Greece Needs a Revolution, But

It is widely believed that if Greece’s Prime Minister Antonis Samaras, who presently leads a three-party coalition government, fails, then the next government will be led by the neo-communist party Syriza.

Syriza has remained vehemently opposed to the “Memorandum of Economic and Financial Policies” — the agreement between the Greek government and the IMF, the European Union, and the European Central Bank that secured continued financing for the Greek state — ever since the agreement was finalized in May 2010 (and despite later revisions).

Rather than accept the conditions demanded by the troika, Syriza long seemed to prefer opting out of that understanding, choosing instead the outright repudiation of Greece’s public debt obligations and the country’s exit from the eurozone.

However, given the unpopularity of a return to the drachma, Syriza eventually changed its tune. Thus, in the run-up to the June 2012 elections and since then, the party has insisted that it wants Greece to remain in the eurozone.

At the same time, it has redoubled its attacks on the government for being pliable to the wishes of the troika and lacking the will to renegotiate the Memorandum.

In this regard, and possibly only this one, Syriza is in full accord with the other three opposition parties: the old Communist Party, the Independent Greeks (a splinter group from the right wing of Mr. Samaras’s New Democracy), and the neo-fascist Golden Dawn, which is rapidly rising in popularity.

It is clear that the most important and urgent political issue for Greece is its negotiation with the troika and whether it will remain a part of — or exit from — the eurozone.

Syriza wants to draw a number of red lines. These mostly concern cuts in wages and pensions, the liberalization of labor laws and, perhaps most important, redundancies in the public sector. Given all that, Syriza seems to be willing to risk Greece being pushed out of the eurozone.

But that would mean a return to the drachma — and, under Syriza, a return to the past with a vengeance. This is because Syriza’s recipe for a revival of the Greek economy is through a rise in public spending, which is the last thing Greece needs.

A devaluation-inflation spiral would inevitably follow. Perversely, the unholy alliance of political parties, the media and state-dependent contractors and suppliers, which are presently effectively bankrupt and clearly in retreat, would be given a new lease of life — by the very policies and approaches of Syriza, which likes to portray itself as a harbinger of real reform.

While public sector employment would increase, the lack of structural competitiveness, which is a crucial problem and constitutes the major impediment to the developmental prospects of the Greek economy, would not be addressed.

In fact, structural competitiveness — the ability to compete internationally without the aid of devaluation — would certainly deteriorate in the absence of labor market reforms.

This may not be a popular position to argue, since it does require profound changes in the ways and means of Greek society. But the evidence is clear that a devaluation-based strategy has never lastingly rectified underlying economic problems.

Devaluation is often billed as a one-time adjustment measure. In reality, it quickly turns into quicksand, only further delaying reforms to the national economy.

Greece’s best chance

The cost of Greece’s bureaucracy, according to European Commission estimates, amounts to 6.8% of GDP — nearly twice the EU average. (This cost includes the burden on the private sector and the productive economy of responding to and implementing state regulations. It is estimated that a 25% reduction of this burden would add 1.6 percentage points to Greek GDP).

This outsized charge on Greek productivity would probably get worse with the strengthening of the public-sector unions under Syriza and would further damage competitiveness.

Privatization efforts of the inordinately large state property, feeble as they are, would certainly be abandoned. Worse, the mismanagement and exploitation of state assets by para-statist rings, often with the collusion of political parties, would continue as in the past. That is hardly the agenda of a party that bills itself as fundamentally reformist.

The needed structural reforms go well beyond the labor market. They include the reorganization of the public sector, tax administration, the judiciary and, arguably most important of all, the financing and operations of the political parties.

The fact that most of this hard-nosed reform agenda is part and parcel of the Memorandum with the troika, and that anchoring it there is probably Greece’s best chance ever to bring about true reform, is ignored by Syriza.

Syriza’s message essentially is not one of reform but of nostalgia for the good old days. That is because it has benefited politically from the shift of the strong public-sector trade unions from PASOK to Syriza.

