In the aftermath of the Great Depression, Keynes argued that for an economy to avoid a fully blown recession, government policy needs to become proactive, i.e. to make up for the reduced spending of the private sector (businesses and households) by increasing its own expenditure. This lesson of history was ignored both by the architects of the European Monetary Union and by the EU leaders in dealing with the current crisis. Thus, the latest banking crisis soon became a ‘public debt’ crisis. That is, the emphasis was shifted ideologically and politically from the financial sector and the deeper issues of casino capitalism to the public budget and debt.
The inherent theoretical fallacy of this view is implicit both in the austerity programs implemented in Greece and in other indebted countries of the Eurozone and in the restructuring of the economic governance of the single currency over the past two years3. This misreading of the crisis is today weighing heavily on the Greek economy and society. In particular, there seems to be no end to the ‘Greek crisis’, since the ratio of public debt to GDP keeps rising, in spite of the unprecedented squeeze on the public budget and the harsh reforms undertaken. Thus, between 2009 and 2012, public deficit fell from 15.6% to 6.8% of GDP, while the primary deficit (excluding interest payments) from 10.5% to 1.4% of GDP. The ratio of public debt to GDP, on the other hand, increased from 129.7% to 176.7% of GDP4. This is not surprising in view of the fact that GDP dropped by more than 20% in the past four years.
In this paper, we shall take a closer look at the distributional aspects of the crisis in Greece. In the first section, we shall examine (i) the main austerity measures and structural reforms influencing distribution, (ii) developments in unemployment and taxation, which are two major channels through which policy influences distribution. In the second section, we shall review the state of inequality, poverty and wealth in Greece, while in the third section, we shall look into the perspectives of redistribution and, in particular, the economic, social and political prerequisites for such a process to be put into effect.
Austerity –Unemployment – Taxation
The EU/IMF inspired ‘Economic Adjustment Program’ Greece has been placed under since 2010 consists of harsh austerity measures, aiming at reducing the public deficit and debt, primarily through severe cuts in public expenditure, and structural reforms, including the privatization of public assets and the deregulation of the labor market.
More specifically, some of the main austerity measures include the following: (i) cuts in the wages of public sector employees; (ii) a reduction in public sector employment; (iii) extensive spending cuts on health and education, as well as on social services; (iv) a decline in retirement pensions and a special levy on pension incomes of over €1,000; (v) an increase in the VAT rate from 19% to 23% and in excise taxes by 30%; (vi) an increase in direct taxation, hurting low and middle incomes, as the tax-free threshold was abolished, while the tax base was extended to include unemployment benefits, large family and non-contributory disability benefits.
In addition to spending cuts and tax hikes, there have been major reforms in labor law, whereby industry and firm based agreements are allowed to set wage rates below those of the National Collective Wage Agreement. Also, the minimum wage rate is set by government decree. Not surprisingly, the collective agreements that expire are generally not renewed, while the number of individual work contracts is proliferating, with the concomitant reduction in private sector pay ranging from 20-50%.
The austerity and labor market deregulation measures described above have both a direct and indirect impact on inequality and poverty. Their direct impact is related to the cuts in wages, salaries and pensions, as well as to the drastic reduction in the size of public sector. Their indirect impact is channeled through the rise in unemployment, especially as a growing number of small businesses – a characteristic feature of the Greek economy – close down. It is also channeled through the structure of the tax system. It should be noted that the impact of unemployment can be more or less mitigated by the social safety net in place, while that of taxation by the regressiveness of the tax system and the extent of tax evasion. We shall go on to examine the current developments in these areas.
Unemployment: In 2008, unemployment stood at 384,539 persons, corresponding to 7.8% of the labor force. It rose to 10.9% in 2010, while in January 2013, it reached 27.2%, amounting to 1,348,742 persons. It has hit young people especially hard ( 59.3% for the under 25’s), as well as women (41.4%).5 The impact of unemployment on inequality and poverty is aggravated by the inadequacies of the social safety net. For example, of the 1,348,742 unemployed in January 2013, only 230,560 persons (17.1%) received unemployment benefit.6 This is because this is granted only to those already insured, thus leaving out the newcomers to the labor market, i.e., the young, while it is only given for twelve months, thus excluding the long-term unemployed, whose number has increased from 296,000 persons in 2010 to 690,000 in 2012.
