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.


  1. 14th month salary even (but that's common for privately owned companies as well)...
    Btw, Cyprus is a very small economy, is it not a bit easier for them?

  2. Nice work Zoltan.
    @Lorenz: IMHO size doesn't matter here (cfr Luxemburg for instance: very small, still poor in the 60's, one of the world's most prosperous places today, without oil or ores).
    I guess when you are part of a monetary union with as many members as Euroland, the difference between a state, a company and a household fades. They are all more or less bound by the same economic principles, and they have the same tools at their disposal.
    So our Greek friends simply will have to apply the baltic recipe: cut public spending now. Yes that means slicing off 25% of social benefits, and 15% of state salaries and pensions as of today.
    Afterwards then, and unlike the Baltics who managed on their own, they may apply for an Euroland loan, at a discouraging premium off course.
    The Germans have been immunized to financial laxness in the 20s for at least 2 centuries!
    If Greece is shown mercy now they will have forgotten the lesson by next summer, and who could blame them?