My Big Fat Greek Government?

The Greek crisis has given neo-liberals a a great opportunity to criticize ‘big government’ Hellenic style – they see the problem as a Big Fat Greek Government (apologies to the film of nearly that name). But as usual the truth about Greece’s problems are rather more complex – what Greece needs is not less Government, but better Government.

Before the international crisis in 2008 Greek government was not that big, comparatively and relatively. Public spending in 2007 was about 43% of GDP, or about 3 points higher than the OECD average. Greece ranked about 9th, about the same level as the UK. Public service employment was about 8% of the labour force (2008), compared to the OEC average of 15%. Employment in state-owned enterprises was however much larger, at about 13% the biggest of OECD countries. The combined 21% was still however only about the OECD average (and again, more or less the same as the UK).

Greek spending on public sector wages was 11.2% of GDP in , compared to an EU average of 10.4%, and

Greece’s problems then come not from the size of government per se, but from deep-seated long-term problems of patronage, corruption, too low taxes, tax evasion and poor productivity in the public sector. This has led to the accumulation of massive public debts – now at over 140% of GDP – that now, as we all know, threaten the stability of the state.

Greece’s public finance problems began with the end of the dictatorship in 1974. Successive Greek governments set about repairing the damage of more than three decades of Nazi occupation, Civil War and Dictatorship and modernising their economy and social fabric.

As the lid of the Colonels dictatorship lifted, public spending rose rapidly in the late 1970s, jumping from about 20% of GDP to 35%. But spending was distorted by several factors, not least on the military. The combination of needing to keep the military happy and the ongoing tensions with Turkey meant Greece spent more on defence than many other European states and less on more productive areas.

Education spending, for example, rose to only 8.3% of GDP by the early part of this century, compared to an OECD average of 13.1%. As a direct result Greece lags significantly in things like the PISA rankings of educational attainment or university graduation rates.

But distortions in public spending also came from a desire to retain political support through what amounted to bribes to the electorate – or part of them.

First, although public sector employment was not large by European standards we have noted that a lot of this employment was in heavily loss-making state owned enterprises. And many of these jobs were allocated through patronage or even simply corrupt practices.

Second, public sector wages were allowed to grow at rates that meant public sector workers were paid more than private sector workers doing equivalent jobs, and worked less hours.

Third, a completely unsustainable pension system was allowed to mushroom out of control. Greek workers could retire at 58 (compared to an OECD average of 63.2) and most amazingly collect a pension of 95.7% of average life-time earnings (compared to only 60.8% across the OECD).

All this meant that the Greek public sector was very unproductive, consuming national resources and failing to contribute to national development in any significant way.

Much worse however was the failure to ensure that all this was funded through the tax system and to systematically hide the consequent deficits and spiraling public debt.

Greek taxes are low by international standards and this is compounded by widespread tax evasion. According to the OECD the later amounted to about 5% of GDP by 2007. Direct (income) taxes were especially poor – whereas the EU average was 13.4% of GDP in 2007, in Greece it was only 7.9%.

The resulting deficit in the public finances jumped from 1.2% of GDP a year in 1970-79 to 8.1% in 1980-89; 8.4% in 1990-99 and 5.9% in 2000-09. It then leapt again when the financial crisis hit to reach 15.4% of GDP in 2009.

This long-running deficit problem resulted in a steadily increasing public debt that rose from 26% of GDP in 1980, to 71% in 1990, 102% in 2000 and a staggering 140% in 2009. (For those who try to equate the UK with Greece please note that UK public debt never rose above 40% of GDP throughout this period and has only just risen to levels Greece had more than twenty year ago and ever since).

Both the deficit and debt positions were compounded by the massaging of statistics by successive governments – deficit figures have constantly been revised upwards and large debts were hidden off-balance sheet for years. When these eventually emerged into the light of day in 2009, it added around 25% of GDP to Greece’s real level of public indebtedness.

These distortions are so great it is obvious Greece would never have met the criteria for joining the Euro if they had been known at the time.

Neo-liberal theorists will undoubtedly see all of this as vindication of the inherent weaknesses of democracy – look what happened as soon as the politicians took over? Which of course ignores the rather obvious point that other advanced democracies have learnt how to restrain public spending, to ration national wealth and largely eliminate corruption, patronage and most tax evasion, relatively speaking.

The truth is that what has happened in Greece is more part of the continuing legacy of the years of occupation, civil war and dictatorship. The failure of democratic politicians in Greece has been their inability to build a state that has sufficient mutual trust that the people are willing to comply with tax and other rules in order to create a better society.

In the United States – notionally a democracy – it took several decades of effort from the second half of the 19th century and well into the 20th to eliminate the ‘spoils’ system and establish ‘progressive’ public administration. And incidentally during this period many states and local governments defaulted on their debts, some several times over. In the United Kingdom similar things happened over much the same period, including a partial default on our First World War debts in 1932.

The real failure internationally has been to assume that countries like Greece, Portugal and Spain could simply wipe away authoritarian regimes in the 1970s and make a ‘great leap forward’ in their public administration systems. Italy has had longer to recover from Mussolini’s regime, but a mixture of factors has meant that it also has never really thoroughly rebuilt and modernised it’s own public administration.

In some ways these countries have made huge strides forward but in others they still have problems that are a legacy of their previous regimes that are not easily shaken off. Most notable are the interlocking issues of patronage, tax evasion and corruption.

The roots of the Greek tragedy are far deeper than an immediate fiscal crisis – it is a crisis of the whole regime. It is time to realize that ‘state building’ is not just for far-flung ‘failed-states’ in Africa and Asia – we need to start thinking more carefully about state building in Europe too. The problems are not too much government, but not enough of the right kind of government.

2 thoughts on “My Big Fat Greek Government?

  1. I’ve quickly scanned this – a good summary of what is now familiar Greek failings. But when Colin says “These distortions are so great it is obvious Greece would never have met the criteria for joining the Euro if they had been known at the time” my obvious question is why were they not known at the time?! For example what on earth were the bureaucrats doing in Brussels – or even in those Member States when they were signing up to the Euro? All of which more generally begs the question about the efficiency – or otherwise – of the EU public audit services: do they routinely report on such matters and, if they do, is such information fed into the EU budget process?

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