•    HOME   
•    NEWS   
•    BUSINESS   
•    INTERNATIONAL   
•    TECH   
•    SPORTS   
•    LIFE & TIMES   
•    OPINION   
•    MY JAKARTA   
•    BLOGS   

Greece is a relatively wealthy country, or so the numbers seem to show. Per-capita income is more than $30,000 — about three-quarters of the level of Germany. What the income figures fail to capture is the relative weakness of Greece’s economic institutions. They are not remotely comparable to those of Germany and some of the other better-governed nations in the European Union, which is why the current crisis will prove so difficult to solve.

The EU and the International Monetary Fund have arranged an enormous bailout package. But it’s not just a question of supplying funds to get Greece through a short-term debt crisis, or of cutting the government budget, but of whether the country will see much future economic growth. Consider the World Bank’s Doing Business index, which ranks countries according to the quality of their regulatory environment for commerce. The index places Greece at No. 109, just behind Egypt, Ethiopia and Lebanon. For the category of “high-income countries,” the Greek ranking is next to last.

Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent. As the World Bank index suggests, government funds are often spent hindering production rather than supporting it. This gives one clue as to why the numbers make Greece appear richer than it really is. Public expenditures are valued at cost when measuring gross domestic product, yet arguably the quality of Greek public services is less than that of many wealthy countries. Nonetheless Greece plunged ahead and joined the euro zone in 2001, with some unfortunate consequences.

Greece’s currency, the euro, is stronger than that of its neighbor Turkey, so a holiday in Greece is more expensive. Yet Greece has not built enough luxury hotels, golf clubs and resorts to justify the cost difference. Overall, the greater expense of Greek goods and services, which are paid for in euros, lowers the country’s competitiveness.

Over time this will worsen if productivity in Germany and France grows at consistently higher rates and the value of the euro puts Greek exports increasingly out of sync with market realities. One painful way out of this dilemma would be to engineer a continuing deflation of wages and prices, but Greek voters have already taken to the streets to pressure their government to preserve salaries and benefits, and planned deflation is difficult to sustain in any case.

At this stage, it’s a moot point whether Greece is a poor country masquerading as a wealthy country or vice versa. The announced bailout requires that an ailing Greek economy borrow and repay even greater sums of money. If the old illusion was that Greece was a wealthy country, the new illusion is that Greece will, in short order, become wealthy enough to pay back ever-growing sums of debt.

Greece is not the only country that suddenly feels poorer. Britain faces budget deficits at about 12 percent of GDP, and Italy has a debt-to-GDP ratio of 110 percent. In the United States, the housing and job markets are recovering only in fits and starts and faces significant future Medicare liabilities. This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren’t as rich as we used to think.

 

The New York Times

Tyler Cowen is a professor of economics at George Mason University in Virginia.