Thursday, September 29, 2011

We have the Troika we deserve!

Athens Review of Books
October 2011

Greece, two years after the agreement on the conditionality program, is closer to bankruptcy than ever, while at the same time all economic initiative is simply frozen. The responsibility of the government that has procrastinated and not done what it had to do for months, is obvious, as is the responsibility of the opposition that undermined in every possible way the fiscal consolidation efforts and the structural reforms. But a substantial responsibility also lies with the troika. Not only towards the European (mainly) taxpayers, whose money it administers, but also towards those Greek citizens who were hoping that the troika would act as a type of catalyst to rid the country from a state-sponsored, vicious and corrupt governance system. This system of governance was fed with European money and it grew to marginalize the healthy and productive powers of the country, in every aspect of the economic, social and intellectual life of the country, during the past thirty years.

Which were the main mistakes of the troika?

Regarding economics, the fundamental mistakes were the duration of the program, the balance between tax increases and expenditure cuts and the fact that the money of the European, mainly, taxpayers was used to keep financing consumption, rather than investment. The assertion that the deficit was so big that it had to be cut slowly during a four year period turned the program into a Chinese torture that multiplied uncertainty and that led to a further increase in the public sector debt which was allowed to soar to uncontrollable levels. With what logic could the bankrupt Greek state justify primary deficits that financed consumption of almost 20 billion Euros in 2010 and 2011? And since the main aim of the program was to restore confidence, why had this to happen in 2012 rather than in 2010? In a country that had the lowest investment rate among all Southern European countries (30% less as a percentage of GDP than Spain and Italy) and the largest extent of overconsumption, the troika did not finance investment but sustained excessive public consumption.

At the same time, and in spite of the fact that the troika publicly argued for the need to emphasize expenditure cuts rather than tax increases in order to reduce the deficit, it accepted the opposite policy that the government pursued. Repeated increases in tax rates, given the corrupt tax-collecting mechanism and the widespread social acceptance of tax-evasion, strangulated the productive private economy, supported the relative competitiveness of the systematic tax-evaders and undermined the productive and competitive law-abiding companies.

Finally, the way the privatization program is advanced is irrational from an economic perspective and irresponsible. It is a program with unrealistic expected returns and a time-frame which lacks careful preparation. Nobody knows or can explain where the famous 50 billion will come from, since nobody has bothered to look what the market would be willing to pay for the assets the government is going to offer. It is a letter to Santa Claus that simply aims to fool the markets and to buy time.


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