Cause and Effect in European Politics and Law

Greece is trying to extinguish the fire in its public finances

Ralitsa Kovacheva, June 30, 2011

In spite the calls of European leaders, of the institutions and the big political families of the EU Greece to demonstrate national unity in such a crucial moment for the country, this did not happen. Yes, with 155 against 138 votes the Parliament has approved the reforms package, worth 28bn euros, and a privatisation strategy for 50bn euros. Thus, the condition of the international lenders of Greece for the allocation of the fifth tranche of the 110bn euros loan, is fulfilled. The voting, though, was strictly political - only two members of parliament voted against the position of their party - a socialist voted against the programme and a representative of the opposition supported it. According to the EUobserver both were expelled from their parties.

While the MPs voted, protesters on Sintagma square clashed with police and set afire the building of the Ministry of Finance. The police responded with unprecedented violence since the beginning of the protests. By literalising the metaphor for the fire in the Greek public finances, the protesters clearly showed that the fragile political victory of the ruling party does not express the popular will and therefore - there is no national unity.

The riots on Sintagma square as if illustrated Deputy Prime Minister Theodoros Pangalos's words before the voting: "A return to the drachma would mean that on the following day banks would be surrounded by terrified people trying to withdraw their money, the army would have to protect them with tanks because there would not be enough police. [...] There would be riots everywhere, shops would be empty, some people would throw themselves out the window". (after EUobserver)

What have the MPs voted on and why are the Greeks so angry?

In the mid-term fiscal strategy for the period 2011-2015 the Greek Government envisages measures to cut spending and increase revenues, amounting totally to 28.3bn euros. The aim is deficit to drop from 7.5% of GDP this year to 2.6% in 2014. "In light of the high and rising interest payments, this deficit reduction effort will require a significant continuous improvement in the general government primary balance from -1.0% of GDP in 2011 to +6.7% in 2014". Economists and politicians repeatedly emphasized that the only way Greece to reduce its debt is by ensuring budgetary surplus for a long period of time.

According to the strategy, public spending must be reduced from 51.4% of GDP currently to 44.4% in 2015. The key measures in the strategy are directed at reducing the number of public servants by 150 thousand (over 20%) by 2015; extension of weekly working hours; savings from closure/merger of public entities; savings from reorganisation of state-owned enterprises; reduction of spending for defence, healthcare and welfare; enhancement of fiscal discipline at local level.

Before the defenders of social justice to have jumped up, the strategy clearly explains that the measures are not aimed at radical removal of social benefits, reduction of spending can be achieved through control over the effectiveness and rational distribution of money.

Increased revenues are expected mainly from the measures against tax and social contributions evasion. A solidarity social contribution will be introduced for the unemployed, which will be paid both by the employed in the private and public sectors, and also by the self-employed. By analogy, everyone will pay a solidarity tax on declared incomes and it is expected the presumable income of self-employed to be increased. Higher revenues are expected from VAT and excises, on a broader base and via better collection.

In parallel the Government commits by 2015 to implement a privatisation programme worth 50bn euros. Only in 2011 the sale of the public share of 10% is envisaged in the telecommunication company OTE, the shares in the Hellenic Postbank, the public gas company, the ports of Piraeus and Thessaloniki, the railway operator TRAINOSE, casino Mont Parnes, the state lottery.

These measures are not the first attempt of the Greek Government to rescue the country from default. They are a continuation of the programme that Greece has been implementing for a year under the agreement with the EU and the IMF for a loan of 110bn euros. But, as it seems, it is not being implemented properly.

Although the country has managed last year to reduce the deficit by 5 percentage points (the biggest fiscal consolidation in the euro area, as noted in the strategy) to 10.5%, it has not managed to achieve the goal of 8%. The salaries in the public sector have been cut by 15% nominally, and the number of employees in the public sector was reduced by 84 thousand or 10%. Pensions have been reduced by 10% as well as social spending for pensions, disease and medication.

An increase of revenues is noted from 37.3% in 2009 to 39.1 in 2010 (the second largest in the EU), due to the increase of excises (by 33%), VAT (to 23%), the introduction of special levies on profitable firms, high income individuals and high-value real estate; broadening of the tax base and measures against tax evasion. Together with this, reforms are being implemented in the pension system, of labour market, the local administration and the business sector (currently the start-up of a business takes only a day, compared to 19 days before that).

And all this proved insufficient to compensate the budget hole, created by the non-payment of taxes and the huge, ineffective public sector.

The problem with tax evasion in Greece is not since yesterday

As the European Economic Advisory Group noted in their report in February, the reason is the large share of self-employed, which is very typical for Greece - the self-employed form some 30% of employment in the country. It is a mass practice doctors, dentists, lawyers and architects to declare lower incomes than those of workers in production. On top of it, the trend is spreading over the employed workers as the firms are generally not paying social contributions or do not register their employees. Through the years various measures to increase tax collection were applied but not general, with frequent tax pardons, the analysts note.

Although euinside wrote in details about the report, I will recall another important conclusion from it: "public sector employment has remained a major channel through which political parties in Greece dispense favours to partisan voters, as well a “redistributive” tool in periods of high unemployment". This is why the increase of wages in the public sector significantly overtakes the rise in the private sector, which not only leads to more public spending but also erodes competitiveness.

In this regard, all claims that the Greek people is a victim of a world conspiracy are definitely not justified. Whatever speculations with Greek debt were made, the Greek politicians are to be blamed, elected by the people who were bribed with generous social benefits for years. These are the risks of democracy - you have a right to choose but if you make a mistake you have to take on the consequences. This is also solidarity, not just sharing of prosperity.

On Thursday Parliament will vote on legislative amendments that would allow the implementation of the measures in the strategy. And by the way, The New York Times notes that one of the most controversial issues is related to the deadlines in the privatisation strategy, especially regarding the state electricity company, "whose powerful union has close ties to the Socialists". This "warm connection" between trade unions and political parties had seriously contributed to the erosion of public finances, consolidating the political status quo.

The European leaders welcomed the result of the voting, expecting a positive voting on Thursday too. This will clear the way not just for the release of the 12bn euros tranche, under the current loan of 110bn euro, but for the agreeing of a second, probably bigger loan. The decision of the finance ministers of the euro area countries is expected to be taken at their extraordinary meeting on Sunday, July 3.