Why Greece is Greece
Board: Macro Economics
We keep hearing that Greece is the first in a long line of dominoes to fall in Europe. It is a compelling and frightening prospect--particularly for someone like me who lives in Europe with a business depending on Europe not collapsing. (I don't need Europe to thrive, just survive.)
I was watching the French news last night, and as the crisis has dragged on, EU monitors have found out just how dysfunctional Greece is.
* 98% of new construction--even today 2 years after the crisis began--takes place without a construction permit, without registering the property with authorities. Thus, no property tax.
* Wide swaths of business work in an all-cash economy, paying no VAT.
* High income and connected people simply pay bribes to friends instead of paying their income tax.
The list goes on, but what it implies is something more than a lack of budget balance. It implies a non-functioning state, unable to collect taxes on the books.
And this is what sets Greece apart from everyone else in Europe. Their problems are an order of magnitude greater than any other country. Italy might be a screwed up, corrupt, chaotic wonderland, but they are as efficient as Scandinavians compared to the Greeks. France might have budget problems, but they are professional and effective bureaucrats. Spain, Portugal, and Ireland are suffering from the collapse of the property markets, but at least they are somewhat able to function.
Greece is in a class by itself.
What is the path forward? Unless Greece can form reliable institutions, it doesn't really matter. If they leave the Euro, they will just have hyperinflation until their populace is reduced to a 2nd-world standard of living. At that point, maybe the country goes back to what it was in the 70's--a cheap holiday destination--and things start to recover. The protests and violence on the way down might preclude that outcome, however, because people generally want to be safe when they are on vacation.
If they stay in the Euro, they will eventually have to take their marching orders from Brussels in return for repeated bailouts. The cost of the bailouts will likely result in a government imposed from Brussels with hopefully functioning institutions. In a culture where the dominant mode of operation is to dodge taxation, that will be a long, difficult, and likely unsuccessful endeavor.
My vote would be to create a mechanism for them to drop out of the Euro and let them deal with the resulting chaos themselves.
As for the bankers who will lose hundreds of billions on Greek bonds. Let them eat cake.