The problems run deep

At risk of insolvency, Greece takes on the underground economy
Danylo Hawaleshka
The problems run deep
Orestis Panagiotou/ EPA/ Keystone Press

Taxis are still reasonably priced in Greece, even though not much else is. In Athens, where an espresso can cost $6, gin and tonics $12.50, and the latest issue of Vanity Fair fetches $16, cab rides still cost about half of what they do in Toronto. It probably has a lot to do with how taxi drivers in Greece pay next to no income tax. Christos Kyriakousis, for instance, drives his own 2004 Mercedes-Benz E270 sedan. Under current tax law he simply pays an annual flat rate of less than $1,700 (1,200 euros). But now, the cash-strapped Greek government is insisting that taxi operators like Kyriakousis—horror of horrors—will soon have to issue receipts and pay tax according to how much they actually earn. In protest, drivers earlier this month staged a 48-hour work stoppage. “As far as I’m concerned, they can do it,” Kyriakousis says of the government’s intention to bring in tougher tax measures. “But we have to be able to trust them, and they have to trust us.”

Therein lies the great dilemma. Still very much a cash-based society plagued by frequently low household incomes, Greece remains terribly corrupt, with trust between taxpayers and politicians holding little or no currency. Transparency International’s corruption index last year placed Greece 71st out of 180 countries, behind Kuwait and Ghana, and only slightly better than Burkina Faso. Little wonder then that Greeks tend to look out for themselves—with a sense of entitlement that has often undermined efforts to improve the common good. And so necessary government reforms, like recently announced austerity measures, are often met by protests like the one on March 11, when as many as 50,000 public and private employees took to the streets. And yet it is difficult to imagine a nation, particularly one belonging to the European Union, more desperately in need of economic change.

This is, after all, a country of only 11 million citizens, where one in four workers is employed by the state (many of them tenured), and where generous state pensions and early retirement provisions have the country teetering on the edge of insolvency. The country’s financial problems are dragging down the euro, the currency used by Greece and 15 other EU member states. And so, earlier this month, the government was forced to institute 4.8 billion euros worth of tax hikes and cost savings ($6.7 billion), in addition to the five billion euros in spending cuts already announced in January as part of the so-called stability and growth program demanded by Eurocrats in Brussels. “This is by far the most austere and painful set of stabilization and austerity measures that has ever been adopted by a Greek government,” says George Pagoulatos, a political economist at the Athens University of Economics and Business. “There’s a lot of fat to be scraped off the public sector. There are far too many [state] organizations that could be abolished without any welfare loss. It is clear that the total wage and pension bill of the government is unsustainable.”

What finally tipped Greece into the current mess was its 2009 budget deficit, totalling 12.7 per cent of the country’s gross domestic product when the EU’s limit is three per cent. Meantime, Greece’s accumulated debt stands at about 113 per cent of GDP. And in April and May, Greece will need to refinance about 20 billion euros of debt on bond markets only too happy to tack on a hefty premium to take on the financial risk of loaning Greece money. Despite media reports of a 25-billion-euro EU aid package for Greece, finance ministers meeting in Brussels this week (March 15 and 16) had little to say, apart from agreeing to a plan to provide Greece with a financial lifeline if its current austerity measures fail.

Those measures include pension freezes, and hikes in fuel, alcohol and cigarette taxes. The value-added tax (VAT) on retail goods rose from 19 per cent to 21 per cent. There’s a new 10 per cent luxury tax on jewellery, yachts and the like. And perhaps most controversially, state employees’ bonuses for Easter, summer and Christmas were cut by 30 per cent, with fears the measure could spread to the private sector. Rather uncharacteristically, polls continue to show that about half the population, while far from happy, may actually be sympathetic. “Society has an unprecedented understanding of how serious the situation is and the extent to which it requires painful sacrifices,” Pagoulatos says. “I believe there will be success, but I don’t think it’s going to be easy.”

Pension reform, expected to take a number of years, remains very much a work in progress. Greece’s average retirement age of 61 is one of the lowest in Europe. And although the government wants to increase it to 63, stories abound of, for instance, hairdressers who can retire with a full pension at age 50 because they handle “hazardous” chemicals like hair dyes. The whole welfare system was recently ridiculed when the New York Times poked fun at how radio and television hosts in Greece are allowed to retire early because bacteria on microphones poses a health risk, noting also that musicians playing wind instruments are entitled to a similar break because blowing may cause gastric reflux.

And yet changing the mechanics of a pension system arguably pales in comparison to retooling an entire nation’s mindset when it comes to the underground economy—something the government is trying to force into the open with new tax measures such as demanding receipts and proper accounting.

For 20 years, Christopher Moutoulas has conducted business in Greece, once as an importer of motorcycles, and most recently as a supplier of industrial components to steel plants, refineries and other heavy enterprises. Sitting in the last Starbucks in central Athens (one went under, another was firebombed and never reopened), Moutoulas leans forward with a litany of corruption allegations. There’s the lawyer he knows who never invoices anyone, collecting cash-stuffed envelopes whenever he appears in court on behalf of clients, making perhaps as much as 1,000 euros a day. “He doesn’t declare any income, basically.” Then there’s the electrician he knows in the construction business who also does everything in cash. And finally, the surgeon at one of the state hospitals who operated on Moutoulas’s aunt for colon cancer and took 500 euros for a procedure that in theory is covered by social medicine (the fakelaki, or “little envelope,” an under-the-table payment that ensures decent service, is ingrained in Greek culture). “It’s not that much money but this guy does a number of operations a day, day in, day out,” Moutoulas says. “It’s thousands of euros a day, under the table, five days a week. Maybe 200 days a year, maybe more. Do the math. These are stunning amounts of money that are tax-free.”

And the government knows it, as did previous governments that either did nothing or failed to curb this massive tax fraud. The difference now is that, for Greece, the stakes have never been higher.