Widespread private and public cheating in Greece is old hat. Michael Lewis documented it splendidly in Vanity Fair in 2010.
What’s “novel” in this just published piece (tho Ive made it a few times before) is that the Euro doesn’t need or can’t have “convergence” of standards of living or in the quality of governance. Rather the common currency needs rules and structures that *minimize* the supporting standardization and regimentation.
“Standardize and centralize only when necessary” is a staple of modern management. And figuring out what and how to centralize (establishing “loose tight controls as Peters and Waterman put it) are an important part of a CEOs job.
Unfortunately economic theories of currency zones take a much more reductionist, all or nothing view, asserting that across-the-board convergence is a must.
I would argue that integration of the banking system, consistency of banking rules and universal deposit insurance is a prerequisite for a common currency. Integration of taxes or mutualization of public debt is not.
But that’s for another article on another day.
BOSTON — The real problem for Greece isn’t economic principles or policies, nor the Germans’ disregard for Greek democracy and their fetish for “austerity.” It’s the malfunctioning machinery of the Greek government.
Greece has the trappings of an advanced Western economy, but its government’s capacity to tax and spend seems distinctly Third World. The proportion of self-employed Greeks is more than twice as high as in the rest of Europe. And as everywhere, self-employment provides more opportunities for tax fiddling than does earning a salary; indeed the ease of tax evasion rather than the glamor of entrepreneurship is what draws many to self-employment.
It isn’t just the small shopkeepers or taxi drivers who cheat: according to a University of Chicago working paper, the “primary tax-evading industries (sic) are medicine, law, engineering, education, and media.” The true income of the self-employed in Greece, the authors estimate, is about 1.8 times their reported incomes, with lost tax revenues amounting to more than a third of the government’s budget deficit.
Greeks aren’t innately more corrupt than their more self-righteous Teutonic neighbors. German businessmen and professionals, it turns out, have not been shy about squirreling away unreported income in anonymous Swiss bank accounts. More likely, the Greek self-employed cheat more — and more of them of them are self-employed — because its tax collectors don’t have the capacity and will to get them to pay.
Spending is similarly leaky. Just as the government doesn’t collect the taxes it should, it makes payments it shouldn’t. An investigation by the state pension fund in 2011 uncovered nearly 120,000 cases of payouts made to dead pensioners; previously authorities had admitted to the possibility of only a few thousand. Last year, the government claimed it had eliminated the “ghosts,” but who really knows. And just as too small tax rolls increase the burden on law-abiding taxpayers, too large pension rolls limit the payments to legitimate pensioners. Greek pensions are skimpy by European standard, but not its total pension bill.
Joining the euro closed the money-printing escape hatch, to the great relief of the Greek citizenry.
Unfortunately, governments cannot fix the dysfunctions of collection and disbursements with the stroke of a pen, as they might fix tax and pension rates. Cleaning up records, upgrading computer systems and re-training and motivating public employees is a slog that elected officials — who would rather be visionaries and statesmen — have little taste for. Thankless too: tax evaders don’t like to be caught and relatives of deceased pensioners don’t want the payments to stop.
Printing money offers an attractive alternative to tightening tax collection or exorcising ghosts. It’s iniquitous, inefficient and unpopular: debasing the currency is a known vote-loser. But it can be accomplished without administrative hassle.
Joining the euro closed the money-printing escape hatch, to the great relief of the Greek citizenry. But thanks to the foundational miscalculation of other European officials and international banking regulators, membership opened the door to unsustainable borrowing from private creditors.
Greece wasn’t too “uncompetitive” (whatever that might mean) or misgoverned to be allowed into the euro. The U.S., India and China have common currencies in spite of vast internal differences in economic development and the efficiency and honesty of state and local governments. Rather, large currency zones are best served by requiring constituent governments to borrow under terms that reflect differences in creditworthiness. U.S. cities and states issue debt at widely varying rates, and if Detroit or Puerto Rico can’t meet their obligations they — and their lenders — bear the consequences.
In contrast, the architects of the euro counted on treaties to uniformly induce fiscal virtue. International bank regulators embraced the fiction, treating the debt of all euro member countries as risk-free. Banks in turn enabled the Greeks (and other structurally impecunious governments) to borrow hand over fist by accepting interest rates that were but a smidgen higher than rates on German debt!
Six years ago, when Greece was about to default on its debts, it was supposedly bailed out by the other euro member governments. In reality, euro-governments (and the ever-obliging IMF) saved banks, most notably Germans ones, from having to write down bad debts. Greece received the lifeline of loan sharks who extend more credit to borrowers who can’t repay their existing debts. Finger-wagging German politicians, in other words, stuck it to the Greeks to protect German banks and bankers, as they had previously done in Ireland.
One more bailout with even stiffer conditions is not an option. Greek pensioners really might starve, and productive taxpayers who could flee, would. The least bad alternative is for European bailout funds, who now hold nearly two-thirds of Greek government debt, to write-down (or even write off) their holdings — but then not lend another cent. Greeks, relieved of an impossible debt burden, could then choose whether to return to printing drachmas or elect leaders capable of repairing the tax and spending machinery.
The Greek quagmire also raises existential questions for the euro. Greece isn’t the only country in the monetary union where leaky tax and spending encourages reckless sovereign borrowing. And citizens of states whose governments live within their means aren’t about to pay for the spending or assume the debts of spendthrift countries. Integrating tax systems or mutualizing sovereign debt is a non-starter. Yet a common currency is of enormous value, not the least to citizens of countries with feckless governments. The challenge is not how to force more convergence but to minimize the regimentation and uniformity.
Amar Bhidé is the Thomas Schmidheiny Professor at The Fletcher School at Tufts University. He is the author of “A Call for Judgment: Sensible Finance for a Dynamic Economy,” published by Oxford University Press in 2010.