The Greek Economy Explained
A warning for Europe, Albany and Washington.
The Greeks are giving the world a good taste of their modern politics. Periclean democracy, meet Athenian mob rule: Tens of thousands are rampaging through the capital and other large cities this week in protest against 30 billion in austerity measures needed to secure the 110 billion bailout for the bankrupt country.
The nationwide strikeled by government-employee unions, which threaten further disruptions after parliament yesterday approved the rescue packagewas a timely show for Greece's prospective rescuers in Germany and at the International Monetary Fund. The medicine for Greece's deficit and debt woes (at 13% and 124.9% of GDP, respectively, and rising) won't go down easily in Athens. We continue to think the country needs to restructure its debts and adopt wholesale economic reforms.
If you want to understand the reason, as good a source as any is the annual World Bank "Doing Business" survey for 2010. The spark for this financial crisis has been decades of overspending and cooking of the public books, but the survey reveals the underlying causes of the Greek disease.
In terms of overall ease of doing business, Greece comes in 109 out of 183 countries around the world. It is dead last among the 27 members of the European Union as well as the advanced economies in the OECD. You have to go up 30 slots to find the next worst EU performer, Italy. The U.S. ranks fourth and Singapore is first.
At 109, Greece ranks below such models of transparency and free enterprise as Egypt (106), Zambia (90), Rwanda (67) and Kazakhstan (63). A country has to work hard to do this poorly.
The Doing Business survey reveals an economy that's hostile to free enterprise and private property, primed for corruption, lacking in labor and capital mobility, stifled by powerful trade unions and unlikely to grow without deep-rooted changes. The table nearby shows Greece's rank in the 10 categories related to business operations covered by the World Bank survey.
Want to start a business in Greece? The country ranks 140 in the world because you'll need an average of 19 days and 15 steps to do it. In the U.S., it takes six days and six steps.
Filing taxes consumes 224 hours a year in Greece. In Luxembourg, the richest European Union state, it takes on average 59 hours. In the U.S., it's 187 hours.
As for protecting investors, the erstwhile cradle of Western civilization ranks 154, which has the obvious effect of scaring good money away. Most glaring are weak laws on disclosure of information to shareholders. By the bank's index, a prospective investor enjoys nearly twice the level of protection in Italy, no stand-out itself.
It's appropriate that Greece's best rankingat 43is for the ease of closing a business. Greeks have certainly had plenty of practice.
Ruled by neo-Marxists at the time, Greece scraped into the EU in 1981 and has since lagged behind the rest of the club. Before the advent of the euro, inflation was four times the bloc average. The political-economic default in that era was for the Athens government to devalue its currency, instantly reducing the standard of living of its citizens but avoiding pro-growth reforms.
Athens got an exemption from the EU's debt rules in order to join the single currency bloc in 2001, a year before euro notes and coins went into circulation. The country rode the wave of the stable currency, low inflation and low interest rates throughout the good times of the euro's first decade. Membership in the euro was an incentive for Greek politicians to institute fiscal discipline and carry through reforms to improve their competitiveness. They did neither, preferring the easy path of low-cost borrowing, which is how they got into their current mess.
As a euro member, Greece no longer has the option of debasing its currency, which was one of the main arguments for creating and joining the euro bloc. This means the burden of adjustment for years of borrowing is now falling on the Greek government, which is where it rightly belongs. The realization of this adjustment is what has Greek civil servants marching in the streets. The government could help ease the pain if it pushed such pro-growth reforms as a flat tax and moved Greece up in the Doing Business categories.
All of this ought to be a cautionary tale for politicians in Europe's other high-spending, slow growth statesand for those in Sacramento, Albany and Washington, D.C., too. Greece shows that the welfare state model of development, dominated by public unions, onerous regulations, high taxes and the political allocation of capital, has hit the wall. Down that road lies more Greek tragedy.