Is austerity a Greek myth?

By David Ignatius
Monday, May 3, 2010

When Greek Prime Minister George Papandreou discusses the $145 billion bailout plan that was adopted Sunday, he describes his nation's chaotic finances in language that should make sense even to grumpy German taxpayers who will be putting up the largest share of the rescue money.

Greece's problem, Papandreou says, was that it developed a financial culture in which pervasive corruption and tax evasion were tolerated. Its leaders made promises they couldn't keep; they expanded public-sector employment so much that nobody even knew, for sure, the number of government employees.

Now it's time to pay the euro-piper, with one of the most severe austerity programs, on paper at least, ever proposed for a developed country. The package will cut public-sector wages and pensions for three years and slash the Greek budget deficit from 13.6 percent of gross domestic product to less than 3 percent by the end of 2014. For every five government workers who leave their jobs, only one will be hired.

"This will create a different Greece," Papandreou said in an interview Sunday. "Our basic bet is that we are cutting down on disorder, cutting down on graft and tax evasion." He explained that under the old culture, "there was a sense that people who had the power and means could go around and do what they wanted. They asked, 'Why should I pay my taxes when others don't?' "

That financial never-land was Greece in the old days. According to Papandreou, those days ended Sunday. He managed to persuade European Union finance ministers and the International Monetary Fund to extend the rescue package this weekend, in exchange for the Greek concessions. We'll see this week whether the financial markets believe that Papandreou can deliver on these promises.

"Austerity" and "Greece" don't go easily in the same sentence. That's my chief reason for skepticism about the bailout-austerity package. It goes against the freewheeling, boisterous national spirit that makes Greece such a delightful place to visit -- and such a nightmare for finance ministers from the more uptight, less spendthrift countries of northern Europe. But it's precisely those cultural issues that Papandreou indicated he is ready to tackle.

Papandreou spoke by telephone from his home in Athens late Sunday evening. Negotiations with the E.U. finance ministers, which have dragged on for days, had ended; the angry Greek demonstrators who had been in the streets this weekend, protesting what one trade union official called "savage" cuts, had gone home for the night.

The prime minister was trying his best to put a positive spin on events. He argued that the demise of the old culture of corruption created a new "opportunity for Greece and for investors" to build the economy on a more solid foundation. He said he plans to conduct a census to count the public-sector workforce -- yes, it's really that bad -- and replace a haphazard system in which some public pay records are computerized and others are kept by hand.

Corruption's drain on the Greek economy is huge, Papandreou said. He cited a Brookings Institution study that estimated the total cost at $20 billion, and a Greek study that pegged the cost at $30 billion. Graft accounts for 8 to 12 percent of Greek GDP, Papandreou said.

What comes next for Europe, now that the Greek rescue package has been negotiated? The first question the eurozone will face Monday is whether the other weak, debt-laden economies -- Portugal, Ireland and Spain -- will also need bailouts to avoid default. Financial bailouts tend to be like falling dominoes: Once one goes down, the others tend to follow.

But the larger challenge is to fix the European fiscal system -- or, to be more accurate, the lack of one -- that created the crisis in the first place. This eurozone has been a weird amalgam of one currency, 16 finance ministers and no final accountability. That must change.

Papandreou cited the stimulus package that Greece and other E.U. countries adopted in 2008 at the behest of Brussels. The rules were too flexible, he said, and in Greece the stimulus money just "ballooned the debt and deficit."

The Greeks need to change their financial culture in the wake of this crisis, just as Papandreou says. But what's equally necessary is a culture change in Brussels and the eurozone capitals, so that Europe has a union in more than name only.

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