The inadequacy of the social safety net in warding off poverty and social exclusion is further reflected in the fact that Greece is the only EU member state not to have a guaranteed minimum income scheme. Such a scheme is going to be put into effect in two regions on a pilot basis in 2014. Overall, the sharp decline in output has led to a steep increase in unemployment, the distributional implications of which are exacerbated by the fact that the social safety net in place is inadequate both in quantitative and in qualitative terms.
Taxation: The Greek tax system is regressive, while the relatively low tax-to-GDP ratio is indicative of the existence of tax evasion. According to the latest available data, in 2010, indirect taxes accounted for 12.3%, direct taxes for 7.8% and social security contributions for 10.9% of GDP. The equivalent tax-to-GDP ratios for the EU27 amounted to 13%, 12% and 11% respectively.7 Furthermore, 55% of personal income tax was paid by wage-earners and pensioners, who accounted for 70% of the total income declared to the revenue authorities; 16% was paid by all other taxpayers (lawyers, doctors, farmers, rentiers, etc.), who declared income amounting to 17% of the total; and 29% by corporations, which declared income equal to 13% of the total.8 Greece’s total tax-to-GDP ratio (incl. social security contributions) amounted to 31% in 2010, that is below the Eurozone average of 36%.9 In fact, a comparatively low tax-to-GDP ratio is a constant feature of the Greek tax system. This is due partly to the web of tax exemptions awarded to various sectors of the economy and categories of tax payers, in order to incorporate them in the mode of capitalist production in Greece, and partly to the existence of a substantial shadow economy, estimated at approximately 27% of GDP for the period 1999-2007.10 Furthermore, it has been found that tax evaders are mostly professionals (doctors, lawyers, engineers, etc.), large farmers and merchants, while tax evasion is highest amongst the poorest (bottom decile) and the richest (top decile) segments of the population.11
Aspects of inequality
According to the EU Survey of Income and Living Conditions in Europe, income inequality in Greece is greater than that in EU27, as shown in Table 1.
Table 1 – Income distribution indicators 2003-2008
Source: EU-SILC, 2012, Tables 5.4a and 5.4b – Notes: 1. The income quantile share ratio ‘S80/S20’ denotes the income share of the richest 20% of the population relative to that of the poorest 20%. 2. The Gini coefficient ranges from 0 (total equality) to 1 or 100 in percentage terms (total inequality). As we can see, both the S80/S20 income quantile share ratio and the Gini coefficient, two commonly used inequality indicators, reveal a relatively high and persisting rate of income inequality in Greece by comparison to the EU27. Moving into the crisis years, this seems to have worsened further. In particular, Matsaganis and Leventi (2012) have calculated these ratios for 2009 and 2010. They have found that the S80/S20 income quantile ratio increased to 6.11 in 2009 and to 6.15 in 2010, while the Gini coefficient increased to 34.9 in 2009 but slightly declined to 34.8 in 2010.12 Thus, in the first few years of the crisis in Greece, the already skewed income distribution deteriorated further. Tracking the distribution of wealth is especially difficult, due to the conceptual and measurement problems involved, as well as the lack of data. To the extent that net worth and disposable income are highly concentrated, our observations with regard to the distribution of income are indicative of developments in relation to that of wealth. Furthermore, very rich Greeks feature among the world’s ultra-rich. For example, in 2012, 455 Greeks were considered to have a total net worth equal to US$50 billion.13 Also many Greek interests are hidden in offshore centres, as shown by a recent investigation on offshore companies.14
The rate of poverty in Greece is above the EU27 average, while this gap has remained at approximately 4% since the mid-2000s, as displayed in Table 2.
