will claim that we passed that point long ago. What both would agree on, though, is that all the fiscal adjustment in the world will still leave Greece short if the country continues to stand on a ramshackle structure. Overhauling the rickety construct is Greeks’ only hope of long-term viability. It’s the only chance they have of seeing a happy ending rather than another horror show.