What led to break-out of the Greece crisis….a monastery?

Most who had looked at Greece’s economic data before its crisis in 2010, would have said things are wrong and needs to be corrected. Though, even the best could not predict a crisis as deep as the one that happened. And even more intriguing was the deep interlinkages and spillovers effect it had on other Europe economies.

However, what brought the curtains down on Greece? What was the Minsky moment?

Michael Lewis has a superb article on Greece and he tracks the Minsky moment as a fallout of a monastery in Greece. Vatopaidi monastery in a very cleaver arrangement, swapped its land with some key land portfolios of the Greek Government. Once this was exposed, the government had to step down. This led to a new government which then looked at the fiscal numbers and declared the deficit was much higher leading to a meltdown.

It is an amazing story which is a must read on Europe’s crisis. How they ignored the Greece bubble for so many years and Greece just kept increasing it. There was a huge moral hazard brewing and all believed Europe (read Germans) would rescue them. But it is this Minsky moment story of Greece which is an intriguing read in typical Lewis style.

There are some other interesting titbits from Greece economy:

  • In election year, the tax collectors are pulled off the street!
  • There is a huge black economy in Greece. To ward off taxes, people do not collect or give receipts for the payments they make. In case a receipt is asked, it is of a much lower amount so that taxes are lower
  • It takes 10-15 years to get cases moving in courts. Hence, no one cares for either filing. In a rare case when someone is sued, he does not worry about its implications
  • Government officials itself discloses lower incomes to ward off taxes
  • Real estate is the place where all the black income is invested. THis is also what got the monastery in trouble
  • How Greece managed to enter EMU in first place remaisn a mystery. It also speaks volumes about the EMU entry process which appears stringent de jure but is too weak de facto. How they doctored their finaces to make it to EMU is a fascinating tale by itself.
  • Greece is full of inefficient Public sector enterprises with huge wage bills.

Reading the Lewis piece, one goes back to how similar all this to what we see in India. The scale may be lower in India but might not take time to reach Greece.  See this for example:

  • The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece’s rail passengers into taxicabs: it’s still true. “We have a railroad company which is bankrupt beyond comprehension,” Manos put it to me. “And yet there isn’t a single private company in Greece with that kind of average pay.”
  • The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland’s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something. There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses.
  • The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.
  • The Greek public health-care system spends far more on supplies than the European average—and it is not uncommon, several Greeks tell me, to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets

Our Indian  railways might be much better but we have our own share of highly inefficient public sector enterprises like the national airlines. Enough has been written about state of public education system and tuitions are a must for kids as small as 5 years old. What is worse is private sector education is also no better with loads of corrupt practices. India’s public health care system too is very bad. Doctors may not be seen taking the government supplies home, but there is too much corruption for any benefit coming to patients.

A superb piece by Lewis, much like his recent article on Ireland’s crisis. Just like we saw in US, where a small sub-prime market pulled down the whole US and then the global economy. Similarly, we see deals between monastery and government which pulled down Greece and Europe economy.

The key lesson is if there are major structural problems with an economy it will get corrected.  The trigger of the collapse may be completely a random or a small event but because of the linkages could impact the broader economy. Policymakers may prolong the problem making it much worse in future.

I hope Indian policymakers take some positive lessons from the crisis. One sees many parallels with Greece’s  economics. The huge corruption in Indian economy alongwith huge black money invested in real estate is a dangerous ploy. India is a larger economy than Greece and hence much of this is ignored and evens out. But one cannot take anything for granted. Larger economy works both ways. It may delay the crisis but the fallout is much larger.

7 Responses to “What led to break-out of the Greece crisis….a monastery?”

  1. Joao Farinha Says:

    Interesting, thanks!

    A propos of the Greek mess, and of the other countries of the periphery, here goes what I expect makes an impact: http://www.levyinstitute.org/pubs/wp_651.pdf

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