The Greek Collapse

In the wake of Angela Merkel’s visit to Greece, I find myself reflecting once more on how much longer Greek society will tolerate the “structural reform” programme.

The cuts in pensions and salaries planned for 2013, together with tax revisions reducing tax deductions for children and increasing tax brackets will probably provide the final nail in the coffin of Greek popular acceptance.

To illustrate some examples of the impact of the new tax code, as it is currently planned:

·    The starting tax-free basic income falls from EUR 12,000 in 2011 to EUR 8,000 in 2012 to EUR 5,000 in 2013. In Cyprus, in contrast, the starting tax-free bracket is EUR 19,000.

·    After years of providing tax incentives for families with over three children, the government is reversing its policy and reducing the tax deductible from EUR 2,000 per child to EUR 400 per child. This will render an additional EUR 1,200 in taxes on average for the same income reported under the new tax code.

·    Taxes on independent professionals will be levied at a flat rate of 35%, starting from the first Euro of income. 

·    Lump sum severance payments are being cut once again, as are ordinary pensions and salaries in the public sector.

·    Retirement ages are being increased from 65 to 67.

·    There are negotiations underway to cut the minimum wage from EUR 586/month in 2012 to a lower amount: some reports suggest EUR 420/month.

These tax changes come at a time when indirect taxation is creating massive problems for ordinary members of society. The special tax on property, for instance, remains unpaid by hundreds of thousands of taxpayers, as are the one-time “solidarity” taxes. This fall, the equalisation of the tax on motor and heating fuel will cause hundreds of thousands of households to go without heating this winter, because they cannot afford to pay for heating fuel.

This tax code is a mistake for any number of reasons:

·    It is the third major change in as many years. This contributes to instability, higher bureaucracy, and higher corruption, and will constitute a major driver of companies and individuals either relocating their head offices from Greece (such as FAGE’s relocation to Luxembourg) or to not declare their income. 

·    It is inconsistent and illogical. The new tax brackets on independent professionals, for example, are entirely different from the taxation on salaries employees, and do not include a progressive scale. The 35% rate is also higher than the rate of both shareholding corporations and limited liability companies, which is levied at 20%.

·    It is extremely regressive, punishing taxpayers honest enough to declare taxes, while doing nothing to control capital flight and tax evasion by larger firms or well-connected individuals. 

·    It is being implemented in the middle of an inflationary depression, where real GDP will have declined by over 20% in 5 years, and real unemployment is over 25%. Inflation remains above 2%.

·    It is typically heavy-handed, being introduced without any real public consultation, and without any regard for either pre-election promises or economic sanity.

To be fair, the Troika has been insisting for years that Greece improve its tax collection and enforcement mechanism. But this has only partially been accomplished. While the Tax Police (SDOE) has made some progress in arresting and charging business owners for non-payment of taxes, the overall record is mixed.

In the last two weeks, for instance, a scandal involving the concealment of the identity of nearly 2000 undeclared Greek depositors at HSBC Geneva has incensed the public. The record of Greek capital flight also shows that sums as high as EUR 120 billion may have been transferred out of Greece, in transactions where the amounts transferred are far higher than the income declared by the individuals making the transfer.

The government’s latest attempt to tax independent professionals is an attempt to crack down on widespread tax evasion in this sector. But it will fail, for the reasons discussed.

This tax code is delusional because it ignores the basic reality of the Greek economy or workforce:

·    Wages in the public and private sector have already been cut by as much as 50%.

·    The minimum wage is already far below the poverty line, and for independent professionals will be taxable from the first euro of income.

·    Most employers have pressured their workers to accept far lower wages (illegally): I know of people being paid EUR 250 for a 40-hour workweek, without social insurance.

·    Unemployment is at 25%; youth unemployment at 55%: there is no wage bargaining possible in the private sector under these circumstances.

·    All other costs—heating fuel, real estate taxes, solidarity taxes—are increasing. Our neighbours are living on monthly pensions of EUR 350 and have been handed a real estate tax of EUR 750 for an 80 square meter apartment. 

·    Loans have not been reduced in line with income. As a result, there are hundreds of thousands of workers who now have a monthly net income marginally higher or lower than their monthly mortgage payment.

The new tax code will have a terrible impact on consumer spending, which is the mainstay of the Greek (and every other OECD) economy. By reducing the amount of net disposable income through higher taxes, the government, at the instruction of the Troika, will drive the economy into another 5-7% real GDP decline in 2013.

I’ve seen reports that the IMF is using a multiplier of 0.5 as a rule of thumb for calculating the effect of cutting government spending on GDP. In Greece, it is likely that this multiplier is 1.0 or even higher, perhaps as high as 1.5, given the abysmal situation with low employment, high unemployment, low wages, high imports, oligarchical markets and higher indirect (taxation) costs. 

The net result is a collapse. It is impossible to see how this situation will continue, or how the coalition government will survive, particularly in the midst of scandals like the HSBC or deposit flight issues.

The Troika and the Greek government appear to be making their policy decisions in an ivory tower. There has been abundant talk of “solidarity”, but no visible or tangible signs of it, at least for the large majority of society. Instead, there is a succession of talking heads who fly into Athens and fly out, but alienating the society in the process.

Instead of supporting real reform, the three successive governments since October 2009 have catered to the worse instincts of demagoguery and political patronage, and done everything possible to preserve and expand their own power structures. The few true reformers (and they are indeed very few) have been outnumbered and outflanked. While much has been accomplished, it is nowhere near what is should be.

And along the way, the PASOK-ND political elite has lost touch with its voters, and has failed to make any kind of case for reform, or provide any positive vision for the future.

The rise of Golden Dawn and SYRIZA indicate that society is already at the breaking point and is looking for new “solutions”, no matter how improbably these may be.

As a result, I do not expect the current government to last beyond May or June of next year. And with at least two political parties actively arming and equipping their paramilitary networks and engaging in what amounts to protection rackets in urban areas, one does not have to be a genius to see what comes next.

© Philip Ammerman, 2012

“The great masses of the people will more easily fall victims to a big lie than to a small one.” 

Adolf Hitler