What really went wrong in Greece?

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Editor’s Note: Evan Liaras is the Davis Post-Doctoral Fellow in European Studies at the Institute of European, Russian, and Eurasian Studies at George Washington University. Harris Mylonas is Assistant Professor of Political Science and International Affairs at George Washington University and Academy Scholar at the Harvard Academy for International and Area Studies.

By Evan Liaras and Harris Mylonas – Special to CNNgreek-flag

After reading about the Greek debt crisis for over a year now, you might think you understand what it’s all about. You’re probably wrong. International media focus on how the Greek government and people spend their money. But an equally important problem is the inability of the Greek state to collect revenues.

The story constantly aired by various news outlets is simple enough. Greece, we are told, free-rode on the security offered by the rest of Europe to attract money from foreign investors, and then spent it lavishly on its bloated public sector. In case you don’t get it, BBC’s website has a recurring instructional slide show titled “What went wrong in Greece?” Apparently, Greece’s adoption of the euro “made it easier for the country to borrow money…. Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics.”

This brief media lesson on Greek economics has proven very appealing to audiences abroad for two reasons. First, it rhymes with the stereotype of lazy Mediterranean people conning their hard-working North European partners and then shamelessly asking for a bailout. (Now that Italy may be heading the same way, there will be more of this coming.) It also resonates in the ears of the euro’s sworn opponents, above all in the UK.

Unfortunately, it is only half the story. Greek public debt as a percentage of GDP did not dramatically rise right after Greece joined the euro. Greek debt actually accumulated back in the 1980s and early 90s, years before Europe got its common currency. The size of the Greek public sector (as a percentage of GDP or share of the labor market) is around or even below average compared to the rest of Europe. Greece did try to spend its way out of the global recession in 2008-2009 and ran large deficits; but so did most other developed countries, including the UK and the U.S.

There are two sides of the public finance coin: expenditure and revenue. What is left out is that while Greek public spending and debt crept up, government revenue fell or remained constant in the years after Greece adopted the euro. Between 2001 and 2007 Greece’s average government revenues totaled 39.4% of GDP, whereas the EU average was 44.4%. Taxes are by far the largest component of government revenue. The issue is not unique to Greece. Declining tax revenues were observed in Ireland, Spain, and in the U.S. after the Bush tax cuts kicked in.

In Greece the culprit has been rampant tax evasion by corporations owing millions in taxes and self-employed professionals who can hide their earnings, unlike salaried employees and pensioners. Under international pressure to balance its budget, the outgoing Greek government axed salaries and pensions and slapped new taxes on the bulk of citizens who were not tax-delinquent. This only drove the country deeper into recession and insolvency, making it necessary for EU leaders to write off part of Greece’s debt in July and then again in October.

Whether the government is reluctant to tax the very wealthy (as in the U.S.) or lax in its duty to punish tax evasion (as in Greece), the results are similar. Revenues can’t keep up with expenditures and lenders become uneasy. Meanwhile, those who are taxed too leniently have an interest in shifting public attention towards cutting government spending. The bitter partisan quarrels in Washington and Athens lately have this much in common. Yet, this obvious point is conspicuously absent from reports on Greece in the English-speaking world.

There is no denying that Greece overspent on security for its Olympics – they were the first games after 9/11. There is also no denying that the Greek public sector is very inefficient. But this has to do with how the money is used. Deep cuts will not make an inefficient public sector better. Other reforms, however, just might. Finally, there is no denying that the euro deprived Greece of the flexibility to devaluate its currency. However, Greece’s revenue collection problem has been perennial and is unrelated to the euro. The first reforms Greece’s new government should focus on are the tax and judicial systems.

Casting the crisis ravaging Greece and closing in on Italy as a fundamental story of governments drunk on loans, doling out stacks of euros to their shortsighted citizens is a half-truth. It makes it easy to caricature on a national basis and to categorize Greeks, Italians, Germans or Americans as people who collectively live either within or beyond their means. It also masks the fact that there are differences within each country: Those who benefit the most from high-profile government contracts are the hardest ones to tax when the creditors come banging on your door.

The views expressed in this article are solely those of Evan Liaras and Harris Mylonas.

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