We all knew it was coming. Greece has been struggling with its economy for the past 5 years. It first asked in 2010, making it the first EU country to send out a distress signal. Spain, Portugal and Ireland had the same problem with Greece when they spent beyond their means for 10 years but they never waved the white flag. With support from EU and international organizations, these three countries slowly recovered. But what happened to Greece? Is it poor management or the lack of successful business ideas that its government and major businesses lack?
Maybe it’s both.
In a nutshell, Greece was too easy on credit, spent too much on wages and defence but with tax collection failing. Athens was one of the recipients of aid but instead of pairing the external help with internal changes, the county kept on overspending. It kept borrowing to keep the costs down but the act only made the situation worse, as Greece became very dependent on cheap loans to fill the gap.
Let’s take a look at the many factors that contributed to Greece’s current economic state:
• It has the highest pension spending in all of the European Union.
Approximately 17.5 percent of the country’s economic output is spent on pension payments; although with the budget cuts, spending was reduced to 16 percent. 16 percent is still high, if compared to Italy, Austria and France that only spend 15 percent on pension payments.
The problem is, banks have started closing and pensioners are beginning to feel the government’s struggle to pay up with some only able to withdraw less than 60 euros from ATMs.
Add to the pricey pension payments, the system is also riddled with political influences especially those coming from the police or the military. The entire defence sector can even reap additional benefits for their pensioners.
• It has been spending too much on wages and benefits for government employees.
Before the bailout in 2010, Greece has the most extensive bonus system for its government employees. For instance, an unmarried daughter is free to still receive her father’s pension even after the latter’s death. There are bonuses for employees coming to work on time.
In fact, for 10 years before the first bailout, the public sector wage in Greece increased and department spending soared as well. The defence costs remained at an all-time high following years of antagonism with Turkey. Even after 3 years from the 2008 economic crash, Greece was still spending about 2.1% of GDP on defence, compared to EU NATO average of 1.6%.
In 2010, the EU, European Central Bank and International Monetary Fund recommended a reduction in wages but on defence cuts. What happened was the wages of soldiers were slashed by 40%. Though the military can still afford to buy new equipment, the funds for maintaining this equipment was slashed; therefore, they were rendered unusable.
The government was again asked to cut the budget for defence to 400m euro to help raise the 7.2billion euro Greece still has to pay for the last bailout, but it refused. It is believed that the refusal to cut the defence budget further comes mainly from the nationalist and pro-military coalition partner, the Independent Greeks. There were also reports of opposition from the military, which remains very influential even after 40 years.
• Early Retirement, High Unemployment and Poor Work Ethics
In Greece, men retire at the age of 63 while women retire at 59. Police and military workers are allowed to retire at 40-45. Once retired, these ex-workers will now become part of the pensioners, which the government is spending too much on.
25.6 percent is the total unemployment rate in the country, which is very high. The problem is that there’s the culture among Greek entrepreneurs that if they don’t get enough profit, then their workers won’t get paid too. This is a classic example of a major no-no when it comes to the implementation of successful business ideas.
• Greeks avoid tax payments
Tax is the fuel that keeps a government running; but in the case of Greece, it’s running dry. In a 2014 report, the EU states that 1/3 of Greece’s VAT revenue was lost in fraud and avoidance. The current VAT system in the country is part to blame because it has six bonds, which makes it open for manipulation.
For instance, shipping is tax-free. Bear in mind that this is one of Greece’s main industries. Income taxes and corporate taxes collapsed as well because the country has troubles in collection. Without proper and prompt tax collection, the country’s national debt remains to be at 177 percent of its GDP.
But without an efficient tax collection system, where did Greece get its money to keep the government moving? It borrowed, of course. The government and other private movers of the economy chose to from French and German banks, among others. In most cases, borrowing was in the form of French and German goods, which is supposed to be good except that not all of them are functioning. For example, diesel submarines bought from Germany never became operational because the Greek navy never got them to work.
Creditors were expecting Greece to pay at least 20billion euros before the next bailout in 2012. However, 5 years after the first bailout, only 2.5billion euros have been paid.
So, what’s next for Greece?
Some economists believe that the financial and political arrangement within the EU is doomed from the start. The EU is composed of 28 nations but with the European Central Bank watching over the single currency zone. ECB leaves the budget and tax policies in the hands of the countries.
When the Greek economic crisis began, most of the foreign investors and international banks have sold out their Greek bonds and other holdings. By doing this, they are washing their hands clean of whatever happens to Greece.
With the vote of NO – Greece has told the EU & IMF that it doesn’t want to be part of their social experiment. But can Greece go it alone? Only time will tell.