The Only Deal Worth Making
There is little on which we Greeks seem to be in agreement these days. Some will tell you that staying in the Eurozone is our only shot at prospering again, no matter the cost. Others seemed to think - at least until recently - that Europeans would budge and allow for a lighter deal. There is a minority that thinks a Grexit is the only way forward, and there are even those who surrender all rational thinking, arguing that they have been so screwed over by the crisis that they’d rather the whole country flounder than give in to the creditors’ demands, insisting they have nothing left to lose.
After months of trying to convince my compatriots that we need this deal, I find myself exhausted. Not because I’ve changed my mind and now think we don’t need it, in fact, I still believe we desperately do. Being kicked out of the Eurozone would make the crisis we’ve been going through - severe as it has undoubtedly been - seem like a walk in the park. The reason why I’m exhausted, is because I have found myself being the advocate of a very bad deal.
The deal that was being discussed pre-referendum, a version of which is likely to be resuscitated in our last-ditch attempt to remain part of the Eurozone, is not bad because it won’t make our country’s debt sustainable overnight. It won’t and it needn’t. This deal is bad because its composition in terms of actual policy measures cannot possibly lead our country into a sustainable growth path.
Don’t get me wrong, that is not solely our creditors’ fault. Time and again Greek governments have proved unreliable when it comes to implementing agreed upon reforms, they have also proved ineffectual in combatting tax evasion. Therefore, our creditors are naturally suspicious when the SYRIZA-led government tries to substitute fiscal hardship with vague reform promises; this is a party that fundamentally opposes reforming the economy, almost on principle. They have also taken expenditure cuts almost completely off the table, while essentially unilaterally reversing the limited progress that had been made on this front. What our creditors are left with is a buffet of very limited policy options, which begin and end with taxes, taxes and more taxes.
It is the same tried and tested recipe that consecutive governments have used throughout the crisis. This recipe has suffocated the remaining healthy elements of the economy, has led to a pie that is constantly shrinking (along with the tax revenues you can extract from it), has skyrocketed unemployment and - given the very substantial tax evasion still going on in Greece - has ensured the distribution of the burden of fiscal adjustment is heavily inequitable. This toxic combination has brought down several governments and will continue to do so until something changes.
Yesterday Greece got a final shot at joining the negotiating table with specific proposals. We have been told this is our last chance before being shown the door. Let’s not waste this final opportunity. Instead of ruminating on the different shades one more bad deal can take, I’d much rather talk about the kind of proposals that I think could work, the only kind of deal worth making at this point.
Dealing With The Cause of the Problem
Greece is not Portugal, it is not Spain, nor is it Ireland. The culprit behind the Greek crisis is none other than an inefficient, ever-growing, obstructive and largely corrupt state, which, having eventually been given access to capital markets at very low interest rates upon entering the Eurozone, over-borrowed and over-spent in all the wrong places.
Can we finally agree that we need serious public sector reform? Can we please stop trying to blame everything but the state for our misfortunes? Can our creditors understand that all the taxing in the world won’t get their money back unless we get to the cause of the problem? Just like a company that has been mismanaged and is going bankrupt fast has to change the way it does business to survive, we need to take a look at the state apparatus, what it is comprised of, what each part of it does against what it should be doing and finally, how much everything is costing.
When its largest single expense remains the wages it pays its employees, we have to take a serious look at what these employees are delivering. Can one person do the same job as three, four or five? Keep the best person for the job and let go of the rest. Does this organization need new blood? Make sure you hire the best you can find, pay them well and give them the right incentives to inspire those below them into shape. You will be doing a favor to all those underused employees that have been suffocating under the weight of the system’s inefficiencies and you will be bringing invaluable new blood into the system.
If you start firing horizontally, across the board, you will fail. The restructuring will be inequitable and it will leave you with a miniature version of the same problematic entity that you were trying to fix in the first place. If you hire new people without making sure you need them, without knowing where it is you need them and without paying them well, checking up on their performance and providing them with the right incentives to keep doing their job effectively (but also honestly), you will soon find yourself exactly where you started.
