Easing Greeks' Debt, One Yacht at a Time
October 28th, 2011
October 28th, 2011
Although most people don’t know this, the tailspin that Greece’s economy is in now did not begin in 2008, but rather in 2001, when it joined the euro. Although that statement doesn’t necessarily imply causality. The problem was there, but festering. When the financial crisis did get going, it didn’t so much create Greece’s problems, as it revealed them. At the beginning of 2010,Greece found itself on a precipice of financial ruin, driven by years of excess spending and borrowing and insufficient revenue.
To prevent the country from defaulting on its debt, in May of 2010 the International Monetary Fund and the European Union promised to provide Greece with a €110 billion rescue package. But in the terms of this agreement, Greece was to meet certain deficit goals: including reducing the budget deficit to 7.6% of GDP.
To meet this challenging goal, Greece has implemented a series of austerity measures, including spending cuts in the public sector, mainly in the form of pay cuts, pension cuts, and privatization, and also increases in taxes, whether they are indirect, like those levied on alcohol and tobacco, or the VAT. Every step of the way, Greek citizens have greeted these prospects with protests, which have sometimes turned violent. And despite the government’s efforts, the response from the international community has largely been “not enough.” In January, Moody’s and Standard’s and Poor downgraded Greece’s debt to junk status.
Though there are several key variables which play into this shortfall, one major component is Greece’s rampant tax evasion. According to Athens-based EFT Eurobank, Greece has one of the poorest rates of tax collection in Europe; more than 33 percent of workers list themselves “self-employed” and remit just 4 percent of revenue. There are anecdotes of Greeks paying “tips” to tax officials in exchange for a reduction in their owed taxes. And a recent estimate by Elena Panaritis, an economics expert for Prime Minister George Papandreou, shows that more than 30% of income taxes inGreece go uncollected. In fact,Greece’s revenue from taxes is 32.6 percent of GDP one of the lowest in the EU.
But Greece recognizes this problem, even at the upper levels of government. Finance Minister George Papaconstantinou has repeatedly asserted the Greek government plans to tackle tax evasion as part of its deficit reducing approach. As a part of this effort, the Greek government has seized 555 yachts and raised $4.7 billion in fines for tax evasion. This might seem like a big number, and to some extent it is, but it’s still just a fraction of the $56 billion Greece officials estimate are owed in uncollected taxes, going back decades.
Greece must continue on its current course to achieve stability. Let’s hope the government—and its taxpayers—are able to pull through.