Monday, April 19, 2010

The Causes of Greece’s Economic Troubles and Lessons for Malaysia

The economic travails currently being experienced by Greece make interesting reading for economists, finance experts and laymen alike. Greece is somewhat in a humiliating situation. Some German leaders have openly suggested that Greeks should spend less time sleeping and more time working, that is, to be more like Germans.

There are diverging opinions in Europe as to whether economic assistance should be extended to Greece or not. Some are of the opinion that regardless of who is to be blamed, Greece still needs to be helped because failure to do so will result in more problems for everybody in Europe. Others feel that assisting Greece will establish a dangerous precedent whereby the bail-out of a profligate EU member country will only encourage others to be profligate in future.

What is not at issue is the root cause of Greece’s problems which is the Greek government's spendthrift policies over the last decades. In order to be popular with its citizens, it made their life as comfortable as possible. There are many stories of the good life in Greece. Education up to tertiary level is completely free. Employees are paid 14 months' salary for 12 months' work. Civil servants can retire after only 20 years of service with a full pension. As a result, many Greeks spend 30 to 40 years of their life enjoying life in retirement and contributing nothing to the economy.

The Greek civil service sector is also oversized and unproductive. This is because it is a common practice for political parties, after being voted into office, to reward key supporters with jobs in the civil service. Many ended up doing nothing productive because their posts were not necessary in the first place. The bloated public sector created unnecessary bureaucracy leading to a high level of corruption. Many businessmen , fed up with bureaucratic delays , preferred to pay bribes to speed things up . Greece is now widely seen as being among the most corrupt countries in the world. Transparency International Corruption Perception Index ranks Greece at number 71, i.e. among the worst in Europe. Even Ghana in corruption-rampant Africa is perceived to be less corrupt than Greece. Transparency International also estimated that in 2008 alone Greek citizens made 900 million Euros in bribery payments.

The worst aspect of the situation was the fact that the money being used to make life comfortable for everyone was actually borrowed money. The Greek government had been borrowing massively from European commercial banks. Their sovereign bonds were snapped up by the banks because these banks were able to borrow at a cheap rate, around 1%, from the European Central Bank (ECB) and lend to the Greek government at about 3-6%. These banks would then deposit the Greek government bonds at the ECB as collateral for more cheap loans. They were able to do this as long as the bonds were highly rated . Unfortunately this could not last forever and the massive amount of debt accumulated by the Greek government (almost 300 billion Euros by the end of 2009 and more than 120% of GDP) resulted in a downgrading of its bonds by rating agencies. This in turn increased borrowing costs tremendously for Greece since lenders are now worried about her ability to repay her huge borrowings, accumulated over the years. Moreover tax revenue collection in Greece is also very poor. A finance ministry report stated that a third of all economic activity in Greece do not yield any tax revenue to the government. It is a common practice for Greeks to pay cash for transactions in order to avoid paying tax. Revenue from income tax was 4.7 percent of GDP in 2007, compared to an EU average of 8 percent. The Greek government recently estimated that they were losing more than 1.2 billion Euros due to lax collection.

The only reason Germany and the rest of Europe may not want to see Greece default on her massive debts is the fear that many of the shareholders of the lender banks will lose out and this fear may be enough to persuade them to lend some more to her at a rate lower than that offered by the market. This indeed seems to be the case because on 12 April the finance ministers of the 16 Euro zone nations agreed to provide up to 30bn Euros ($41bn) in loans to Greece.

But this does not mean that Greece is out of the woods. It is simply a postponement of the day of reckoning. In the meantime there will be lots of pain for ordinary Greeks in the coming years as government expenditures will have to be radically reduced. Massive amount of job cuts and pay reductions are unavoidable. Many social services provided by the government such as free education and subsidized health care will also disappear. These severe economic pains, if not handled well, may very well lead to social and political chaos. Already there have been violent riots. More will take place as anger and resentment boil over as a result of the expected sudden rise in unemployment as well as radical reduction in the quality of life for everybody.

For us Malaysians the most important question to ask is what is the possibility that the Greek experience will be repeated in Malaysia? To answer that we need to consider the following questions. What is the trend of Malaysian government debt? Is it increasing or decreasing over the years? Are the political parties, in trying to woo Malaysian voters, promising more comfortable life for them, promises which inevitably will result in the growth of public expenditure and public debt? Or are they willing to be honest and explain to voters that our massive public sector debt of more than RM350 billion (and growing) is evidence that we are living beyond our means and that we need to sacrifice short term comfort and cut public expenditures before the debt spins out of control? To me, the answers to those questions are obvious and therefore the prognosis for Malaysia is worryingly also very obvious.


  1. Masalah di Malaysia ialah kerajaan membelanjakan wang pada tempat yang tidak sepatutnya. Banyaka projek yang telah dinaikkan harga kerana faktor komisen dan rasuah. Projek terbengkalai memerlukan kos tambahan. Semuanya diperolehi dengan berhutang.

    Masyarakat muda dibelai dengan hiburan yang merosakan dan menjadikan produktiviti rendah. Remaja malas bekerja dan hanya memberi tumpuan kepada hiburan.

    Jika tiada hasil minyak, maka nasib Malaysia akan lebih teruk. Sama-samalah kita tunggu.

  2. Dear Prof,
    Just want to share an interesting interactive map on debt burden in EU. Here's the link:

  3. I come from an industry whereby blue collars are needed, n long hours n dirty working environment is a norm. With all these comes working skills n technical skills that are actually highly needed for engineering industry. However, i noticed that whenever the young ones turned up for interview, they are more willing to sit in aircond at shopping centers n cashiers for the same, if not less amount of money. Under such trend, our people are actually heading a way where by jobs would depend strongly upon consumer spendings.. when one day (touch wood), consumer dun hv so much cash to spend, where are these people going? When they only have skills to sit around and count cash?

  4. I'd just like to share a link on Greece's troubles by Prof Richard Wolff - described as a clash of classes, underlying the ills of capitalism - and perhaps a way forward through socialism...the author is also the author of "Capitalism Hits the Fan".