This does not need to happen overnight. For example, you can make a commitment to cut government expenditure gradually, in a matter of 10 years. Becoming lean and efficient should not be seen as a necessary evil to cut costs, but as a way to create a state more attuned to the needs of its people. This new system will allow for bureaucracy reform to take root, it will make e-government practices easier to implement and will create a new culture of public service that will permeate throughout the system and send ripples through the economy.
What about the people leaving the public sector? Some will be retiring anyway. Others will need to be let off gradually. A big chunk of public sector employees should be retrained and given benefits until they find their place in the private sector, which can and will start booming if the right incentives listed below are finally provided. We need to make this transition as smooth as possible, mitigate the pain being felt by people who are being let go and make sure opportunities arise for them in the new economy we are trying to build.
Get Out Of The Way
Now that we have made a commitment to cut our expenses, let’s have a look at our revenues. The economy has been overtaxed these past few years, and while doing business in Greece has somewhat improved, it is still comparatively difficult. As a result, the private sector has shrunk and very few private entities are interested in investing in our country. Lowering income taxes and a lower VAT would lead to a collective sigh of relief that could kickstart demand in the economy. Demand spurs growth, which might actually lead to a bigger pie to tax, which could eventually lead to higher tax revenues.
How do you incentivize people to create and grow their businesses? First, you make it easy for them to start and easy for them to stop. There is a range of measures that have been recommended to Greece to make sure the state gets out of the way of entrepreneurs who want to do business in our country. You make it your goal in life to speak to entrepreneurs, listen to what they need, get them what they need. You incentivize them further by making sure new business is given a tax break for at least a few years, with a gradual hike that will lead them to the general corporate tax. These are new businesses that would not have been created otherwise, thus you are not foregoing any actual tax revenues by giving them this break.
Part of the reason why our economy is in the shape it is today is that Greeks have not exploited the emerging comparative advantage they have in a number of fields: we have affordable, highly-skilled labor, a temperate climate, and a country of unique beauty and historical relevance. Businesses that find ways to exploit these advantages through extroverted activities should be given a push by the state, either in the form of lower taxes or through focused grants of European funds. We need to start producing products and services that are in demand in other countries and rely less on domestic demand.
Getting out of the way does not by any means mean that you give up your right and obligation to check up on companies and corporate governance, making sure businesses are paying their taxes, playing fair and sticking to the rules. You make sure you simplify legislation and you also set up a new tax authority of well-paid tax collectors that have every incentive to do their job well and a lot to lose if they don’t. You also make sure the rule is clear when it comes to businesses and individuals evading taxes: if we catch you once you are under probation, if we catch you twice you’re toast.
Reboot Social Security
Our current pension system is quite simply failing and unless it’s fixed it will no doubt let future retirees down entirely, soon. If one principle is to be followed throughout social security reform it is this: the system needs to be protected constitutionally and escape from the control of myopic, profligate politicians who only think about present gains and never about future woes.
Given the financial constraints our state is faced with, social security needs to be reformed into something closer to the Swedish pension system model, using the defined contributions principle which is by far better in terms of motives and social justice. For example, every retiree should be entitled to a minimum guaranteed pension after reaching a certain age (with clear, specific exceptions for people who are ill, handicapped or employed in professions that take a physical toll on them). This pension should be supplemented by the social security contributions he has actually made over the course of his professional life.
67 is a retirement age on which even our government has agreed to as a goal, what we need to do is make sure people are given the right incentives to retire then and not earlier. One simple way to do that is to establish a rule that says no one has access to their minimum guaranteed pension before that time: all they can get before they turn 67 are the social security contributions they have made throughout their working life. Finally, your right to your minimum pension plus whatever you have contributed needs to be constitutionally guaranteed by the state, prioritized compared to other state obligations like public sector wages.
These measures are not without costs, they are not without losers, they are not without pain. We cannot avoid pain at this point, the only thing we can and ought to do is make sure that the pain is distributed as equitably as possible, and that pain today leads to gains tomorrow. We have experienced pain these last few years, however it has mainly been shouldered by three groups of people: the weakest links in our society, private sector employees who have been let off and are unlikely to be hired any time soon, and entrepreneurs, the very group of people that creates jobs in functioning economies.
I am under no illusion; our current government (just like the ones that came before it) doesn’t have the guts to propose and implement a policy mix such as the one I am proposing above. That is too bad, as it is the only sustainable way forward.