After eight years, Greece has finally exited bailout territory, and the European Union is making a strong case that the program was a success. But while Greece may have ended the process, the underlying issues that wrecked its economy remain largely intact.
None of the measures has solved Greece’s real problem. No, it’s not the euro or the austerity plans. It’s not the cost or maturity of its debt. Greece pays less than 2.3 percent of GDP in interest expenses and has 16.5 years of average maturity on its bonds. In fact, Greece already enjoys much better debt terms than any sovereign restructuring plan in recent history.
Greece’s problem isn’t one of solidarity either. The country has received the equivalent of 214 percent of GDP in aid from the eurozone. This amounts to 10 times more, in terms of GDP, than the aid steered to Germany after World War II.
The Real Problem
Greece’s challenge is—and has always been—one of competitiveness, and bureaucratic impediments to business and job creation.
In the latest World Economic Forum’s Global Competitiveness Index, Greece (87) ranks far below its neighbors Spain (34), Portugal (42), and Italy (43). In fact, its competitiveness ranking is nearer to that of Algeria (86) and Guatemala (84), both non-OECD countries.
On top of that, Greece has one of the worst fiscal systems. It imposes a very high tax wedge that limits job growth, alongside high bureaucracy and aggressive taxation on small and medium enterprises. Greece ranks among the worst OECD countries for ease of doing business as measured by the World Bank’s Doing Business report: 67th out of 190 countries, well below Spain (28th), Italy (46th), and Portugal (29th).
The euro isn’t the fundamental issue. Greece’s average annual deficit in the decade before it adopted the currency was already 6 percent, and in the following period, it still grew significantly below the average of EU and peripheral countries.
From 1976 to 2012, the number of public employees tripled, while the private-sector workforce grew by just 25 percent. Add to this more than 70 loss-making state-owned firms and a government spending-to-GDP ratio that has averaged 49 percent since 2004, and you get the real Greek drama, one that won’t be easily solved.
One thing is sure: the Greek crisis won’t end with more taxation or with timid adjustments to a pension system that remains outdated and miles away from those of other European countries.
The inefficacy of subsequent Greek administrations and troika proposals is that they never address the country’s lack of competitiveness and job creation. All they do is dig the hole deeper by raising taxes and allowing wasteful spending to persist.
From a credit-market perspective, the risk is undeniably contained, but not inexistent. Fewer than 21 percent of Greek debt-holders are private investors. Most of the country’s debt is in the hands of the International Monetary Fund, the European Central Bank (ECB), and EU countries.
Non-Solutions Spell Peril
The main risk for the eurozone, which already is showing signs of economic slowdown, comes from a prolonged period of non-solutions.
Greece still shows the highest non-performing loan figure (43.3 percent) relative to total loans of the eurozone, per ECB statistics on Q1 2018.
However, while deficits have been contained—mostly by raising taxes—public debt hasn’t fallen. According to Eurostat, Greece’s public debt as a share of GDP stood at 178.6 percent in 2017.
The tax wedge—40.8 percent of labor income, according to OECD statistics—is one of the highest in the eurozone and the OECD, which makes Greece an uncompetitive country in terms of job creation and capital investment.
While unemployment has fallen, it was still the highest in the eurozone at 21.5 percent in 2017. With such a high tax wedge, the number is unlikely to go down significantly.
Summing up: Greece’s problem isn’t the euro or austerity. The problem is the system, which penalizes job creation and private enterprise to subsidize a gigantic bureaucracy and political spending machine.
Daniel Lacalle is chief economist at hedge fund Tressis and author of “Escape From the Central Bank Trap,” published by BEP.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.