Greece’s Next Government Has to Show Europe It Can Reform

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By the Editors May 2, 2012

Europe’s effort to rescue Greece has become all too like an episode of the TV hospital drama “House.”

If you’ve seen the show, you know the drill: An unreliable patient with alarming symptoms (Greece) is being treated by a chief doctor who has the bedside manner of a sociopath (the troika of the European Commission, the European Central Bank and the International Monetary Fund). Near deaths and false recoveries ensue.

Sunday’s parliamentary elections should in theory offer a chance for a cure. Political parties, which since November have taken a back seat to a government of technocrats, now have the opportunity to secure a popular mandate for reform.

The prognosis isn’t great. That’s because the two main parties -- New Democracy and Pasok -- are part of the problem. In the years leading up to the crisis, they spent freely on pensions and health care, and a New Democracy government then lied about the resulting budget deficits. They also failed to reform a bloated and dysfunctional state bureaucracy.

Worse, neither party has taken full ownership of the austerity program they had to accept for Greece to get a 130 billion euro ($172 billion) bailout in March. They’ve spent too much of their election campaigns promising to find ways to ameliorate the deal, and too little explaining to Greeks the hard things they need to do and why.

Messy Coalition

Not surprisingly, New Democracy and Pasok look set to lose about half of their usual share of the vote to a rash of small, new or extreme parties. The likely outcome will be a messy coalition government or a repeat vote. This is problematic, because Greece has a deadline in June to detail how it will make budget cuts worth an additional 5.5 percent of gross domestic product for 2013 and 2014. If it fails to do so, the troika might cut the country’s cash lifeline.

Greece’s dysfunctional state, crippling as it is, has a potential upside. If any new government can achieve even a modicum of competence, it can reap great rewards with some simple changes. Consider, for example, a discovery the Labor Ministry announced last week: It found 200,000 people who were claiming pensions illegally, many on behalf of people who had long been dead. That’s almost 10 percent of Greek pensioners and a potential savings to the government of 800 million euros a year.

The same goes for taxes. Greece’s ratio of uncollected tax debt to tax revenue was 72 percent last year, compared with an average of 12 percent among fellow countries in the Organization for Economic Cooperation and Development. This represents a huge potential harvest of revenue to reduce the deficit.

Greece has moved exceedingly slowly to fix these obvious problems. It took civil servants a full two years to complete the seemingly simple task of checking the names of pension recipients against death records. No wonder the IMF’s review of Greece’s rescue program released in March reads like a cry of despair -- especially when it comes to fixing the tax system, a top priority on which the fund admits to failure.

Many of the reforms demanded of Greece are things it needs to do for its own sake, not Germany’s, and regardless of spending cuts. The World Bank’s ease of doing business index ranks Greece at 100, just below Yemen. Latvia, which ranks 21st, saw a much sharper decline in GDP than Greece as a result of the economic crisis, but is already (and not coincidentally) bouncing back.

Real Hardship

It would be grossly unfair to say that Greeks and their government have done nothing. Since 2009, they’ve reduced the primary budget deficit (excluding interest payments) by more than 8 percent of GDP and unit labor costs by 9.5 percent. There has been real hardship: The economy has shrunk by 13 percent since the onset of the crisis and is expected to contract by an additional 4 percent to 5 percent this year.

Greece has promised the troika that it will slim the public-sector workforce by at least 150,000 jobs, more than a fifth, by 2015; reduce the minimum wage by 22 percent (and a further 10 percent for workers younger than 25); and deregulate 20 protected professions, including truck drivers. To date, most of these promises have gone unfulfilled.

As we’ve argued before, the spending cuts that the troika is demanding are too drastic and have tipped Greece into a downward economic spiral. But if the country wants to get the time and money it needs to recover, it has to show that it is willing and able to execute politically difficult reforms that are obviously in its best interests.

Opinion polls suggest New Democracy will win with a little more than 20 percent of the vote on Sunday, and as many as 10 different parties -- from the neo-fascist Golden Dawn to the Communist Party of Greece -- will pass the 3 percent threshold required to get into parliament. If a government can be cobbled together, it will have to get on with creating a viable state.

Otherwise, chief doctor House might just pull the plug.

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