Governments, like everyone else, are required to pay their bills. Greece has been unable to do so for quite some time and has managed to stay afloat only through financial aid from European institutions and the IMF.
How did Greece end up in the current situation? Some argue that Greece’s historic socialist ideology has led to a government that is too large to be supported with what remains of the private sector. I tend to favor lesser government influence and intervention as I believe that governments are not very good at administering their resources efficiently; show any government some cash and there is a pretty good chance that it will be directed towards their voters or financers.
This argument can however, be easily disproved by northern European countries which tend to have high living standards and strong economies despite public sectors much larger than Greece’. The political ideology whether ultra-Socialist, Neo liberal, capitalist or whatever does not determine the well-being of an economy or the living standards of its citizens.
What determines a country’s growth path and ultimately its history are its level of transparency (as opposed to corruption), efficiency (as opposed bureaucracy) and its legal framework (that guarantee ownership right and TIMELY right of recourse).
Basically if you are doing business with someone trustworthy you need to do fewer checks, thus you are able to spend more time and energy making money and growing the business. A strong legal framework means that if you have a dispute you get a quick resolution, not years of uncertainty. Greek governments have failed for decades to guarantee these aspects as European authorities found out following the crisis of 2011.
Greeks are lazy; this is outright not true. OECD data shows that Greeks work on average 2,034 hrs per person in 2012. By comparison Germans worked 1,393 hours on average and the Euro area average is 1,557 hrs.
However, Greece has one of the lowest workforce participation rate in Europe at 52 percent. World bank data shows that in 2013 53 percent of Greeks were active in the labor force as opposed to 60 percent of Germans and 62 percent in the United Kingdom.
They are also less productive. The GDP per hour works in Greece stood at $34.5 compared to $58.3 in Germany and $52.9 in the Euro area. This implies that while Germans work much less they still manage to produce more per individual. This is the main problem that Greece has to solve in order to be able to generate enough income through taxes to be able to me it financial commitments and improve its citizens standard of living.
The Troika has highlighted several areas that are leading to an uncompetitive environment, primarily extensive bureaucracy and rigid labor rules. These are keeping Greece from being able to compete even in area were Greece has an advantage like shipping, tourism, olive oil and their famous yoghurt.
A quick search of the internet gives infamous examples of what Greeks face on a daily basis. One particular EU resident got married in Greece and tried to open a business. He spent three day lined up in a queue trying to register his van, two months to get his marriage paperwork and more than a year trying to get permits for his business. Finally he gave up, did not register his van and is working without a permit.
These inefficiencies have hindered businesses from growing and achieving the necessary economies of scale. That means lower profitability and fewer jobs. Hence Greece is not yet able to cater for modern demand patterns such as integrated tourism resorts, large ports for cruises, marinas etc. Manufacturing also cannot compete in pricing.
Following the first bailout, the Greek government was forced to accept a change in direction, at least on paper. Labor liberalisation and measures aimed at reducing bureaucracy and excessive government intervention did produce some initial results in terms of an improving economy.
However, leftwing Syriza have started to reverse the process. A newly implemented electronic public payment system that was intended to improve transparency has been changed, workers are being rehired by the government and labor laws are being reversed once more.
The next few weeks will be critical for Greece. However, I believe that the main stumbling block will be the huge gap in ideology. For all its good intentions, a socialist state can only be maintained through strict discipline by authorities and strong institutions otherwise the weight of the government will strangle the economy.
And while the Greek government is insisting it can do it, creditors are understandably skeptical and thus unwilling to part with their money without a commitment of reform from Greece. The outcome will probably be revealed in the next few weeks if not days.
However, I believe that the EU and the Euro will recover from whatever outcome; Franco-German discussions emerged this week that indicate that a road-plan already exists for a more efficient Euro Area. Greece will have a hard time whatever the outcome.
Disclaimer:
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.