Greece, Democracy and Catastrophe

Greece has a long and complicated history with democracy, but the future of Greek democracy will be short and brutal.

Largely as a result of 400 years of savage Turkish occupation, Greeks retain an innate distrust of and hostility towards the State – as one Greek said: "We never had the Enlightenment because of the Turks."

As a result -- and this is no different in America -- political power has only been maintained through outright bribery of special interest groups. Chief among these are the military-industrial complex, born out of military rivalry with Turkey, which costs over €14 billion, or 6% of GDP. Naturally, nearly 80% of the Defense Ministry budget is spent on administrative costs and payments to Army staff.

20%-30% of the entire Greek population works for the government; they cannot be fired, and many are allowed to retire with a pension in their 40s. Tens of thousands of unmarried or divorced daughters of civil servants collect their dead parents' pensions, and pension outlays are projected to rise to 12% of GDP, over four times the EU average. Some civil servants receive bonuses for using a computer, speaking a foreign language and even arriving to work on time - and all workers get 14 monthly salaries a year, the result of a plan to keep monthly wages -- and so future pensions – low.

Two weeks extra salary is paid out at Easter, and also during the summer -- the 14th salary is paid to government workers at Christmas. Until 2008, the government owned Olympic Airways, whose employees and their families were allowed to fly around the world for "free." It was only able to sell the money pit after lavishly paying or rehiring almost 5,000 employees. Overall, the Greek government owns 74 companies, mainly utilities and transport firms, most of which are overstaffed and bleeding money. The state rail company warehouses over 9,000 people and reported 2008 losses of 800 million Euros.

Nebulous and pointless committees infest government payrolls -- one committee is supposed to manage Lake Kopais, which actually dried out in the 1930s.

Greece was able to gain entry to the European Union by cooking its books and hiding debt through swap agreements, with the help of US financial services firms. Greece then continued to fake its budget numbers until 2008, when it ran out of money, and revealed that its deficit was four times larger than reported – 14% of GDP. It is important to note that this GDP measure is completely misleading, since the government does not have access to the entire GDP – it's like planning to pay down your debts by using your pre-tax income and ignoring your interest payments. The Greek public sector consumes about 40% of GDP, which represent a cost to the state, not an income, while taxation rarely rises above 50% – so at best only 10% of the GDP is available to address the debt, which basically means that debt levels are in reality 10 times the numbers commonly reported.

Like all doomed governments, Greece imagines that it can "grow itself" out of its fiscal crisis, referring to the fantasy that the Greek economy grew by almost 4% per year between 2003 and 2007. However, even if these numbers are true - and the source is not at all credible – this was due largely to massive infrastructure spending for the 2004 Athens Olympic Games, and consumer borrowing as a result of easy credit -- even before this crisis, Greece was a major beneficiary of EU aid, equal to about 3.3% of GDP. If past growth was an illusion, future growth is an impossibility.

What about increasing government income? There is little room to raise taxes; the top income tax rate is already 40%, and the sales tax is 21%. In addition, 44% of salary is taxed for Social Security, with employees paying 16%, and employers paying 28%. These ridiculous tax rates, combined with a historical mistrust of government, have created an enormous black market and a culture of tax evasion. In one wealthy Athenian neighborhood, 324 residents admitted on their tax forms that they owned pools, while satellite photos revealed almost 17,000 pools. More than half of the doctors in a trendy neighbourhood claimed incomes of less than $40,000, while a quarter claimed less than $13,000, and so were tax exempt.

It is an axiom of statism that compulsion and control must always expand, and the current bailout of Greece is an inevitable result of the long-term subsidization that has already occurred. S&P has already downgraded four Greek banks to junk status. Euro zone banks are holding about 75 billion Euros of Greek bonds (about $97.5 billion). French and German banks are holding about 34 and 20 billion Euros respectively, so a noticeable amount of their capital is at risk. A retreat of investors from the debt of Greece, Spain, and Portugal could lead to high interest rates, declining investment, and slow economic growth in Europe. This will affect countries, including the U.S., that export to Europe.

Greece's dismal economic performance has in part occurred because it is already being bailed out by the EU, and has been for the past 11 years -- first because Greek bonds are priced relative to the economic strength of the EU as a whole, rather than its own basket-case economy, and second because the European Central Bank accepts Greek government bonds as collateral. European banks that buy Greek government bonds (paying higher interest than German bonds, because of the additional risk) use these Greek bonds to obtain a loan from the European Central Bank at 1% interest.

Without a doubt, and with no possible alternatives, the EU is doomed, and Greece is just the start of the avalanche. Since wages and social benefits constitute 75% of total (non-interest) public spending, the Greek government will attempt to stave off the inevitable by targeting public wages and pension bills. Daniel Gros, an eminent EU economist, argues that for each 1% of GDP decline in Greek government spending, total demand in the country collapses by 2.5%. If the government reduces spending by 15% of GDP — the initial shock to demand could be well over 30% of GDP. These sorts of transitions from public to private employment can work in a low tax, low regulation environment -- think of the millions of soldiers returning from the Second World War -- but the Greek economy is crippled by suffocating state controls and crushing taxation.

Firing government workers provokes violent, expensive and destructive conflicts, raises short-term costs for severance packages and legal battles, and the resulting unemployment destroys income tax receipts, and raises welfare and retraining costs.

What is rarely mentioned is the basic economic reality that every EU nation is currently running enormous deficits, carries catastrophic debt levels, and so has no actual money to give to Greece. Germany remains the strongest European economy, but German voters, already weary from decades of bailing out Eastern Germany, will find themselves hard pressed to muster the motivation to cut back on bratwurst in order to pay for the sundrenched retirements of Greek public servants. England is beyond useless, since its own budget deficit is poised to surpass Greece's as the worst in the European Union.

The entire European Economic Union is a house of cards, with governments all loaning money to each other in order to hide their true deficits from potential bond purchasers. Bailing out Greece with imaginary fiat currency is not a solution to a problem, but only a brief respite, designed so that those at the top of the political class can finish their looting before escaping the collapse.