Zoltán Pogátsa's blog on economics in English

Zoltán Pogátsa's blog on economics in English

Tuesday, 27 April 2010

Corrupt Greece, Prudent Cyprus: The Weakness of Cultural Explanations for the Greek Crisis

There is an amazing amount of talk, articles, analysis of the Greek euro-crisis. Interestingly almost all of it seems to focus on one single issue: how to solve the situation? Should EU member states provide Greece with a loan? Should they set up a Euro-IMF? Or should they leave it to the IMF proper?
What is perplexing is that almost nobody discusses the CAUSE. Why did Greece end up with a huge international debt burden and a budget deficit of 13.6% out of the blue? Were there any signs of this before? Could this have been prevented? Could other nations face similar difficulties that could still be evaded?

I fear that this discussion is missing for two reasons. Firstly, once again, simplistic assumptions are accepted by almost everyone. Secondly, some uncomfortable truths would come to light if these debates were indeed carried through.
The simplistic assumptions are about Greece being an inherently corrupt country, with a bloated public service, and that this would be the main cause of their difficulties. I.e. they have themselves to blame, they are corrupt and cheat on statistics. However, this is a rather weak argument. There are dozens of countries with very corrupt business and state lives in the EU. One of them is Greece’s twin, Cyprus. Both sides would agree that the formerly Ottoman Hellenic states share an almost identical cultural heritage, including VISMA, the need to have strong personal connections for business success, rather than a formalised set of rules. Yet the macroeconomic performance of the two states could not be more dissimilar. While Greece is the fiscal apocalypse itself, Cyprus has continued to be the muster for budgetary prudence. Just one example: while not a single would be Eurozone country observed all four of the Maastricht criteria throughout the nineties, Cyprus, then outside of the EU, did. The country has continued to be an example of fiscal and monetary prudence. Could we say, therefore, that Greek cultural deficiencies account for Papandreou’s current headaches? Hardly.
The arguments about large public sector employment are also flawed. There are plenty of countries in the EU with huge public sectors that do not have constant fiscal crises, including countries that guarantee their public servants generous benefits such as 13th month salaries (including Austria, for instance).
Let us offer an alternative explanation. One of the key problems with Greece is the low tax morale. It is generally accepted not to pay taxes, especially at the higher echelons of society. The largest Greek businesses can easily avoid paying their dues, and are heavily involved in capital flight right now, as the crisis unfolds. This gives Greek finance minister Papaconstantinou additional headaches. Where are these superrich Greeks taking their money? One can only guess, but offshore islands are an obvious choice, with plenty of them even within the EU. Including, astoundingly, Cyprus. What is most ironic in the Greece-Cyprus comparison is that while Greece is suffering from the impossibility of drawing taxes from the rich, its twin in the Mediterranean actually functions as a de facto tax haven, under close scrutiny by the EU Commission, but never actually found guilty due to very lax EU legislation on the matter.
Another reason might be the lack of a wide enough tax base. Greece had a 55% employment rate from its 1981 entry into the EU right until the start of its euro-enhanced artificial boom around 2001. Like in other low employment economies, the narrow tax base and the large dependent population must have been central to the problem of budgetary inbalance and debt accumulation.

Tuesday, 13 April 2010

Hungarian elections: How a landslide to the right is actually a move to the left

Most international news about the results of the Hungarian elections are superficial and concentrate on the issue of the far right and the 2/3 majority of Viktor Orbán. If you just fly in and out of the country and look at the names of political parties, you get the impression that there has been a massive shift from the left to the right.
But in Hungary everything is the other way around.
The Socialists, who have been governing in the last eight years, and between 1994 and 1998, have in fact traditionally been a very right wing, neoliberal party - a complete break with their past of being the Communist party of Hungary until 1989. Their pendulum swang to the opposite exteme. From believers in the omnipotent state they went on to being believers in the free market. Socialist Prime Minister Gyula Horn carried out mass scale privatisation to foreing investors, making trade unions weak and Hungary one of the most open economies in the world. Socialist governance between 2002 and 2008 was characterised by an attempt to privatise healthcare, constant talk (albeit little action) about decreasing taxes, inflation targeting in monetary policy, and massive capital flight from amongst the Socialist political-economic elite to de facto tax havens such as Cyprus.
These Socalists have now suffered the biggest defeat in their history, and their auxilliary parties, the neoliberal Alliance of Free Democrats and the Hungarian Democratic Forum (also neoliberal lately) have not even made it into parliament. So neoliberalism maintains a 19% presence in the Hungarian Parliament.

All of the other political forces in the new parliament are to the left of the Socialists economically.

The nominally conservative Fidesz are likely to get a 2/3 majority in Parliament, perhaps even more. Although at the centre of their election campaign were also tax cuts, which would make them neoliberal and Lafferist, they are already backtracking on this issue, and it is difficult to see how they lower taxes without blowing an enormous hole hole in the national budget that is already in strongly negative territory. All other areas of their agenda are very vague, essentially populist, but past policies of Fidesz were rather social democratic in character: a stronger state, state aid to enterprises, free and state owned healthcare and education, etc.

Much has been made of the exremist party, Jobbik, which has received 17% of popular vote. While strongly nationalistic, antisemitic and racist (anti-Gipsy) in their politics, their economic policies are in fact very similar to Fidesz's except they advocate no tax cuts and would instead default on Hungary's huge debt burden - a very unrealistic idea.

The last party that got into parliament is called LMP (a Hungarian acronym for Politics Can be Different). It is a Green party of the Scandinavian type, with a root in the left wing global alterglobalisation movement. Their ideology is the New Left / Naomi Klein / Chomsky type, which realises that environmental sustainability is dependent on a radical shift of the economic system from assymetrical deregulated capitalism to societal-economic-environmental sustainability. That in fact green is red. What policies they will actually advocate in parliament is somewhat difficult to tell at the moment, as their election manifesto was a little vague on detail, not unlike the mainstream parties that they criticised.

Since all three parties are left of the Socialists economically, a landslide towards the right in fact means a decisive move towards the left in Hungary.