Greece And The Debt Problem That Just Won't Go Away

Greece And The Debt Problem That Just Won't Go Away
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Another year, another round of fraught negotiations between international leaders about Greece, as Chancellor Angela Merkel and International Monetary Fund (IMF) managing director Christine Lagarde met up last week to discuss the terms of the latest €86bn emergency loan package for the country. While the outcome of the talks was positive, with Greek Prime Minister Alexis Tsipras claiming that the era of austerity is over, disagreements within the Troika could still push Greece over the edge.

The IMF is arguing that sinking more funds into the Greek economy amounts to little more than throwing money down the drain. According to the Fund, the only way forward would be debt relief and deep reforms in order to fix the structural problems that have created and exacerbated Greece's debt crisis. European creditors, however, are sticking to their guns and are demanding that the money owed will be paid back to them.

That the issue of Greek debt is still on the agenda after seven years, three bailouts and roughly €250bn later was never part of the plan. In 2010, the country received €110bn in aid from the EU and IMF - at that time the largest financial rescue programme in history. And while the other countries that turned to international creditors to prop up their failing economies (namely, Ireland, Portugal, Spain, Romania, Latvia and Cyprus) are all tentatively back in the black, the Greek problem has not only proven to be staunchly persistent, but has actually getting worse. Ashoka Moody of Princeton University summarized the status quo best, when he said that "The combination of catastrophically bad policy imposed on Greece and the country's unwillingness to change its ways - the ones that got it into trouble - have led to a economic and social collapse of historical dimensions."

Ducking the taxman

Indeed, some of the blame can be placed on the creditors and their insistence on imposing strict and crippling austerity measures with scant regard for the range of unintended consequences that it might cause. Austerity measures failed to attack the root causes of Greece's floundering economy, such as its lack of competitiveness and its fragile banking system. Indeed, Jeffrey Sachs, the Director of the Centre for Sustainable Development and Sustainable Development Solutions Network, has described the Germany-led policy response as "unwise and highly unprofessional", with a misplaced focus on lending Greece more money so existing debts can be serviced, rather than helping foster conditions that will halt debt spiral. As a result, Greece has plunged deeper into poverty, with 22.2% of the population classified as "severely materially deprived" in 2015.

But German intransigence and IMF orthodoxy do not mean that Greece played no role in its economic downfall. Albeit belatedly, the latest bail-out package is now focusing on structural reforms, forcing Greece to clean up its act in earnest. Paying taxes would be a start. It is estimated that the country loses around €30 billion each year in unpaid taxes, and that half of all Greeks owe €86 billion in back taxe - the same amount as the last bailout package. Athens' tax problem is exacerbated by a flawed tax system that is exceedingly complex, incentivises non-declaration and is hampered by ineffective collection mechanisms. Despite plummeting approval ratings and international pressures, the current Syriza government has so far been unwilling to shore up its tax policies. As a number of heavyweight economists writing to Greek newspaper Ekathimerini observed, "bad governance is a huge disincentive in attracting investments, without which economic recovery is not possible".

Reform then, is key. And without evidence that Greece is capable of changing, Germany will insist on austerity, trapping Athens in a vicious circle. Austerity is now driving even formerly law-abiding people into the shadow economy, thus contributing to further dwindling tax receipts. Greece's black market is now estimated at 20-25% of the GDP as even more people run away from the taxman. Living in an "every man for himself" economic climate honouring ones' taxes becomes much less of a priority as, say, surviving.

If Greece is to stand a chance of implementing the reforms that will help it fix its debt problem in the long run, a game of give and take is needed. And the incentive that it should receive is debt relief. The IMF has refused further financial support unless Greece and its European creditors enact this mix of reform and relief. However, with elections coming up in both Germany and the Netherlands this year, whether these creditors have the political capital to favour what will no doubt be an unpopular measure with their own electorates remains to be seen. But without debt relief, a Greek sovereign bankruptcy followed by Athens quitting the Eurozone is only a question of "when", not "if".