Why Greece Is a Basket Case
07/14/2010 1:00 pm EST
Gary Shilling, editor of INSIGHT, explains why Greece got in so much trouble, and says its financial and budgetary problems could still have a big impact on the rest of the world.
In the Club Med set, tax avoidance is a honed skill, labor rigidity is legendary, and public and private labor unions exert immense economic power.
The European Commission estimates that bureaucracy in Greece—the cost of work devoted to dealing with government officials—equals 7% of [gross domestic product], twice the [European Union’s] average.
Permanent government employees have lifetime jobs. Bribery, patronage, and other forms of corruption also reduce GDP by 8% in Greece, according to a Brookings Institution study, [which] also finds a close correlation between corruption and government deficits.
The World Bank ranks Greece the most corrupt among the 16 eurozone countries, and also the worst among the EU 27, along with Bulgaria and Romania, according to Transparency International. Estimates are that one-fourth of all taxes in Greece aren’t paid, a third of that due to bribes. Greeks also retire much earlier than most, at 58, even though they live as long as the Germans.
Furthermore, in Greece, brass instrument players, masseurs in steam baths, pastry chefs, and hairdressers who use hair dyes can [retire] at age 50 because their working environments may cause breathing problems later.
As part of externally imposed austerity, Greece agreed to raise retirement ages and cut pension benefits. As expected, public and private unions called a strike in response. As long as Greece remains in the euro zone, she does not have the option of devaluing her way out of her current financial woes, a solution often prescribed by the International Monetary Fund.
During the Asian financial crisis in the late 1990s, Indonesia’s currency dropped 83%, Thailand and Malaysia’s fell 40% and South Korea’s declined 35%. Growth resumed within a year.
Government debt restructuring in Greece is probably unavoidable. The amounts involved are huge. In 2009, Greece had $288 billion in net government debt outstanding, Portugal had $132 billion, and Spain had $510 billion.
Furthermore, eurozone debt has crossed borders freely. French banks held $80 billion in Greek government debt and German banks are stuck with $45 billion. So if Greece restructures, financial institutions in many other countries would be hurt, as would their governments if they needed to be bailed out.
The European Central Bank holds huge amounts of Greek government bonds as collateral for loans to commercial banks and could face big losses that would erode its credibility and faith in the euro.
Financially, [even though in terms of economic size, Greece is a pigmy, accounting for 2.6% of euro zone GDP,] Greece is important to the eurozone and, indeed, the world. If she defaults on her government debt or restructures it, the effects will spread quickly and painfully.