THE BLOG

A Uniquely Greek Tragedy

05/11/2012 06:08 pm ET | Updated Jul 11, 2012

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.