There is a wonderful short documentary doing the rounds on the Internet at the moment courtesy of The New York Times. Directed by Errol Morris, the film focuses on the presence of the so-called “Umbrella Man” at the assassination of US President John F. Kennedy. With the help of private detective and former philosophy professor Josiah Thompson, Morris paints the picture of the apparently sinister presence of a man holding a black umbrella on a sunny day in Dallas exactly at the point where Kennedy was shot.
However, Thompson goes on to point out that the Umbrella Man eventually came forward and explained that he was holding the umbrella as a protest against the appeasement policy of JFK’s father, Joseph P. Kennedy, when he was US ambassador to Britain before the Second World War. The umbrella was a visual reference to the British prime minister at the time, Neville Chamberlain, who also carried one.
“If you put any event under a microscope, you will find a whole dimension of completely weird, incredible things going on,” says Thompson, adding that the Umbrella Man episode is a “cautionary tale.” “If you have any fact which you think is really sinister; forget it man, because you can never think up all the non-sinister, perfectly valid explanations for that fact,” he says.
As incongruous as the two events are, perhaps there is a lesson that we can take from the story of the maligned Umbrella Man going into this week’s momentous European Union leaders’ summit. One of the main reasons that we have arrived at the point where the future of the euro and the EU itself is hanging in the balance is that too many decision-makers within the Union and the eurozone have spent the last two years chasing shadows, or men with umbrellas if you will, rather than addressing the real issues.
For much too long, this crisis — which Europe now unanimously admits is a systemic one — was approached as if it was a symptom of the failure of one country: Greece. Rather than treat Greece as the weakest link in a chain that would be tested to its limits, the eurozone chose to view it as the font of all Europe’s woes. The fact that a more comprehensive strategy to tackle the euro’s weakness is now being sought is tantamount to an admission that the wrong strategy was adopted.
The blinkered view that persisted over the past couple of years was built on certain myths that went largely unchallenged and became established in public discourse, much to the damage of both Greece and the eurozone. These myths have since given rise to other tales that threaten to undermine any possibility of recovery, even at this late stage. For this reason, perhaps now would be a good time to address some of the misnomers and misconceptions of the past months.
1. Greece should never have joined the euro — it used false statistics.
People often make the mistake of lumping these two issues together when there is clear distinction between the two. There is a valid economic argument that Greece, and several other countries, should not have joined the euro when they did. In Greece’s cases, it had achieved only a superficial convergence based on public debt and deficit figures but the negative underlying economic factors should have meant that the Greek organ was rejected in this currency transplant.
The structural problems that Greece never addressed, such as its decrepit public administration and weak production base, meant that it was at a disadvantage from the start and would have had to undergo a remarkable transformation — one which was never attempted by the country’s timid politicians — to achieve a sound footing within the eurozone. Instead, Greece ended up producing only one euro of its own wealth for every three that it imported over the last decade.
However, this issue is totally removed from that of forged statistics. It has become a throwaway line for commentators and journalists to write that Greece fibbed its way into the euro. This misconception is largely driven by the decision of the New Democracy government that came to power in March 2004 to conduct an audit of public finances that led to Greece’s budget deficit figure being revised upward, above the 3 percent of gross domestic product limit for euro-area members. However, the deficit increase was largely down to the conservative administration changing the way military expenditure was recorded. Rather than record the spending when the procurements were delivered, it attributed them to the date when the orders were made. This exposed a weakness in the way that the eurozone treated statistics. By failing to agree on a uniform system for all, it allowed statistics to be open to political manipulation in several member states, not just Greece. It is an issue that the European Commission has only addressed over the last few months. As Dimitris Kontogiannis revealed in Kathimerini English Edition recently, the EU now uses the delivery method to record procurements, which means Greece’s deficit when it joined the European Monetary Union in 1999 met the 3 percent target.
According to the Commission’s database, several other countries’ deficits, including France and Spain, were over 3 percent. Some will argue that this is irrelevant now and in a sense it is. But the regular rehashing of this myth has contributed to the impression among commentators, as well as average Europeans, that Greece has to answer for an original sin even though this offense was never committed. Establishing the truth has to be the first step to rebuilding trust.
2. Greece wasted years of European Union subsidies.
It is true that Greece has not made the best use of the cohesion funds it has received since joining the EU. The money should have helped invigorate the Greek economy so it could compete and create jobs. Instead, too much of the money was frittered away on useless schemes, such as agricultural subsidies — although Greece was not alone in doing this.
