GREECE is a relatively wealthy country, or so the numbers seem to show. Per-capita income is more than $30,000 — about three-quarters of the level of Germany.
What the income figures fail to capture is the relative weakness of Greece’s economic institutions. They are not remotely comparable to those of Germany and some of the other better-governed European Union nations, which is why the current crisis will prove so difficult to solve.
The European Union and the International Monetary Fund have arranged an enormous bailout package. But it’s not just a question of supplying funds to get Greece through a short-term debt crisis, or of cutting the Greek government budget, but of whether the country will see much future economic growth.
Consider the World Bank’s Doing Business index, which ranks countries according to the quality of their regulatory environment for commerce. The index places Greece at No. 109, just behind Egypt, Ethiopia and Lebanon. For the category of “high-income countries,” the Greek ranking is next to last, ahead of only Equatorial Guinea, which has oil wealth.
Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent.
As the World Bank index suggests, government funds are often spent hindering production rather than supporting it. This gives one clue as to why the numbers make Greece appear richer than it really is. Public expenditures are valued at cost when measuring gross domestic product, yet arguably the quality of Greek public services, per dollar spent, is less than that of many wealthy countries. Nonetheless Greece plunged ahead and joined the euro zone in 2001, with some unfortunate consequences.
Greece’s currency, the euro, is stronger than that of its neighbor Turkey, so a holiday in Greece is more expensive. Yet Greece has not built enough luxury hotels, golf clubs and resorts to justify the cost difference. Over all, the greater expense of Greek goods and services, which are paid for in euros, lowers the country’s international competitiveness. Ideally, they should be priced in a weaker currency, which would be appropriate for a poorer country.
Over time this problem will worsen if productivity in Germany and France grows at consistently higher rates and the value of the euro puts Greek exports increasingly out of sync with market realities. One painful way out of this dilemma would be for Greece to engineer a continuing deflation of wages and prices, but Greek voters have already taken to the streets to pressure their government to preserve salaries and benefits, and planned deflation is difficult to sustain in any case.
The Germans and the French have been complicit in treating Greece as a wealthier country than it really is. The strong euro keeps exports from the poorer euro zone nations noncompetitive and also makes it easier for Greece and other lower-income euro zone nations to buy German and French exports; both tendencies benefited German and French commercial interests.
To make matters worse, following its accession to the euro zone, Greece began spending and borrowing as if its future productivity would be high. The European Central Bank treated Greece as a fiscally responsible nation by buying some Greek bonds, which were then highly rated. Many European banks followed suit, and this meant an unjustified credit boom for the Greek state. Greece was able to pursue unsustainable policies; for instance, many Greeks retire before age 60 with benefits at three-quarters salary. Such a luxury is uncommon even in far wealthier countries like the United States.
At this stage, it’s a moot point whether Greece is a poor country masquerading as a wealthy country or vice versa. The announced bailout requires that an ailing Greek economy borrow and repay even greater sums of money. If the old illusion was that Greece was a wealthy country, the new illusion is that Greece will, in short order, become wealthy enough to pay back ever-growing sums of debt.
Since the Greek economy accounts for only about 2 percent of the euro zone gross domestic product, in theory it could be made a permanent recipient of largess. Yet that’s hardly an appealing solution, both because Portugal, Spain and others might want the same deal and because Europe doesn’t have much social solidarity across national boundaries.
The United States has rich and poor regions, but the 50 states are forced to run balanced budgets, and there is greater mobility within the nation, based on a shared language and culture. Major national policies, like President Obama’s health care plan, are not judged primarily in terms of which states win and lose; in fact the largely opposed “red states” get a lot of the benefits through higher Medicaid subsidies.
GREECE is not the only country that suddenly feels poorer. Britain faces budget deficits at about 12 percent of G.D.P., and Italy has a debt-to-G.D.P. ratio of 110 percent. In the United States, the housing and job markets are recovering only in fits and starts and we face significant future Medicare liabilities. This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren’t as rich as we used to think.
Tyler Cowen is a professor of economics at George Mason University.
http://www.nytimes.com/2010/05/23/business/global/23view.html?src=me&ref=business