That is some reformist spirit. The only difference from the past, according to Syriza, will be that the rich will pay more taxes.

Of course, there is no question that the rich should pay their proper share of tax. The need for better collection of taxes is beyond dispute, as tax evasion in Greece is rampant. And, of course, there is a huge need for an equitable and operationally simple tax system, which citizens recognize as fair.

At the same time, strong measures are required to minimize the systemic corruption in which tax collectors routinely engage.

Despite all that, it is important to recognize that ultimately Greece’s tax problem is not so much that the rich don’t pay taxes. It is that those who can hide their income do not pay taxes.

Self-employment, especially in services, provides comparatively more opportunities to hide one’s income. This applies to all countries — but all the more to those that lack a highly developed sense of civic duty.

In Greece, the self-employed have the highest share of the labor force among all OECD countries. Also, small family-run firms with a minimal number of non-family employees constitute the vast majority of firms in the Greek economy.

With trust in government understandably low, and with a value-added tax rate of 23%, the buyer of a service provided by a self-employed supplier has a significant incentive not to demand a receipt.

In this way, the buyer gets a discount equal to the amount of the tax and, of course, the seller does not report the transaction and does not pay income tax on it.

This explains how the average income of the self-employed, from doctors to plumbers to small shopkeepers (and they, too, are proportionately more numerous in Greece than other OECD countries), turns out to be a small fraction of the average salaried person’s income.

Where Greece leads the world

So what can be done about this? There is a great Greek success story in the international economic arena that provides a clue as to what should be done.

This is international shipping, in which Greece leads the world. Greece has achieved this by imposing a simple tonnage tax on ships. The amount of the tax due is reliably and unambiguously known at an instant.

There is no need for detailed bookkeeping and tax accounting. There is no need for tax inspectors and no possibility of corruption, no bureaucracy and meddling by the state. There are no tenterhooks for political clientelism and patronage to come into play. Better yet, there are no obstacles to enterprise and development.

Such a tax regime obviously goes against the grain of the political elite’s core interests. They live, as political parties and as individuals, off the murky grey zone of patronage and protection.

Why then did the politicians agree to this regime, however reluctantly? It was not so much because of shipping’s undoubtedly important contribution to the Greek economy, but because shipowners had — and always have had — the option to easily move their operations elsewhere.

Consequently, it would be futile and counterproductive to tax the income of shipowners rather than ship tonnage, as the Left wishes. Indeed, this type of tax could be used, with equally beneficial effects, to solve the problem of taxing those who can hide their income.

A similar kind of tax, based on simple, unambiguous and readily obtainable indices of indispensable inputs to the various goods and services provided by self-employed persons and very small firms, should not be impossible to design. It just requires the political will to do so.

An even simpler alternative would be the imputation of a minimum income, which is considered necessary for the provision of the various goods and services. This would take into account the local cost of living.

Such a tax system based on imputed values has in fact been used in the past, the last time about 20 years ago. Coincidentally, it was introduced by the last coalition government before the present crisis, which was led by the technocrat Xenophon Zolotas — a former director of the Bank of Greece — from November 1989 to April 1990.

The opposition from the self-employed and small business on the one hand and the Finance Ministry and tax accountants on the other, who saw their cozy deal vanishing, ensured that it did not last long.

Thus, the allegedly “antiquated” tax, which was “not fit for a modern state,” was eventually abolished, allowing the self-employed to pay practically no tax and the tax profession and the tax-evasion industry, both state and private, to thrive.

The only hope for Greece’s future is that the structural reforms agreed to with the troika are implemented and the public sector undergoes a radical overhaul. Reducing the public sector’s size, minimizing bureaucracy and promoting private enterprise is the only revolution that Greece needs. This is the exact opposite of the Syriza program.

However, the one thing about which Syriza seems to be right is that Greece’s debt repayment will need to be renegotiated. But that negotiation will take place only after the country has effectively implemented structural reforms designed to restore economic competitiveness.

That is not just in the interest of creditors. Even more so, it is in Greece’s interest.