At the heart of Greece’s fiscal problems is a toxic combination of outstanding sovereign debt (which exceeds 123 percent of the GDP), poor confidence in the legal and political systems, institutionalized corruption and huge amounts of social-welfare spending. Calomiris says that spending cuts are likely to be the most successful tool the government can use, however, without reform that addresses the country’s chronic corruption, the prognosis for sustainable recovery remains dim. Calomiris writes:
The top priority for Greece right now is to make the immediate and massive cuts in public expenditure that are necessary to restore fiscal balance. Cutting expenditures by a total of, say, 14 percent and promising tax and corruption reforms that would increase taxes by 14 percent would buy Greece time to make the deep reforms necessary to restore its tax base. Failing those tax reforms, additional expenditure cuts would be needed quickly. Following that path not only would resolve the Greek debt problem, it would help restore Greece’s productive competitiveness, increase labor participation and increase savings, all of which would boost growth and reduce the Greek current account deficit. … In the medium term, even if Greece restores fiscal sustainability through expenditure cuts alone, it must address the deeper problems that plague its economy, its taxation system and its society more broadly, all of which revolve around the problem of endemic corruption.
Photo credit: Flickr/lpinseel
More...