/ 14 September 2012

Professional class drags down Greece

Martin Sandbu
Martin Sandbu

And needs outside pressure and support to sort things out. Even if Greece and its prime minister, Antonis Samaras, could overcome the huge loss of pride and reap some of the economic benefits of quitting the single currency, they would still be left with a corrupt economy, much of which strengthens the power of unions and trade associations.

City economists tend to ignore the problem. They have arrived at the opinion that leaving the eurozone is the best, if not the only, option for Athens. Central to the argument is that an independent drachma would immediately be devalued, making Greek exports more competitive and at a stroke wiping out many, if not all, of the country's debts.

Yet these economists ignore the challenges that beset a country in which very few people pay their taxes, public sector jobs are secured through family ties and contracts for work, public or private, are rarely signed without someone in a position of power asking for a backhander.

As in Italy and Spain, bankers perpetuate all the worst corrupt practices.

Martin Sandbu, the chief leader writer on economics at the Financial Times, recently chided the southern Europeans for not jumping at the chance to join a European banking union. He argued that the loss of control over a crucial pillar of the economy to a higher European Union authority was worth it when set against the chance to end the insidious and corrupt relationship between bankers, politicians and the professional classes.

It may seem conspiratorial to argue that corruption is at the heart of the Greek malaise, but it is one of the main reasons why Berlin is adamant Athens has had all the help it is going to get.

<strong>Non-taxed economy</strong>

Supporting the view that Greece is beyond helping itself, an in-depth study of Greek banks, politicians and professional workers was published last week by two economists from the Booth School of Business at the University of Chicago and a Greek academic based at the Virginia Polytechnic Institute. Interestingly, their report, Tax Evasion Across Industries: Soft Credit Evidence from Greece, which documents the hidden, non-taxed economy, blames the malaise not on dodgy taxi drivers or moonlighting refuse collectors, but on the professional classes.

They found that €28-billion of tax was evaded in 2009 by self-employed people alone. As gross domestic product that year was €235-billion and the total tax base was just €98-billion, it is clear that this was a significant sum. At a tax rate of 40%, it amounted to almost half the country's budget deficit in 2008 and 31% in 2009. The chief offenders are professionals in medicine, engineering, education, accounting, financial services and law. Among the self-employed documented in the report are accountants, dentists, lawyers, doctors, personal tutors and independent financial advisers.

The authors were given unprecedented access to the records of one of the top 10 Greek banks. They found that when professionals approached the bank for a loan or mortgage, their tax returns showed that debt payments ate up 82% of their income. For the beleaguered tax authority, this meant their income was too low for income tax.

On average, they found the true income of self-employed people to be 1.92 times their reported income. Banks assume this is the case, so they offer loans to almost every customer.That is why Greece has more home ownership than the United Kingdom (80% versus 68%).

Several countries lost control of banking regulation in the run-up to the financial crash, including the UK, Ireland and Spain. But it is noticeable that the two countries that have so far done the least about the corrupt relationship between banks and their customers – Greece and Spain – are the two in the worst trouble. – © Guardian News & Media 2012