Why Greece Needs to Leave the Euro Zone

An exit from the euro zone would be the prerequisite for the political new beginning that the country's reformers believe is inevitable. One of those reformers is Gikas Hardouvelis, 56, the chief adviser to transitional Prime Minister Lucas Papademos.

His job description was easy to write but difficult to fulfill: He was supposed to ensure that Greece remains in the euro zone. Since the end of November, Hardouvelis has had possibly the most beautiful office in the country. The Maximos Mansion, next to the National Garden in downtown Athens, is the prime minister's grand official seat.

But since taking office, the economist has also had a mission which could well be described as impossible: to revamp a country that has been completely mismanaged.

Until last summer, the total number of government employees wasn't even known, nor was the number of government agencies, which were often established for the sole purpose of concealing the enormous expenditures of certain ministries.

Devastating Conclusion

When Hardouvelis began working as chief adviser to the prime minister, the reform process was supposed to be in full swing already. His first step was to count the laws that had not only been passed but had actually been put into effect. "It was a very small number," Hardouvelis recalls.

After two years, Hardouvelis came to a devastating conclusion about Greece's economic, political and social situation: Almost none of the government's reform efforts have been a success.

The privatization of state-owned companies, which was intended to help fill up empty government coffers, has hardly even begun. Of the €50 billion in anticipated revenues by 2015, the program has only generated €1.6 billion to date.

The sale of real estate holdings, in particular, is more difficult than expected. Until recently, the Greeks were almost wholly unfamiliar with the concept of the land registry. After over 10 years of efforts to develop such a registry, only 6 percent of all real estate has been entered into the system.

The liberalization of restricted sectors of the economy has also ground to a halt. Symptomatic of this failure is the plan to open up the services of architects, lawyers and shipping agents to competition. There are roughly 140 so-called closed professions; no one knows the exact number. The members of these professions received the licenses for their profitable activities under the former military junta, and they are passed on from generation to generation or sold for a lot of money. Sums of €100,000 to €150,000 are not uncommon for the purchase of a taxi license in Athens.

Furious Reaction

The system seemed to have come to an end in the early summer of 2010. After only a few months in office, the Socialist government enacted a law to liberalize the closed professions, which were expected to become open to competition in the free market in the future.

Professional groups like pharmacists and taxi drivers reacted furiously by going on strike. In the early summer, freight forwarders used their trucks to block major roads, bringing the entire country to a standstill -- at the height of the tourist season.

The efforts to protect the vested rights of many professions were successful, and the protesters secured transition periods, special rules and exceptions. As a result, the professions are still virtually closed to outsiders today.

In addition, large parts of the government administration are still in agony. One of the new miracle weapons that the European Commission is keeping ready for the European economy was also supposed to be used in Greece: so-called project bonds. They would have enabled private investors to hedge against the risks of investing in major trans-European infrastructure projects.

But there is not a single Greek project among the construction projects that the European Commission has proposed for the pilot phase this year and next year. It isn't as if the officials in Brussels did not have every intention of finding a project in Greece that could be implemented quickly. The new stimulus program was intended to drum up €4.5 billion in investments in Europe in the short term. But the Greeks also had to fit the requirements for the scheme. Now the subsidies will go to the Baltic countries.

Tricking the Troika

The only progress, albeit modest, that the Greeks have to show for themselves is in the fight against the budget deficit. To this end, the value-added tax was raised from 19 to 23 percent, several new taxes on luxury goods and special duties were introduced, pensions were cut by 15 percent and the salaries of government employees slashed by 30 percent or even more.

Through these efforts, the budget deficit was reduced by an impressive 7 percentage points. A historically unparalleled debt haircut, in which 95 percent of creditors relinquished 75 percent of their claims, also brought some relief. Nevertheless, the successes of the debt reduction effort remained modest. Despite creditor participation, the country still suffers from a debt burden of 160 percent of gross domestic product, which threatens to suffocate the country in the long term.

This is aggravated by the fact that the established ruling class has no interest in the reforms being a success. To accommodate the programs called for by the so-called troika of the European Commission, the European Central Bank (ECB) and the IMF, laws were established that could not work, "because the relevant cabinet ministers didn't want them to work," says Hardouvelis.

According to Hardouvelis, it is very clear that members of the former administration tricked the troika, and valuable time was lost as a result. "They thought the party would somehow go on," he says. And they behaved accordingly.

Little Interest in Reform

One of the peculiarities of the Greek state is that, although there are 32 laws on deregulation, there is in fact no deregulation in reality. Greece routinely ranks poorly on the World Bank's Doing Business index. Neither the troika nor the local EU Task Force for Greece, whose goal is to actually implement reforms, have been able to change this.

Officials from the Greek Interior Ministry complain that the ministers are usually the ones getting in the way of progress. "We have to fight with our own bosses when it comes to administrative reform," they say. There is a rumor that the minister of public administration advised the environment minister to agree to the troika's proposals, but not to implement them.

The international envoys and the EU Task Force staff members are familiar with many such examples, as are those ministerial officials who truly want to change things and have given up on the old system.

Most politicians have very little interest in reform, says Hardouvelis, whereas the general population is more willing to change. "The Greeks want their government to work, and they want it to be more equitable," he says. Like Italy, Greece currently has a technocrat, Papademos, as (interim) prime minister. But unlike in Italy, the ministers in Greece unfortunately stayed the same -- in other words, the same old politicians are still in charge.

High Price

It's no surprise that the EU and IMF reform plans have failed so far, given that the people who were responsible for the country's problems were expected to solve the crisis.

It is difficult to explain to a deeply frustrated population that while ordinary people are supposed to change, and have to pay more taxes and receive less income, the political class continues to occupy key positions and can keep doing as it likes.

The policy of austerity and drastic cuts has a high price. Domestic demand plummets, the economy shrinks, new holes open up in the budget and further cuts become necessary. The result is a downward spiral from which the country cannot extricate itself without outside help.

• Back
• 1
• | 2
• | 3
• | 4
• Next

• Part 1: Greece Can No Longer Delay Euro Zone Exit
• Part 2: Reforms Have Ground to a Halt
• Part 3: The Only Way Is Down
• Part 4: Scenarios for a Greek Exit