However, that’s not to say the money was completely wasted, nor that the structural aid packages were as large as some people like to believe. During its 30-year membership of the EU, Greece has received the equivalent of 78 billion euros in Union funding. Beyond that, the European Investment Bank has also helped finance key projects such as the construction of Athens International Airport and the city’s metro system. They are just a couple of schemes where EU money has helped improve Greece’s infrastructure substantially since the 1980s. Although still far from ideal, it should not be forgotten that because of its geography, Greece has to build and maintain an unusually extensive infrastructure — such as island ports and airports — for a small country.
Also, it’s worth bearing in mind that before the advent of the euro, the structural funds were a way for Greece to bring in foreign currency, which it then used to buy imported goods — mostly from Europe. Equally, one should note that many of the companies involved in Greece’s major infrastructure projects over the last decade were European. In other words, much of the money that was provided to Greece ended back in European pockets.
3. Greeks spent their money unwisely and ran up huge debts.
In the fog of crisis, people often confuse public and private debt. In Greece’s case, accusing its citizens of being irresponsible with their money over the last few years is perhaps one of the most unfair accusations you can make. While it’s true that the cheap credit which became available during the last decade fueled an unsustainable consumer boom, it inflicted damage on the Greek economy rather than on anyone else’s. The rise in demand for imported products strangled local production and meant that far too much money was flowing out of the country. However, it did not lead to Greeks as individuals owing inordinate amounts to others.
In fact, Greece has one of the lowest ratios of household debt to disposable income in the European Union. In 2009, it stood at 40 percent. Compare this, for example, to 122 percent in the UK, 130 percent in Spain and an eye-watering 240 percent in the Netherlands and it’s clear to see that those who are indignant at Greeks’ purported spending habits are misguided.
4. Greeks don’t work hard enough.
Comments over the last two years about Greeks’ work ethic, or lack thereof, have often been laced with cultural or genetic exceptionalism. The argument is often based on the theory that Greeks work too little, are always slinking off for a siesta and take long holidays. This is usually illustrated by a colourful anecdote about an idiosyncratic taverna owner on an island or a chain-smoking civil servant.
This is about as fair as basing your judgment of British or Dutch culture on the behavior of those countries’ teenagers in Malia or Hersonissos. There is no reason to form such stereotypes as there is ample statistical evidence to provide a clear picture of how hard Greeks work. Eurostat figures consistently show that Greeks work the longest hours in the eurozone. The latest figures show that Greeks worked an average of 40.9 hours per week in 2010. The eurozone average was 36.6. Even the usually privileged civil servants are now working 40-hour weeks after their working days were extended by 30 minutes this summer. Figures compiled by the Organization for Economic Cooperation and Development (OECD) also show that Greek productivity kept pace and in some cases exceeded other eurozone countries, including Germany, during the last decade.
However, what statistics cannot show is how much of an obstacle Greeks who do not work effectively can be to the rest. Numbers, for instance, are not able to illustrate how much time a Greek business owner or employee has to invest in processing paperwork because of his country’s arcane public administration in comparison to a eurozone peer that does not suffer such a drain on his or her resources. Greece’s problem is not one of its people being lazy but one of finding a way for those who do put in the hours to be efficient.
5. Greeks retire in their 50s.
Until last year, Greeks could earn a full pension if they completed 35 full years of work. However, for them to retire in their 50s, they would have had to complete 37 years. There were some exceptions to this in the public sector and the military. Similar rules on early retirement exist in other European countries. Nevertheless, the average retirement age in Greece is not in the 50s. According to figures compiled by Eurostat, last year it was 61.4. In Germany it was 62.
However, Greece’s pension laws were overhauled early last year so that by next year Greeks will retire at 65 and will earn retirement payments that are based on the average of the salaries they earned throughout their career rather than on their final wage. These are stricter pension rules than those in other EU countries, such as Britain, where public servants went on strike last week to protest about a planned scheme very similar to the Greek one.
6. Tax evasion is widespread in Greece.
Greece has a considerable problem with collecting taxes but it is inaccurate to suggest that a sizable percentage of the population is involved in serious avoidance. According to the Finance Ministry, some 900,000 people owe the state an estimated 41.1 billion euros in outstanding taxes. However, a mere 5 percent of tax dodgers owe 85 percent of the outstanding amount. Just 14,700 individuals, companies or organizations owe 37 billion euros, according to the ministry. Each of these owes more than 150,000 euros.
