On Notice: Greece’s Vested Interests

By HUGO DIXONSEPT. 16, 2015

The New York Times

TINOS, Greece — One of the few near-certainties about Sunday’s general election in Greece is that it will produce a government committed, at least nominally, to the bailout agreement struck last month with the country’s creditors. Not only is former Prime Minister Alexis Tsipras a reluctant convert to the deal, which could make available 86 billion euros in new loans, the main opposition party, New Democracy, is prepared to back it, too.

A casual observer may think the bailout condemns Greece to more years of austerity. This is part of the story, but not its main aspect. Greece’s two previous bailouts sought to cut spending and raise taxes; insofar as they tackled special interests, they concentrated on limiting the power of organized labor. The thrust of the latest plan, in contrast, is to combat cheating and sweep away the privileges enjoyed by a wide swath of groups, including farmers, shipping magnates and pharmacists. Some of these are natural supporters of the former conservative-led coalition, which explains why it did not do more to curb their privileges (and why Mr. Tsipras, a leftist, sees some political mileage in doing so).

Affected groups may squawk, but the country will benefit. Prices will fall and consumer choice will increase as businesses respond to competition. And if the fight against tax evasion succeeds, honest citizens will no longer have to carry the burden of those who cheat.

Take farmers, who enjoy a 13 percent income tax — half the rate at which Greek businesses, and most Greeks, are taxed. They also receive diesel oil subsidies and cheaper electricity. No wonder thousands of Greeks who may be only tangentially employed in the agriculture sector identify themselves as farmers.

With the new agreement, the government will increase the tax rate to 26 percent, phase out subsidized diesel and tighten requirements to ensure that benefits go only to those who genuinely live off the land. The adjustment process will be harsh, but the result will be fairer.

Prior to the latest bailout, Greece capped the shelf life of “fresh” pasteurized milk at seven days, well under the 10-day European Union average. This made importing milk impractical: In 2011, the price of fresh milk in Greece was 35 percent above the E.U. average, according to the O.E.C.D. The new agreement abolishes the rule setting the shelf life of fresh milk. The resulting shift to cheaper imports may increase competition for Greek farmers, but should benefit consumers.

Now look at medicine. Generally, the standard practice for Greek physicians has been to prescribe expensive patented drugs instead of generics. This, coupled with a large prescription volume, led Greece in 2012 to spend 2.3 percent of its G.D.P. on pharmaceuticals, above the E.U. average of 1.5 percent. The high level of spending is good for pharmacies, but has drained the public purse. Doctors are now being told to prescribe generic drugs, and pharmacists must offer patients cheaper alternatives to pricier brand names. What’s more, nonprescription drugs like aspirin will be sold in supermarkets.

Educators are also in the line of fire. According to the O.E.C.D., Greek primary school teachers in 2012 spent only 569 hours in the classroom, about a quarter below the E.U. average. The discrepancy was even greater for secondary school teachers, who spent one-third fewer hours in the classroom compared with their E.U. counterparts. Now the number of classroom hours per teacher must be increased by June 2018, to align Greece with O.E.C.D. best practices.

The list continues. Shipping is one of Greece’s most important industries, accounting for about 7 percent of G.D.P. The country’s nationals control some 17 percent of the global merchant fleet. Unsurprisingly, Greece’s billionaire magnates enjoy tax exemptions on profits from their operations and the sale of vessels. Under the new bailout, the tonnage tax on shipping has been increased, and some tax privileges will be phased out.

Perhaps the most damaging vested interest is the government itself. For decades, Greek politicians stuffed the civil service with their cronies, leaving it weak and politicized. Greece’s latest deal with its creditors requires senior public administrators, who have been working on a temporary basis since the civil service was reorganized in 2014, to reapply for their jobs by the end of next year. Re-employment will be merit-based, determined according to a system coordinated by the European Commission.

It is sometimes hard to distinguish a vested interest from an excessively generous benefit. One case in point is the pension system, which enabled Greeks to start drawing benefits before reaching the country’s official retirement ages. As a result, Greece in 2012 spent 17.5 percent of its G.D.P. on pensions, compared with a 13.2 percent E.U. average. While previous bailouts pushed through some reforms to reduce these expenditures, the latest program goes further, raising the official retirement age to 67 and increasing financial penalties for taking pensions earlier.

Greeks haven’t just been creative in dreaming up privileges; they’ve been masterful tax dodgers. To target this problem, the new agreement more broadly defines tax evasion. It also eliminates the 30 percent discount on value-added tax in the Aegean islands, which made it possible for people to buy goods on an island with a lower sales tax and ferry them to the mainland.

Greece had to endure a near-death experience before it was prepared to confront its vast array of vested interests. It remains to be seen whether the next government will energetically target these privileges. But if it does, Greece will emerge with a fairer and more efficient economy.

Hugo Dixon is the author of “The In/Out Question: Why Britain Should Stay in the EU and Fight to Make It Better.”

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