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Greek economy January 28, 2010

Posted by Yilan in EU, European Union, Yunanistan.
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The Greek economy is in far deeper trouble than ever before in modern times. This euro zone country is currently four times over the deficit limit that was required when it adopted the currency in 2001.

Its total debt now comfortably exceeds its entire GDP for the year. Its international credit rating is sliding, so making it technically harder and certainly more expensive to seek fresh loans. Greece, not its old rival Turkey, is now clearly the Sick Man of Europe and the alarming signs are that it is not going to be recovering any time soon.

At the core of Greece’s economic troubles is dishonesty, pure and simple. Greeks do not pay their taxes. Taxmen can and often are bribed to go away.

The unofficial black economy is traditionally reckoned to account for 30 percent of GDP but some observers think this assessment is far too conservative.

Greece’s public sector accounts for around half of GDP but measured against the private sector, its workers are markedly less productive and often distinctly better paid. All governments, but particularly each socialist PASOK administration, have used the civil service and nationalized industries as a source of patronage. This is in itself dishonest, in that it means government money is often being invested not where it will have the greatest economic benefit, but rather the biggest political pay back.

Dishonesty has become ingrained in the system. Finance officials in Brussels along with colleagues in the European Central Bank (ECB) in Bonn, were appalled and angered to discover last month that even the official financial data, which underpin Greece’s credit rating and its reports to its fellow euro zone countries, had been falsified.

The irony is that the wheels finally started to come off the Greek economy just as PASOK won an election last October bringing George Papandreou back to power.

With no further place to hide, the new government was forced to accept radical cuts to its bloated expenditure and vow to raise revenues. This latter could be achieved simply by collecting the taxes that are actually due.

Cutting revenues is the harder part. Political violence is rarely far from the surface, notably in the capital Athens. Farmers are already protesting deep cuts and unions have called a one-day national work stoppage, as a warning of a general strike. Few Greeks seem prepared to bite the economic bullet and accept the discomfort of wide-ranging economic and fiscal reforms.

Meanwhile, ECB officials watched with concern earlier this month as investors rushed to buy up a new Greek bond issue. It was four times oversubscribed for the very good reason that it is paying at twice the rate of a similar German bond. Better still for investors, the currency in which the Greeks will be settling this and previous bonds is the solid and stable euro. Yet Greece itself is very far from being solid and stable. There is a difficult contradiction here. Consequently, the euro zone may be facing the biggest challenge to its currency since it was established 11 years ago.

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