A decade of overspending: how Greece plunged into economic crisis

[unhappycamper]

http://www.theguardian.com/world/2015/jul/03/greece-overspending-defence-wages-taxation-economic-crisis

Athens was poorly prepared for the 2008 crash - living off easy credit, while spending on wages and defence soared, and taxes began to fall away

A decade of overspending: how Greece plunged into economic crisis
Phillip Inman Economics correspondent
Friday 3 July 2015 14.20 EDT

How did Greece get into this state?

Greece was badly prepared for the 2008 financial crisis after a decade of overspending. In many ways, the weakness of its economy and public finances was akin to that of Spain, Ireland and Portugal, which also found themselves brutally exposed after 10 years of living beyond their means. Greece, though, was a special case, which was why in 2010 it became the first EU country to send a distress signal. Since then, Athens has struggled to piece together a deal with its lenders that allows the economy to recover.

Why did the government overspend?

After a long period as one of the EU’s main recipients of investment aid, the funds started to run dry. Brussels switched its support to new joiners in the east and the Baltic nations that had entered the EU and wanted to join preparations for the euro. Nevertheless, Athens kept on spending, helped by its decision to join the euro in 2001. The new currency kept borrowing costs down and made it easy to secure funds from commercial banks at rock-bottom interest rates, increasing its dependence on cheap loans to fill the spending gap. In the 10 years before the financial crash, public sector wages doubled and departmental spending soared. Already high defence costs continued to soar, propelled by years of antagonism with its neighbour Turkey. In 2011, three years after the crash, the country was still spending €4.6bn (£3.3bn) on defence, representing 2.1% of GDP against an EU Nato average of 1.6%.

Why did taxes fall behind as the economy expanded?

A report by the EU in 2014 estimated that Greece lost a third of its VAT revenues in fraud and avoidance (only Lithuania, Latvia, Romania and Slovakia lost more). With a VAT system that has six bands, tax experts say it was open to manipulation. Shipping, one of the main industries and the source of Aristotle Onassis’s vast fortune, was known as a tax-free zone. Income taxes and corporate taxes, traditionally the subject of huge avoidance, collapsed in the wake of the financial crisis.

So where did the money come from?

The Greek government and the country’s major businesses borrowed heavily on the international money markets. Among others, they borrowed from French and German banks, often in return for French and German goods, not all of which worked. For instance, two diesel submarines bought from Germany from the bulging defence budget were never operational after the Greek navy failed to get them to work.

[DetlefK]

1. Oh, lookie: Greece's military overspending isn't Germany's fault after all.

"The International Monetary Fund (IMF), which joined the rescue of Greece in 2010 alongside the EU and the European Central Bank (ECB), never asked for defence cuts, but insisted on reductions to wages. So while the defence equipment budget remained intact, soldiers suffered a near 40% drop in salaries. Commitments to buy new military equipment were also honoured to placate voters fearful of a Turkish invasion, even though the maintenance budget was slashed, rendering most equipment unusable.

...

The Syriza-led government of Alexis Tsipras was asked to cut €400m from the defence budget, less than 10%, to secure the last €7.2bn of its previous bailout. It refused, saying the most it could cut was €200m. Some analysts said deeper cuts were blocked by Syriza’s nationalist and pro-military coalition partner, the Independent Greeks. Others blamed the military, which remains influential 40 years after it relinquished power and Greece became a democratic state."