Serious tax evasion in Greece is the business of a relatively small number of people and enterprises that have taken advantage of an indifferent state sector. That’s not to say that smaller-scale avoidance by companies — the Social Insurance Foundation (IKA) estimates that 10 percent of firms don’t pay social security contributions — is not a problem. But when about half of the working population is employed in jobs where their income is taxed at source, thereby ensuring they cannot avoid paying their dues, it is unfair to tar the whole country with the same brush.
One last factor to take into account when discussing tax evasion in Greece is the structure of its economy: Unlike most eurozone countries, more than half of Greeks are either self-employed or work in small companies of less than nine people. In Germany, for instance, this figure is less than 20 percent. This is significant because anywhere in the world you go, there is a direct correlation between this type of employment and the black economy because it becomes more difficult for authorities to check disparate tax records. A graph of OECD data shows that there is a steady rise in the size of undeclared revenues and earnings, the more self-employed professionals and small companies a country has.
In the last few months, Greece has made slow but positive steps toward addressing the problem of tax evasion. Authorities are now employing an electronic system that allows them to crosscheck data and root out dodgers.
7. Greece spent too much money on its public sector.
The key phrase here is “too much” because nobody can really define what that is. Following a request by the government, academics carried out a study on Greece’s public sector in the 1990s with the aim of providing an assessment of what the country needed from its civil service. Their findings were never published or adopted. The impression has remained, though, that Greece employs too many civil servants and spends too much on services.
In terms of personnel, the process to reduce numbers has begun. It has been slow but some 150,000 contract workers and retirees have left the public sector and more than 30,000 civil servants will be placed in a labor reserve scheme over the next few months. Undoubtedly, more people will lose their public sector jobs in the years to come as in its current economic state Greece can certainly not pay their wages.
However, 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.
However, these figures don’t show what taxpayers get in return for the apparently average amounts that are spent on the public sector. This is where the real problem lies: Greeks are getting far too little bang for their public expenditure buck. Too much of the money has been wasted on fulfilling political favors — either through the handing out of cushy public sector jobs or juicy public contracts — rather than being invested in areas such as education, infrastructure and incentives for business that would provide the country with growth, jobs and a sturdy platform for the future.
In what is a double whammy for Greeks, the waste of money means that they do not enjoy the benefits of a social security system that would normally be associated with a country that purportedly spends heavily on its public sector. Social spending in Greece is actually several percentage points lower than in countries like Germany and Italy. One of the results of this is that the growing number of Greeks losing their jobs have little of the support that citizens in other eurozone countries can expect. In most cases, they will get a monthly unemployment benefit of 500 euros for a year and then be left to their own devices.
8. Greece has failed to implement the terms of its EU-IMF loan agreement (memorandum).
Greece has failed to meet the targets it agreed with the EU and the International Monetary Fund when it signed the 110-billion-euro loan agreement in May 2010. Undoubtedly, part of this is down to delays by the government and holdups in the judicial system and wider public administration. The liberalization of closed professions and the downsizing of the public sector are just two such examples.
The derelict state of the public administration, however, should have been clear to all. If a country’s civil servants are largely untrained and not monitored, if key departments lack know how, if its legal system is tied up in knots and its ministries are at war with each other due to allegiances to political parties rather than the public, then what hope can there be of achieving any meaningful change. A new OECD report suggests just as much and the EU Task Force that began work in Greece aims to provide expertise that will help improve the situation. That’s why there had to be greater emphasis in Greece’s bailout on uprooting this system rather than on getting public finances on track.
Furthermore, the targets that Greece was set were based on certain forecasts about the way the economy would evolve in the ensuing months. These predictions, as well as the troika’s understanding of how the crisis would develop, proved to be fundamentally wrong. Greece, for instance, is set to miss its deficit target for this year by about 1 percent of GDP, but on the flip side, the Greek economy had been projected to contract by 3.8 percent, whereas it will actually by shrink by about 5.5 percent. This also highlights the fact that Greece’s drastic austerity program — the likes of which has not been seen in Europe for several decades — does not appear to be having the desired effect. In fact, it seems to be worsening Greece’s recession.
Nevertheless, having entered into an agreement, Greece and its government must shoulder most of the blame for the program not working so far. This does not absolve the EU and the IMF — particularly the latter as it has experience of applying such programs in other countries — of their responsibility. The program devised for Greece has simply not been fit for purpose. Greece has consistently been told over the last two years that it’s a unique case, yet the EU-IMF program appears to be largely a mish-mash of measures that have been applied in other countries and which do not account for the particularities of the Greek case. Surely, if it were a unique case, it would require a unique program.
