Greece: Not yet out of the woods
November 23rd, 2010
Though Ireland is the European country headlining this week with words like “DEFAULT” and “CONTAGION” looming overhead, let’s not forget that the flames have not yet been completely doused on Greece. To prevent the country from defaulting on its debt, this May 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 (earlier this year the IMF estimated the Greek deficit was 8.6 percent in 2009, but recently Eurostat estimated it “above 15 percent,” up from a previous estimate of 13.8 percent).
Despite the doomsday scenarios, Greece seemed to be evening its keel in recent months. In October, Prime Minister George Papandreou pledged to cut next year’s budget deficit faster than agreed in the bailout deal. He noted the “aim is none other than to get out of the tunnel as soon as possible,” impressive words for a country which was uncertain of its future a few months earlier.
Though it has lost its status of “European Country in Crisis,” thanks in large part to the mess the Celtic Tiger has found itself in, Greece isn’t out of the woods yet.
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.
The measures have met with limited success. But the country’s prospects to stick to the deadlines are not yet certain. Greece must meet these targets in order to receive the third installment of the bailout. To simplify the situation, Greece is still about €4.5 billion short of its requirement.
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. Furthermore 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. And the country’s efforts have met with limited success: as the ministry noted money from income, corporation and sales taxes increased 3.7 percent in the first 10 months of the year. The government is also trying to collect on back taxes; a recent amnesty program has shown significant results. The program has a deadline of November 29th and has already collected €300 million from taxpayers.
Greece must continue on its current course to achieve stability. And the prospect certainly seems closer now than it did six months ago. Let’s hope the government—and its taxpayers—are able to pull through.