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As Greece Goes ...
While it is tempting to dismiss this national tragedy as a local problem, Greece's troubles have global implications. If Greece is forced out of the euro zone for failing to follow through on reforms that include creating aggressive new tax-collection measures, slashing public-sector wages and raising the retirement age, the ensuing financial meltdown could have as much of a psychological effect as a financial one, spreading social unrest abroad and undermining the idea of European unity itself.
Although Europe is still standing by Greece, it is still by no means clear which way Greece will turn. Greeks fear the economic and social consequences of leaving the European currency union, but after decades of social erosion, they don't trust their leaders or one another to fairly share the sacrifices required to remain in the euro zone. And rather than rebuilding trust, the recent political wrangling at the top is making matters worse. "The social contract is breaking down because the political Ponzi scheme is breaking down," says Aristos Doxiadis, an economist and former private-equity professional. The resulting fear that is gripping Greece may just be enough to force the real structural change Greece needs, or it could push the country further into social chaos.
The first requirement for building trust in an economy and a society is honest and transparent reporting of the government's activities. In Greece, that is hard to come by. While corruption may cost Greece as much as 20 billion euros a year, or up to 8% of its GDP, according to a recent study by the Brookings Institution, powerful forces have conspired to cover up the true extent of Greece's economic woes. When Andreas Georgiou, a native Greek and 20-year veteran of the International Monetary Fund in Washington, returned to reform Greece's Statistical Authority in August 2010, he found that whole state-run industries had been left out of the accounts that were being sent to the country's euro-zone partners. Everything from the state-run television company to the Centre for Disease Control and Prevention and the Greek National Tourism Organization were running off the books, as far as the country's debt and deficit were concerned. Georgiou, 51, who has a Ph.D. in economics from the University of Michigan, pushed through standardized reforms and generated in late October 2010 a set of Europe-approved numbers that would show a deficit equivalent to 15.4% of the country's GDP, well over the euro-zone limit of 3%. In May, Greece had predicted an 8.7% deficit for the year.
But just as he was preparing to send the figures to Europe's central statistical authority, a board of parliamentary, ministry and union appointees demanded that they be allowed to vote on whether to approve and release the data, Georgiou says. His e-mail account was hacked, according to charges brought against one of the board members earlier this year. Georgiou forced the data through, but earlier this month, he was informed that the national prosecutor for economic crimes was investigating him for "artificially inflating Greece's deficit and debt numbers." Europe's official statistical agency, Eurostat, which has had members embedded in the Statistical Authority since late 2010, says Georgiou's numbers are accurate.
The country's systemic lack of accountability helps explain why tax evasion is particularly entrenched. Greece's economy loses 22 billion euros a year through tax evasion, according to some estimates. The gray market, which operates outside government taxation, is the equivalent of at least 25% of Greece's official GDP. The wealthy northern suburbs of Athens, including gardener Giraud's neighborhood of Kifissia, were supposedly home to 324 swimming pools in 2010. Suspecting that some homeowners might be evading a special pool tax, the Finance Ministry decided to take a helicopter census. It counted 16,974 pools.
In the fiscal crisis, tax evasion is moving offshore. In September the government declassified banking transactions and discovered that nearly 9,000 people remitted 4.9 billion euros to overseas bank accounts in 2009, but nearly half of those people declared an annual income of less than 20,000 euros. Deposits in Greek banks are down from 230 billion euros in February 2010 to 189 billion euros in August 2011, and the number dropped nearly 3% from August to September alone. One banker says he's sent half his money to the U.S. and is keeping the rest in Greece only out of a combination of shock and loyalty to the country.
It takes personal fortitude not to cheat when everyone else does. "I'm not corrupt at least to the best of my ability but I notice I'm becoming more tolerant of corruption," says Aristides Hatzis, 44, a law professor at the University of Athens. "I paid 15,000 euros in taxes last year because I want be honest, but with my salary cut and taxes even higher, the temptation to cheat is always there." Which makes ending the country's pervasive tax evasion even harder. Greece boosted its revenues 5.4% last year, to 51.1 billion euros, through a combination of settlement offers to tax evaders and tightened enforcement. But that was still short of the target by 280 million euros.