Table 2 – Poverty and social exclusion (%)
Source: http://epp.eurostat.ec.europa.eu/statistics_explained Notes: At risk of poverty (AROPE) are persons with a disposable income less than 60% of the national median income (after social transfers)
As we can see, in 2009 and 2010, the rate of poverty declined, while it increased steeply in 2011, as a growing section of the population was left out of the social safety net. By age group, 30.4% of children (0-17), 31.6% of adults (18-64) and 29.3% of the elderly (>65) were at risk of poverty in 2011. The parents’ educational level is an important factor, since children whose parents had acquired a high level of education faced a 7.9% risk of poverty, as opposed to 50.2% risk faced by children whose parents had a low level of education.15 The high poverty rate of Greek children is confirmed by the UNICEF report on child well-being, which ranks Greece in 25th place among 29 countries, taking into account material well-being, health and safety, education, behavior and risks and housing and environment.16
At the present time, Greece is experiencing a dwindling economy, a society in distress and a threat to democracy, as the fascist right is gaining in strength. Thus, the utmost priority of economic and social policy should be to halt the downward spiral and to secure a breathing space in order to get the economy going again. The reduction of poverty and the redistribution of income and wealth need to be at the centre of such a policy. The neoclassical dilemma between ‘efficiency and equity’, whereby catering for equity undermines efficiency, does not hold. On the contrary, redistribution is the key to reviving the economy and rebuilding social and political trust, necessary ingredients for stabilization and prosperity.
The approach to this fundamental issue needs to extend over the immediate, medium and long run. It also needs to involve social actors and society at large, while it is best carried out in a European context, i.e. in conjunction with the long-needed transformation of EU economic and social policy towards a prosperous and equitable European society. In the immediate run, employment needs to be boosted with special emphasis on young people and women. The brain drain of young, qualified Greeks has to stop. At the same time, the provision of social services and benefits should be strengthened, so as to provide an adequate social safety net, supporting the unemployed and the needy. Other short-run measures include the reinstatement of the public services and of the social provisioning role of the state. Boosting the provision of public health and education services does not only provide employment. It is also an investment in the present and future well-being of Greek society.
In the medium term, chronic problems associated with the mode of capitalism in Greece, such as the phenomenon of tax evasion, need to be dealt with. Similarly, R&D, a long neglected sector, needs to be supported and linked to economic policy and the requirements of restructuring. In the long-run, further areas, such as the completion of a country-wide register of property ownership, should be dealt with. The present patchwork of the property tax system has to be replaced by a socially fair and financially effective system. Also, wealth has to be documented and taxed accordingly.
The above measures are but indicative of the effort needed to restore the Greek economy and society on a path of environmentally and socially sustainable development. This is a major effort requiring the support of the largest part of the Greek population. At the same time, the co-operation and support of Greece’s European partners is yet another prerequisite. Such support is necessary in relation to gaining a breathing space from Greece’s pressing financing needs. For example, the regulation of the financial markets, so as to limit, if not eliminate, speculation is an area that can only be dealt with on the European level. Similarly, the halting of the privatization drive and the reinstatement of public services, albeit a national concern, is best carried out in a European framework.
These are perhaps tall demands. However, in view of the depth and length of the crisis in Greece and elsewhere nothing less will do. Trade unions and social movements, as well as left political forces in Europe, seem to realize it. This is a hopeful sign that will support the struggle of social actors and left political forces in Greece towards a meaningful future in economic, social and political terms.
1Frangakis, M., 2011, The rising public debt in the EU: Implications for policy, in the Journal of Contemporary European Studies, Vol. 19, No. 1, 7-20, March
2Reinhart, C.M. & K.S. Rogoff, 2009, The Aftermath of Financial Crises, NBER Working Paper no. 14656
3Skidelsky, R., 2012, “Does debt matter?”, www.social-europe.eu/2012/01
4Statistical Annex of European Economy, Autumn 2012
5Greek Statistical Office, 2013, Labour Market Survey, January (in Greek)
6Labour Force Employment Office, 2013, Statistical Data, February (in Greek)
7Eurostat, Statistical Books, 2012, Taxation trends in the EU, Date for the EU member states, Iceland and Norway
8Ministry of Finance, 2012, Statistical tax data for the year 2010 (in Greek)
9Eurostat, Statistical Books, 2012, Taxation trends in the EU, Date for the EU member states, Iceland and Norway
10Matsaganis, M. and Chr. Leventi, 2012, The distributional aspects of tax evasion, Athens University of Economics and Business, Issue no. 2/2012 (in Greek)
12Matsaganis, M. and Chr. Leventi, 2012, The distributional impact of the crisis in Greece, Athens University of Economics and Business
14The investigation was carried out by the International Consortium of Investigative Journalists http://icig.org
16UNCEF, 2013, Child well-being: Progress in danger?