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Public deficit and democratic duty
“Unless the general public is informed by basic economic theory and by key economic facts, they’re going to make wrong decisions,” Korean economist Ha-Joon Chang recently said in an interview following a presentation at the London School of Economics. “Members of the general public have a duty to educate themselves in economics to an extent so that they make enlightened decisions.” In Greece’s case he should add fiscal statistics to the list of things voters need to learn about.
A newspaper article on Sunday, quoting an allegedly secret report by officials at Greece’s General Accounting Office and the Hellenic Statistical Authority (ELSTAT), claims that the country’s deficit figure in 2009 was “over-dramatised” (or “sexed up” if you prefer) by the PASOK government that took over in October of that year.
The suspicion about Greece’s deficit figure and the circumstances in which the government sought a bailout from the eurozone and International Monetary Fund is an old chestnut that is polished off and tossed to the public from time to time. This time it is claims of an unpublished report, in the past it was ELSTAT employee Zoe Georganta making allegations against the service’s chief, Andreas Georgiou, and about how the deficit figure was calculated. Even the current government spokesperson, Sofia Voultepsi, was among New Democracy MPs to claim that Greece was the victim of a conspiracy executed by former Prime Minister George Papandreou and his aides.
In an ideal meeting of minds, Georganta stood as a candidate for the austerity-hating, conspiracy-loving Independent Greeks in the European Parliament elections in May. Her party took just 3.4 percent of the vote and Georganta was not elected. Last month a prosecutor recommended that the case against her former boss, Georgiou, be dropped due to a lack of evidence. However, Sunday’s report in Real News has led to a new round of speculation about how Greece’s public deficit reached 15.8 percent of GDP in 2009. Indeed, a council of appeal court judges decided on Thursday to start the investigation into Georganta’s allegations from scratch.
This will undoubtedly lead to another drawn-out slanging match over what did or did not occur and whether there was some masterplan to place Greece under the yoke of the troika. Independent Greeks leader Panos Kammenos wasted no time in asking for a parliamentary probe to be launched on Friday.
People could be saved from expelling all this unnecessary hot air if they actually looked at the numbers. It is here that the ignorance Ha-Joon Chang refers to is exploited by those looking to spin a yarn or apply a little misdirection.
Greece’s statistics were repeatedly questioned between 2004 and 2010 by the European Commission’s statistical agency Eurostat. It was only after several checks by the Luxembourg-based body that the 2009 figure was approved, seeming to leave little scope for claims of it having been manipulated by Greek authorities through the inclusion of public utilities. Also, regardless of the argument about adding the utilities to the budget, there can be no doubt that their debts were being paid from central government coffers.
It is also absurd to suggest that Greece’s deficit was inflated so it was bigger than Ireland’s, triggering an international bailout. The most obvious flaw in this argument is that Ireland did not escape a bailout or austerity measures. Beyond that, the two countries were suffering from vastly different problems. Whereas Greece owed 112.9 percent of its GDP in 2009, Ireland’s debt-to-GDP ratio was just 44.5 percent. The Irish problem was in the financial sector, Greece’s was predominantly fiscal and macroeconomic. By May 2010, Greece had a financing gap of 35 billion euros for the rest of the year, so it is difficult to see how there was any prospect of Athens borrowing from international markets at reasonable rates, staving off a financial assistance program.
Lastly, to put the blame for Greece’s 2009 deficit figure (which was not actually finalised by Eurostat until November 2010 – six months after the first Memorandum of Understanding with the troika had been signed) on the PASOK government is to ignore what had gone before. Not even if George Papandreou had appointed David Copperfield as finance minister could his government have conjured up a deficit of 15.8 percent from nothing.
One only needs to go through the budget execution data from the months before PASOK came to power to see that the New Democracy government of Kostas Karamanlis had already overseen a major fiscal derailment. Even as early as May 2009, the state budget deficit was already at 14.4 billion euros, with 43 percent of the budgeted expenses already used up while revenues stood at just 31 percent of the annual target.
In September 2009, before the elections that brought George Papandreou’s PASOK to power, the state deficit was at 23 billion euros, almost twice the projected amount for the entire year.
With the inclusion of 1.5 billion euros for hospital arrears payments – the only decision of the newly elected Papandreou government contested by New Democracy – the 2009 deficit closed at 30.9 billion euros after a complete collapse of revenues, which missed the annual target by 11 billion euros. At the same time, Greece entered the first year of its long recession, with GDP contracting by 3.1 percent.
By focussing just on what happened in the final months of 2009, people (intentionally perhaps?) miss what happened earlier in the year. Worse still, they absolve Karamanlis’s government of any responsibility for leading Greece to the precipice.
This means ignoring that public spending reached 53.8 percent of GDP in 2009 when it was at 45.2 percent in 2006, two years after Karamanlis came to power. During that time his government had increased the basic pension by 80 percent and hired an extra 100,000 civil servants. Welfare spending stood at 28.8 billion euros in 2004 but had shot up to 48.9 billion by the end of 2009. The public wage bill increased from 21.3 billion euros in 2004 to 31 billion five years later. Public debt rose from 98.9 percent of GDP in 2004 to 129.7 percent in 2009.
Clearly, Greece’s current predicament is not the result of Karamanlis’s government alone, nor is Papandreou’s administration without its own serious faults. Neither does accepting that Greece had lost control of its public finances mean you have to agree with the way that the government and its lenders decided to tackle the situation.
What is important here is that to mislead people about what happened in the build up to Greece turning to the eurozone and the IMF for a bailout is far more sinister than just doing them a disservice. The public, though, must also take responsibility for informing itself. To ignore what happened in the years leading to the crisis is to not care about how your country contracted a debilitating illness.
“We have [instead] created a system where self-appointed experts basically run the show and democracies become a kind of rubber stamp because people don’t understand what’s going on and they don’t want to understand what’s going on,” said Chang.
That is why understanding what triggered Greece’s crisis is a matter of democratic duty.
One point which has confused me all along is the following: with so much deficit spending up to 2009 (particularly in 2009), how could the recession already have started in 2009? One would have thought that the recession was triggered by a cut-back in government spending. It would appear that the recession began already while the government was still spending like there was no tomorrow. When looking at the increase in government spending from 2006-09 described in the article, it is inexplicable to me how the recession could have begun while the government was still spending. There must have been other forces at work, too.
The simultaneous recession and huge deficit in 2009 just goes to show that you cannot just spend yourself out of a recession, especially when you are a small open economy.
As the world economy went into recession, Greek exports collapsed, but imports did not. This, together with slower investment and private consumption (as interest rates spiked up) explain the lower GDP. Remember also that the economy actually first ground to a halt end-2008 (though we only knew this much later), and that 2008 also was a mega-deficit year with 10%!