Christine Lagarde may not have wanted to imply that Greeks were suffering payback for years of living large and that the world should have more sympathy for people in Niger because they’re much worse off and at least they pay their taxes, but that’s certainly what the International Monetary Fund managing director appeared to suggest in her interview with The Guardian on Saturday.
A few hours later, and after she had been condemned by Greek leaders and thousands of people posting on her Facebook page, Lagarde clarified her comments: she was “very sympathetic to the Greek people and the challenges they are facing.” She added that a comment regarding widespread tax evasion in Greece was a reference mainly to “the most privileged.” By then, though, the damage had been done.
Since the Greek crisis erupted in 2009, the country has fought an unequal battle to tell its story. Too often a complex, multi-faceted problem has been reduced by commentators and politicians inEuropeand elsewhere to a tale of comeuppance for the feckless Greeks. Whenever balance looks like being restored to this demoralizing debate and people begin appreciating the myriad factors that have created the current mess – some originating within Greece’s borders, others outside of the country – some official or other will step forward, open their mouth and let the stereotypes fly. Each time, square one seems that little bit further fromGreece’s reach.
Tax evasion is the hobby horse of choice for these moral crusaders. Greeks didn’t pay their taxes and brought this fiscal plague upon themselves, they argue. There’s no doubt that tax evasion played a part in leavingGreece’s public finances dangerously exposed and the failure to address it helped cultivate a sense of impunity that damaged more than the country’s coffers. However, that does not make tax avoidance inGreecea national sport. Roughly two-thirds of the workforce, about 1.8 million private sector employees and some 800,000 civil servants, have their incomes taxed at source. Instead, tax evasion is concentrated among self-employed professionals and businesses. Add pensioners to those who are taxed at source and you can see tax evasion in Greece is more of a minority sport, like golf, which is also played by those that have the money and convenience to do so. That’s whyGreece’s tax revenues account for less than 7.5 percent of GDP, compared to the eurozone average of 11 percent.
Tackling evasion in Greece’s unusually large – by eurozone standards – self-employed sector is slow and tortuous work. The tax-free threshold of 12,000 euros, behind which many self-employed hid, has been reduced to 5,000 but replacing a defunct and toothless tax collection system with one that is efficient and incorruptible cannot happen overnight, especially when only one new civil servant is being hired for every five that leave. Nevertheless, a pattern of indifference has been broken as a result of suspected evaders being arrested since the end of last year. The next step is to speed up the process by which they are tried and their assets seized. This requires the creation of special tax courts, which is one of the reforms contained in the memorandum thatGreecehas agreed with the IMF and EU. It would be more constructive for Lagarde to focus on reforms like this rather than dabble in broad brushstrokes that lead to the population of a whole country being tainted.
To focus simply on tax evasion also obscures the role the IMF had in the Greek crisis, both during the build-up and the messy aftermath we are experiencing now. We should not forget that the Washington-based fund was one of several institutions, along with the European Commission, credit rating agencies and banks that turned a blind eye to the impending Greek implosion and, in some cases, even helped to cover it up. As French finance minister at that time, Lagarde, is bound to have been aware something was awry.
Landon Thomas Jr and Stephen Castle of the New York Times summed up the denial that pervaded the IMF and others, including Greek politicians, in a report in November 2011: “The alarm, sounded in mid-2009, in a draft report from the International Monetary Fund, never reached the outside world. Greek officials saw the draft and complained to the IMF. So the final report, while critical, played down the risks thatAthensmight one day default, an event that could have disastrous consequences for all ofEurope. What is so remarkable about this episode is that it was not so remarkable at all. The reversal at the IMF was just one small piece of a broad pattern of denial that helped pushGreeceto the brink and now threatens to pull the euro apart. Politicians, policy makers, bankers — all underestimated dangers that seem clear enough in hindsight.”
Although there were warnings in the June 2009 report about the need for fiscal consolidation and greater competitiveness, there was no suggestion in the paper that Greece may have only been months away from being shut out of the markets. “Greecehas felt the downturn with some delay,” the report said. “Given that the economy is highly integrated with the euro area, which is experiencing a sharp recession, decoupling is unlikely.”
