Understanding the Crisis in Greece: From Boom to Bust [Hardcover]

As a long time subscriber to The Economist I've been reading the slow motion demise of the euro for years. The canary in the mines is unfortunately Greece, with an economy in terrible shape and getting worse. While the euro itself may avoid implosion, it is increasingly unlikely that the euro of 2015 will include Greece. In order to understand the unraveling of that country's economy I recently read three books on the subject: The Greek Economy and the Crisis by Panagiotis Petrakis, Greece's 'Odious' Debt by Jason Manolopoulos and this book.

Of the three, this is the book for the general reader who wants to understand the inner workings and psychology of the Greece economy and politics; to understand for example not only the extend of tax evasion but to obtain a historical prospective on why the problem exists.

The author reminds us that the history of Greece is unlike that of most European countries. Part of the Ottoman Empire for 300 years, taxes were used to extract wealth from the country, not to provide for the public good. Avoiding taxes was thus not seen as selfish or wrong, but instead almost as a patriotic act. Only a fool pays what the state demands.

The author argues that the state is still in opposition to its citizens, with disastrous and ongoing consequences for the country. Corruption by public officials is rampant and avoidance of taxes is widespread. Earnings under 12,000 euros per year weren't taxed, though those with high incomes pay tax rates well above the euro average. When the authors look at professions and job categories that would normally earn about this threshold, the percentage of people holding those jobs that are self-employed increases dramatically. The ability to under report income is considerably greater for persons self-employed, and the authors present endless data providing that this is certainly true. The data is based both on personal experience (the difficulty to getting a receipt from a plumber or doctor with the correct amount listed) and statistical (percentage of doctors living in wealthy areas with little if any taxable income). Add to this system of tax avoidance a pension system that is ludicrously generous, and the result is an inherent fiscal imbalance. In 2007 the average pension was 12,707 euros, only slightly higher than the average for all workers and pensioners. You can retire at full pensions after 25 years, and there are endless exceptions to this 25 year requirement. In 2007 31.7% of central government expenditures went to pension and social security payments, with slightly lower amounts to debt payments and public employee salaries. The three categories combined are approximately equal to revenue received. An obviously unsustainable situation. But until recently the government's only response to this fiscal debacle was to cook the books.

While the amount of data is at times overwhelming, the author organizes the book into coherent chapters with subjects such as corruption and quality of justice. And he has a clear, if overly optimistic purpose for the book: to assist reformers by pointing out which reforms will have the greatest impact. The answer is that the political and justice systems must be reformed and the government must end its excessive involvement in the markets. The author believes that reforms in these areas are prerequisites to any other reforms.

While the author is optimistic that change is possible, that is not the conclusion reached by this reader. There are virtually no bright spots in the relentlessly bleak data provided in this book. Repeatedly we are told that the telecommunications industry was deregulated, showing that deregulation is possible. But then he lists the endless taxes imposed on the industry as soon as it was showing signs of strength, calling into question the future of even this industry. Very, very sad.

An academic examination of institutional factors in political economy that have contributed to Greece's poor economic condition

This book is written by academicians in a very academic style (i.e., making extensive use of theory and empirical work in the academic sphere) but can, nevertheless, be understood by layman. The book does not cover macroeconomic factors, such as capital flows, balance of payment problems, foreign exchange fluctuations, etc. that have brought the Greek economy to the horrendous state that it is currently in. Readers interested in such an analysis will be sorely disappointed and should look elsewhere for an analysis. The authors, two academicians, instead focus on institutional factors in the realm of political economy that have brought that nation's economy to its current state.

The authors examine a wide scope of institutional factors ranging from very high level (i.e., the constitutional framework of the nation's legislature) to relatively more mundane and easier to change factors, such as the transparency of the legislature and judiciary. The authors not only examine the institutional factors themselves but also make recommendations as to how these can be reformed to bring about improved performance in terms of economic growth and efficiency.

The authors examine, among other factors, the uni-cameral nature of the country's legislature. This, they claim, provides little in the way of checks of balances on any governing party. Hence the governing party has little to prevent it to from dispensing with excessive political patronage. The authors recommend a bicameral system, like that in the U.S. or Britain, to provide a counter weight to any governing party. Unfortunately, such a reform requires an almost revolutionary change in the parliamentary system and hence is very unlikely. The authors, fortunately, examine other areas where the legislature can be improved in a very feasible and realistic manner. For example, they recommend that the legislature becomes more transparent by issuing minutes of its meetings and conferences.

The authors also examine Greece's judiciary. Here they cite two major problems, lack of transparency as well as tremendous inefficiency and backlog. The first problem stems from the fact that many, if not most, of the judiciary's rulings are not made public, an unbelievable fact in a democratic state. The authors recommend a policy of full disclosure. Another major problem is the inefficiency of the judiciary. The authors show how backlogged and inefficient the judiciary is (cases in the Greek legal system take the longest average of time to resolve in the European Community). The authors recommend reforms such as more resources be devoted to the judiciary but just as importantly, if not more so, legal reform. Greece has a very high per capita level of laws (with many conflicting with each other). The authors recommend a cleaning out of these laws, analogous to how Justinian cleaned out the Byzantine legal code.

The authors examine many other problems with Greece's political institutions and suggest reforms albeit many will be difficult to accomplish in reality due to the interests of strongly entrenched political interests. This makes for very interesting reading and provides a picture as to why, as the author's posit, the root of Greece's real economic problems lie in its poor political infrastructure.

Nevertheless, the authors do miss some points (inexplicably) that are in need of reform. One involves the issue of property rights, along the lines put forth by DeSoto (in his book "The Other Path"). In that book DeSoto stresses the importance of property rights, in particular having a non-corrupt and functioning land registry system. Greece is alone, quite disgracefully, in not having one. The authors also do not discuss the self-evident fact that the civil service needs to be switched from a system based on political patronage and connections as opposed to based on merit (i.e., via examination).

All and all a book that should be read by those interested in developmental economics, political economy and the reasons behind Greece's current economic condition and performance.