9. European taxpayers’ money is being wasted on the Greek bailout.
The language attached to the 110-billion-euro Greek package (bailout, aid, financial assistance, for example) often gives the impression that bundles of euro banknotes are arriving in Athens from other parts of the eurozone in cardboard boxes stamped with a red cross and that this cash is never to be returned. The reality is somewhat different. Greece’s eurozone partners are lending this money, not gifting it.
An agreement struck earlier this year means that this money is being lent at a reasonable rate of about 3.5 percent and that the maturity of the loans has been extended to 10 years. Based on a rudimentary calculation involving all the disbursements for the first year being added together and charged at a rate of 3.5 percent, France and Germany earned about 300 million euros each in interest over the 12 months. An extra 300 million euros flowing into the public coffers of France or Germany may not make a huge difference to either of those two countries but these are sizable sums for Greece. The total interest for the first year of loans stands at about 1.3 billion euros.
Furthermore, it is estimated that only about a fifth of the money that Greece receives goes toward covering public spending commitments such as salaries and pensions. Some analysts calculate that at last 60 percent of the bailout money leaves Greece in the form of loan repayments.
In other words, those contributing to the bailouts are making a profit on their investment and the majority of their money is being returned to European banks that have in the past bought Greek bonds.
10. A return to the drachma would be the best solution to the crisis.
A number of economists and commentators have pointed to a Greek exit of the euro as being the most effective way of tackling the crisis. Some of them have put forward a convincing argument about how Greece could regain competitiveness if it is freed of its euro shackles. Certainly, it is now evident that the drachma was overvalued when Greece joined the single currency and that this damaged the country’s competitiveness. However, Greece did not help itself by failing to reform its public administration and push for a more dynamic economy in the years before and after it adopted the euro.
The danger that most foreign analysts fail to identify in the eventuality of Greece returning to the drachma is that the political impetus for carrying out these reforms will also disappear. A euro exit would be the kiss of life for the current discredited political system and its cronies. In charge of the printing press and monetary policy once again, yesterday’s men will find a way to cling on to power and run the country according to their personal designs rather than in the interest of its people.
Beyond that, there are serious economic consequences to leaving the euro — such as a potential collapse of the banking sector and housing market, substantial depreciation of the new drachma and difficulty in importing vital supplies. These are sometimes easy for foreign observers to play down as they do not have to consider what effect all this will have on their day-to-day lives. Greeks, however, should be in no doubt that — economic theory aside — a return to the drachma will be ugly.
A cautionary tale
None of this is to say that there aren’t problems in Greece. There are plenty of them. They used to be small but years of social indifference and political timidity meant that they grew deep roots. Even at this late and urgent stage, there are elements of the political and economic system that want to cling on to the status quo at all costs and avoid the structural changes that would give the country a chance of moving forward and creating an economy that was not heavily reliant on cheap credit from abroad, imports and consumer spending.
To tackle these problems, you must be clear about what they are. Unfortunately, much of the debate over the last two years has focused on anecdotes, extreme examples, stereotypes and exceptions to the rule. It has emphasized the worst rather than identifying the best so it could serve as an example.
Why bring all this up now? Because for much of the past two years, too many decision makers in the eurozone have been sucked in by the Greek myths. It has provided politicians, European bureaucrats, economists, bankers and even citizens a curtain to hide behind. The easy response to the crisis was to dismiss it as a problem generated by Greece and the other PIIGS.
For two years — and despite the fact the euro was hurtling toward disaster — the focus was on austerity, price stability, markets and bond yields. Too little attention was paid to the inherent structural weaknesses of the euro, such as the large current account deficits being run up by the countries on the periphery or the lack of institutions to manage the single currency. European politicians shied away from seriously discussing the recapitalisation of European banks and the creation of new tools such as Eurobonds or revamping the role of the European Central Bank.
It is only now that the crisis has come knocking at the door of many more countries in the form of rising yields and general investor concern that the decision makers are focusing their minds on the actual causes and potential consequences of the crisis.
So, as EU leaders gather in Brussels for make-or-break talks on what needs to be done next, the Greek case should serve as a “cautionary tale,” much in the way that “The Umbrella Man” did. There were lots of explanations for how the crisis struck and why it gripped Greece first but eurozone leaders chose to ignore them. Instead they focused on a bit-part player in this whole episode. They made the mistake of believing the myths.