The IMF also partnered up with the European Commission and European Central Bank, among other institutions that dithered as the Greek crisis loomed every closer, to devise a plan to preventGreece’s collapse. This resulted in the May 2010 signing of the Memorandum of Understanding, which prescribed for the Greek patient a course of structural reforms and strict fiscal targets that would be achieved by sweeping austerity. Events since then suggest the doctors misdiagnosed and their patient is in danger of dying in their arms.
In terms of the fiscal program, the formula was one applied by the IMF many times before, only in Greece’s case it had the ECB – channeling Germany’s determination that the Greeks should be seen to be paying a heavy price for their profligacy – egging it on. The result was therapy that seemed to consistently moveGreeceaway from any hope of recovery. Each time the troika forecast a slowing of the recession, the Greek economy took another nosedive toward a depression. Each time the troika predicted the rise in unemployment would ease, the numbers defied the technocrats in Brussels, Frankfurt and Washington.
The IMF, at least, cannot claim surprise. It knew exactly what the impact of a rapid fiscal consolidation plan would be. Its own Finance and Development department produced in 2011 a publication titled “Painful Medicine.” It explained how these fiscal programs lead to economies contracting rather than expanding, especially if there is no monetary stimulus from central banks. As a result of the economic contraction in Greece, which is on course to be the biggest experienced by a developed economy, the incomes of the country’s private sector workers are due by the end of the year to fall to half of what they were in 2008. The tax revenues being lost as a result of this endless slide put into perspective the losses from tax evasion.
However, losing people is the most important of all. Comments such as the ones initially made by Lagarde on Saturday undermine any effort for progress inGreece. For the country to move forward, it needs those who work hard, pay their taxes, want a productive relationship with its European partners and who believe in change to remain on board. Constant barbs from abroad erode the confidence and will of these people and guarantee that any attempt to getGreeceback on its feet will fail.
The crassness of Lagarde’s remarks in comparing conditions at a school in Niger with suffering in Greece was a heavy blow to understanding between Greeks and their lenders. Comparing the two situations is facile but dismissing the difficulties many Greeks are facing is puerile. Greek schoolchildren may not be sharing chairs like the ones in Niger that Lagarde has in mind but education is one of the areas on which deep cuts have been inflicted, leading to pupils sharing textbooks because there are not enough to go around, warmth because some schools can’t afford heating oil and food because some children are going to classes undernourished. Equally, there are some 600,000 people who are unemployed and receive no benefits and hundreds of thousands who have no health insurance. There are currently cancer sufferers in Athens dragging themselves from one hospital to the next in the hope of finding their medicine because pharmacies can no longer stock them.
Greece is not the subject of charity, nor is Christine Lagarde a new Bob Geldof. Athens entered into a hastily-arranged and ill-conceived loan agreement with the EU and IMF. It receives loans – at favorable rates – largely to repay its existing debt. Of almost 142 billion euros Greece has received so far, 44 millions has gone towards covering its deficits. The rest has been used to pay bonds and loans, in other words, financial institutions in Germany, France and elswhere that lent money to Greece while hoping that tax evasion, corruption and an uncompetitive economy would not damage their investment. Yet, as a piece by William D. Cohen and Simon Johnson for Bloomberg suggested this week, it seems the irresponsible lenders might not have done quite as badly out of the Greek bailout as the irresponsible borrowers.
“When the European Union and European Central Bank stepped in to bail out the struggling countries, they made it possible for German banks to bring the money home,” wrote Cohen and Johnson. “The other national central banks of the euro area collectively offset the outflow with loans to the Greek central bank. These loans appeared on the balance sheet of the Bundesbank as claims on the rest of the euro area. As opposed to the claims of private banks, the Bundesbank’s claims were only partly the responsibility of Germany. If Greece reneged on its debt, the losses would be shared among all euro area countries, according to their shareholding in the ECB. Germany’s stake would be 28 percent. In short, over the last couple of years, much of the risk sitting on German banks’ balance sheets shifted to the taxpayers of the entire currency union.”
Neither the causes of this crisis, nor the manner in which it has been tackled allow anyone – be they in Greece or elsewhere – the luxury of moralizing. Reducing the Greek crisis to clichés and stereotypes and underestimating the danger many Greeks find themselves simply builds on the criminal mistakes of the past. Our focus should be on what lies ahead and what needs to change. The IMF’s role should be to assist Greece in whatever way its institutional role permits to recover from the crisis and be in a position where it can repay its debt on its own. This is the only payback we should be talking about.