Is it surprising that Greece got into such a mess?

The Greek economy, burden with huge government debt, continued to adopt stringent austerity plans in order to secure a bailout from the European Union. Although markets received the news of an emergency package for Greece with a positive view one wonders if anyone actually understood the package in the first place. Greece is getting a further €109bn in soft loans from the eurozone and the IMF over the next 3 years taking its overall package to around €200bn. Credit rating agency Moody’s downgraded Greek debt to junk status on the grounds that default is virtually certain. This also affects other economies in the Eurozone (Italy and Spain) as they now know that bailouts from northern countries won’t be forthcoming if they have to take “haircut” (loss).

Will it work? I am not sure as Greece’s debt-to-GDP ratio will still be around 130% and there are few “engines of growth” available to get the economy back on the rails. But is this situation that Greece finds itself in a surprise to any of us?

Tax evasion a Greek national pastime

For years Greek governments have struggled to collect enough taxes to fund their spending. The gap between what tax payers owed last year and what they actually paid was approximately 33% of total tax revenue – about the size of the country’s budget deficit. The “shadow economy” in Greece accounts for approximately 27.5% of GDP and this culture of evasion has the effect of burdening those that are honest and pay their taxes. Greek officials are well known as easy to bribe with cash and there has been little enforcement especially around election time. According to James Surowiecki in “The New Yorker” Greece, with Bulgaria and Romania, is seen as the most corrupt country in Europe.

It is a vicious cycle – as tax evasion is prevalent everywhere people trust the system less, which makes them less inclined to pay taxes. Therefore the government makes up the shortfall by raising taxes on those who do. This then increase the motive to not pay taxes at all. A social inclination toward tax evasion is hard to eradicate and Greece needs more than a policy shift but a cultural one. One wonders how they were able to afford to host the Olympic Games in 2004?

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