By Alan
Wheatley and Karolina Tagaris
(Reuters) -
Signs across Athens
advertise property for rent or sale. One in three shops has closed. At those
still open for business, turnover has slumped.
So it is
one of the mysteries of Greece 's
economic depression that prices of some things - milk and the new iPhone, for
example - are among the highest in Europe .
The riddle
matters hugely. If costs and prices were lower, exporters would be more
competitive and people's shrinking pay packets and pensions would stretch
farther, cushioning a sharp drop in consumption.
Increases
in value added tax and other indirect levies are part of the answer. Greece is also
hostage to the cost of imported oil and food.
But another
set of reasons goes to the heart of Greece 's political and economic
malaise: collusion among producers, the state's complicity in shielding
protected professions and businesses, and a thorough lack of competition that
allows a favored few to extract economically unjustified profits from a
long-suffering populace.
Much of the
economy, in a word, is diseased. And until the disease is cured, sustainable
growth cannot resume even if euro zone finance ministers finally agree - after
two failed meetings in successive weeks - how to lighten Greece 's
unsustainable debt burden.
The good
news is that Athens
is implementing some deep-seated administrative reforms and its trade deficit
is receding.
But the
clock is ticking: the burden of austerity and reform has fallen
disproportionately on the man in the street, and his patience is all but
exhausted. Protests over inequality and austerity are proliferating, fomenting
political radicalism.
"Greece is on
the edge right now. That's why 2013 will be a crunch year for the economy and
society," said Dimitris Asimakopoulos, who owns one of the oldest pastry
shops in Athens .
Asimakopoulos,
who also heads the GSEVEE small business confederation, said his turnover had
fallen 35 percent since the crisis struck. Profits were one-fifth of what they
were then.
"The
economy here is not an advanced capitalist economy," he said. "But
you can't change an economy by pressing a button. You need time, and right now
we don't have time."
LOW WAGES,
HIGH PRICES
One button
that a country living beyond its means has to press is marked ‘cost cutting'. Greece has done
that. Wages are plunging at the behest of international creditors who are
keeping the country alive on a drip-feed of aid.
By the end
of this year, the entire surge in the average cost of labor per unit of output
from 2001 to 2009 will have been unwound, according to a draft European
Commission paper.
The drop in
nominal unit labor costs this year alone is projected to be 8.7 percent - not
surprising given that the unemployment rate is 25 percent.
But wages
are only one input among many that determine prices. The most comprehensive
gauge of a country's cost competitiveness is its real, or inflation-adjusted,
effective exchange rate (REER) relative to its main trading partners.
And in
2011, Greece 's
REER was still 18-20 percent above its 2000 level, according to Eurostat, the
EU statistics agency.
"Of
course the issue of prices concerns us. There's a problem, and we're aware of it,"
Athanasios Skordas, deputy minister for economic development and
competitiveness, told Reuters.
Inflation
is falling - it was 0.9 percent in the year to September - and economists
expect it to come down further.
But to
thoroughly convert wage to price competitiveness will entail a daunting array
of reforms, such as making it easier to start a business and removing barriers
to competition in key markets such as energy.
Platon
Monokroussos, head of financial markets research at Eurobank in Athens , said these market
rigidities were one reason why falling wages had not translated into a quicker
drop in inflation.
FAT PROFITS
Another
reason, Monokroussos said, is rent-seeking - making excessive profits.
Eurostat
figures show average food prices in Greece are higher than in the rest
of the EU except for meat, fruit and vegetables. Milk, cheese and eggs are 31
percent more expensive than the EU average; cereals and oils cost 16 percent
more.
The
Organization for Economic Cooperation and Development says profit margins
exceed the EU average in many key sectors, especially retailing, due to a lack
of competition.
"This
is a structure as old as the Greek state," said George Zombanakis, an
economist with the Bank of Greece, the central bank. He stressed that he was
speaking in a personal capacity.
"This
is something that can only be tackled by structural reforms, and everybody
tries to do anything and everything except structural reform because then it
becomes a political matter," said Zombanakis.
Firms across
the EU are frequently fined for price-fixing. But in the case of Greece , ending
what the Commission calls "price rigidity and collusion in prices"
means breaking a particularly strong nexus between politics and business.
"They've
cut wages but haven't touched monopolies," said Costas Lapavitsas, an
economics professor at the School of Oriental and African Studies in London .
"And
the reason they haven't intervened is because of the strength of the
incumbents. The strength of big business is paramount, and it will take
profound political change to alter this," he said.
FISHING FOR
CARTELS
Dimitris
Kiritsakis, the head of Greece 's
Competition Commission, acknowledged the lack of competition and said his
watchdog, with just 120 professional staff, was probing 30 sectors to see if
cartels operated.
"You
can't just make cartels disappear," Kiritsakis told Reuters. "People
think I can say 'Come out, cartel, so I can catch you'. But you need to be
lucky. It's like fishing: you need to be in luck for the shoal to swim past in
front of you."
Other
nefarious practices keep prices high.
Since
March, doctors have been required to prescribe, and pharmacies to dispense,
generic drugs instead of expensive brand names. But, as is often the case in Greece , the
regulation has not been fully implemented.
This is
costing patients money and leaving room "for wrong incentives to doctors,
overprescription and outright fraudulent prescription behavior", according
to the European Commission.
What's
more, as part of their strategy to minimize taxation, multinational companies
export goods to their Greek subsidiaries at inflated prices, said Vassilis
Korkidis, president of the National Confederation of Hellenic Commerce.
Skordas,
the deputy development minister, said he had filed an official complaint with
the local representative of Apple Inc (AAPL.O), charging that the company's new
iPhone 5 sells for more in Greece
than anywhere else in the EU.
THE DRACHMA
NIGHTMARE
Addressing
all the reasons for Greece 's
high price levels and lack of competitiveness will take a decade or more, the
International Monetary Fund reckons.
But Greece does not
have that time. Korkidis said one in five of the 300,000 small trading firms
that he represents might not make it through the winter.
Companies
are starved of credit, but, just as importantly, they and their customers are
unnerved by the specter that Greece
might yet be forced out of the euro.
Why invest
and spend hard euros if they might suddenly be converted into devalued
drachmas?
"If
this drachma nightmare goes away, the situation will probably be much
better," Korkidis said.
Asimakopoulos,
the cake shop owner, agreed. Every quarterly inspection by Greece 's
international lenders is the harbinger of more austerity and fresh doubts whether
the country will stay in the euro, he said. Uncertainty is asphyxiating the
economy.
"The
most crucial thing is that there is no hope," he said. "If we had
light at the end of the tunnel, we could invest in our businesses."
Which is
why, though reforms to tame prices are imperative, it is more urgent to agree
on a plan to put Greece's massive debt on a stable long-term footing and banish
the threat of ‘Grexit', or exit from the euro.
"Greece is
making big adjustments, but without a credible solution to the issue of debt
sustainability, all that effort is going to be undermined. We need to end the
uncertainty," said George Pagoulatos, a professor of European politics and
economy at Athens
University .
(Editing by Giles Elgood)
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