The history behind the ‘Grexit’

According to Business Insider magazine, Greece’s economic woes began in the 4th Century BC, a time when Plato and Aristotle were alive. Thirteen Greek city-states borrowed from the Temple of Delos, but most of the borrowers defaulted and the Temple lost 80% of the money it loaned. Modern Greece has defaulted five times – beginning in 1826 – and has been in financial crisis for almost half of the time since it finally gained independence from the Ottoman Empire in 1832.

The past aside, how has modern Greece followed its previous generations and found itself in such a mess?

The initial answer is simple. Greece has consistently failed to collect taxes; it has a remarkably generous pension system and the administration of the country is hopelessly inefficient. Let’s look at three simple examples.

VAT

Greece has six different rates of VAT. The nominal rate is 23%, but there are two reduced rates for items like food, fuel and medicine. The Greek islands have reduced rates, in a bid to encourage people to stay in the remoter parts of the country and to help the tourist industry.

Tax evasion is clearly much easier with such a complex system. Then there’s the fact that so much of the Greek economy is based on cash. The Financial Times reported in January of this year that the country as a whole appeared to stop paying tax in anticipation of a Syriza victory in the General Election. ‘State revenues have collapsed,’ reported the FT.

Pensions

The Greek pension system is not particularly generous and yet they spend 30% more on pensions than the UK does. A huge number of professions are classed as ‘arduous and unhealthy’ and allow people to retire at 50. Among these are bakers, hairdressers, masseurs and trombonists. Five years ago, The Independent was reporting, ‘Greece to call time on cushy pensions.’ Since then it seems as though not much has happened.

Inefficiency

Lastly, there’s simple inefficiency. At the start of the crisis, the Greek government pledged itself to bring in €50bn from privatisations. The target was rapidly reduced to €30bn, then €20bn: it’s estimated that the total raised so far is €2-3bn.

There was a lot of coverage given to the recent suggestion by the author Michael Lewis that the Greek railways were so inefficient that it would be cheaper to pay for every passenger to go by taxi. In fact, this idea was first mooted by finance minister Stefanos Manos in 1992 as he tried to highlight gross public sector waste. Recent figures suggested that the Greek railways system collected £80m per year in fares, against a wage bill of £500m.

The history suggests the ‘Grexit’ hasn’t suddenly appeared on the horizon, but is a state of being that has been coming for years. The question now is can anything be done to get Greece out of the current mess, or at least plan for a sustainable future.

Sources:

http://uk.businessinsider.com/mind-blowing-facts-about-greece-economy-2015-6, http://www.ft.com/cms/s/0/b47c6d76-a320-11e4-bbef-00144feab7de.html, http://news.sky.com/story/1504923/greek-pensions-q-and-a-too-generous, http://www.bbc.co.uk/news/magazine-18032721, http://www.independent.co.uk/news/world/europe/greece-to-call-time-on-cushy-pension-deals-for-unhealthy-jobs-1978789.html