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A Uniquely Greek Tragedy

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As the debt crisis in Europe continues to unravel, a better
understanding of what really caused the crisis and how it should be
resolved is starting to emerge. Analysts initially focused on the
similarities between Portugal, Ireland, Italy, Greece and Spain --
lumping them together under the unflattering "PIIGS" acronym. Yet as
events have unfolded, it has become increasingly clear that each
country has a very different set of problems. Nowhere has this been
more evident than in Greece.

This weekend, Greek voters have a unique opportunity to show that the
cradle of democracy has come of age. Many now agree that the Greek
problem is idiosyncratic, yet it has been treated as an "ordinary"
case of macro-economic imbalance. Expenditures vastly exceeding fiscal
receipts and an inefficient public administration are rightly seen as
the kernel of the problem, and Greece has been pushed to restore
fiscal balance.

But there is much more to the Greek crisis than this. The true
underlying issues are a crumbling public administration and a
political system where a few beneficiaries distort economic flows in
the country, stifling development and depleting state resources.

The True Tragedy

While such structural problems have been noted for a while, their
magnitude seems to have been underestimated. The true Greek tragedy is
that a country that could potentially be on a solid growth
trajectory is instead facing chaos because of the way the public
sector (and its associated political system) interferes with the use
of public resources. The press has been part and parcel of this
corrupt system, impeding the understanding that would help resolve the
issue. More consequentially, it has proved convenient for the
stakeholders in the crisis -- in particular the European Union -- to
avoid confronting the real nature of the problem. Doing so would
require the sort of far-sighted action and pragmatic leadership that
is -- perhaps understandably -- lacking from politicians concerned
with re-election and administrative units vying for relative power.

As a result, kicking the can down the road has become the de facto
solution, in the hope that things get better. The EU and the IMF have
been treating a cancer with patches and aspirin. They have been busy
addressing symptoms of the sickness, without daring to address the
underlying cause. The EU task force, for one, has neither the skills
nor the mandate to engage in the massive change management needed. So
for all its short-term risks, it's time the Greek electorate addressed
the problem head-on, confronting the state-induced sclerosis and
sending a message to populist politicians from the left and the right
alike.

The problem in Greece is three-fold. First, the public sector has
proven to be a woeful manager of its own resources. The Greek public
administration lacks accountability as well as a stable backbone of
senior civil servants. It relies on formalistic rules to guide every
step of the operation of public administration, as opposed to focusing
on how it can substantively serve its purpose. These personnel
issues, along with poor information and management systems (or data of
any sort), mean that the public output related to expenditure is
disappointing.

Serious problems exist at the top of the structure. The political
system is highly influential and self-serving; its beneficiaries are
able to carve out excessively compensated positions within the broad
public sector, which means diverting funds from where the need exists.
One such need, not surprisingly, is the growing number of Greeks
living below the poverty line, as well as increasing criminality.
Finally, an extremely important problem in Greece is tax avoidance --
Greece has only 30 percent of its GDP as tax receipts; the EU average
is 37 percent. The inability to tax fairly has hit not only public
finances, but has also created a sense of unease and social discomfort
with taxation, especially under conditions of duress.

Second, the interface between the private and the public sector has
seriously skewed the productive tissue in Greece. The Greek state has
been a purchaser of services for construction, armaments, technology,
and more mundane goods and services. Side-payments are often inherent
to such procurement, as the scandal with PASOK's former strong man
Akis Tsochatzopoulos
, now behind bars, showed. Exposed to a corrupt
system, many Greeks have shown initiative, adaptability and drive, but,
sadly, this has further increased the incidence of corruption.
Entrepreneurial drive and corruption have created a vicious circle
which is amplified by the political system, but one which is not
desired by most Greeks.

Third, the state distorts the functioning of the private sector.
"Closed" or regulated professions which have given birth to local
monopolies; a loose competition policy which does not really promote
competition; and most importantly, a bewildering set of regulations,
all deter entrepreneurial activity and private investment. Capricious
taxation and unpredictable authorities add to the problem of a
malfunctioning justice system, with long delays and inefficient
procedures. All of this means that reduced Greek labour costs have
yet to translate into reduced prices and productive investment has all
but stopped.

To tackle the Greek problem, the underlying causes, as opposed to the
symptoms alone, need to be treated. Unless Greek voters have the
courage to grasp the uncomfortable nettle of political reform, they
are likely to receive more of the same.

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