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Greece is being forced to accept savage spending cuts, but the real problem is tax avoidance by the rich, says Michael Burke

European finance ministers have agreed that they should try to prevent any deepening of the financial crisis as it affects Greece and threatens to engulf a number of European Union countries.

The terms of the rescue and its extent are unclear. But what is apparent is that Greek workers will not be enjoying a bailout of any kind. Along with the lowest paid and those dependent on public services, Greek workers will bear the brunt of the “adjustment process” – through wage and welfare cuts, pension reductions, an increased retirement age and other austerity measures. The sticking point seems to be that Greece is being pressed by the European Central Bank and leading EU nations to go even further in the austerity stakes than has already been announced At the same time, the left-of-centre Pasok government is facing mass demonstrations and strikes, which have encouraged further resistance to the cutbacks.

It is interesting to note who is not being targeted. Greece has one of the lowest tax takes in the eurozone. In the 15 years to 2006, Greece’s total general government revenues as a percentage of gross domestic product were 37.9 per cent, compared with an average rate across the euro area of 45.3 per cent. This low level of taxation was, in the Greek case, the source of longstanding deficits which were hidden from a gullible EU inspectorate (Eurostat) over a number of years.

Taxation in Greece has long been a burden borne mainly by the poor. Meanwhile, Greek shipping magnates and others among the super-rich are registered as “non-domiciles” in Britain and consequently do not pay tax anywhere.

Greece is not in the firing line because it has been far more affected by a severe recession than other countries. Nor is its banking sector more blighted than anywhere else. The latest estimates from Eurostat lowered Greek GDP down by 2 per cent in 2009. However, this compares with minus 4 per cent for the euro area and minus 4.1 per cent for the EU as a whole

At the same time, Greece has committed funds to its banking sector equivalent to 11.4 per cent of GDP, compared with 31.2 per cent for the EU average.

The cause of the turmoil in Greece is the high level of government debt, which existed long before the current crisis, combined with a sharply rising deficit.  Greek government debt as a percentage of GDP has been hovering close to 100 per cent of GDP in all the years of this century. The EU forecasts that this will rise to 125 per cent of GDP. Greek bond yields were already rising, but were pushed much higher by the decision of the European Central Bank in effect to remove Greek government bonds from the list of assets it would hold at the end of this year.

A reversal of that announcement would, on its own, transform the attitude to Greek government debt, but none has been forthcoming. Likewise, a genuine transformation of the tax system in Greece, as well as a rigorous clampdown on tax evasion by the wealthy, would have a dramatic impact on the deficit.

Instead, it seems as if the European institutions are intent on acting as a quasi-International Monetary Fund, with any support conditional on a deepening of current austerity measures. This is no more likely to be successful in Greece than it has been in Ireland, where deficit projections continue to rise.

As elsewhere, the rise in the Greek deficit is caused by a slump in taxation receipts, which have fallen by 8.1 per cent in 2009 and are forecast to fall by more than 10 per cent in 2010. This hole in government finances is itself caused by plummeting levels of investment.

The recession in investment began a year earlier, in 2008. Levels of investment have already fallen in total by 22.5 per cent, with further falls expected this year. By contrast, the recession-related rise in government spending over the same two years has been just 3.5 per cent.

There is no logic in supporting spending cuts to close the deficit. Higher spending was not the cause of the deficit, lower tax receipts are. Worse, since tax evasion is endemic among Greek businesses and the rich, cutting the income of the one section of society that does pay tax – the poor and salaried workers – will only reduce taxation revenues further.

The austerity measures foisted on Greece stand in sharp contrast to the reflationary measures adopted across nearly the entire eurozone and led by Germany. German reflation has amounted to 4 per cent of GDP. The measures could have been better targeted. But despite a stagnant fourth economic quarter, forecasts for Germany’s growth and its deficit are both on an improving trend.

So the question is: why is a reflationary recipe that clearly works for “core” Europe deemed unsuitable for Greece? Why can government investment work for Germany, France, Belgium and so on, but is ruled out for Greece?

The answer may lie elsewhere, in the countries of eastern Europe. There, a number of countries had been hoping to benefit from further EU enlargement, which now seems postponed. Prior to enlargement, the EU demanded continual reform of the eastern European economies – including further privatisations, liberalisation of the labour markets and a reduction of social spending.

The privatisations facilitated the arrival of Western European and American telecommunications, agribusiness and other companies, but above all banks and financial firms. The drive to lower wages and social spending allowed a cheapening of labour – to be exploited by Western firms – and led to widespread emigration. The removal of local producers expanded the market for Western goods.

This sounds like the package of “reform measures” to be demanded of Greece in return for any loans. Greece may soon find that, while all members of the EU are equal, some are more equal than others.

Michael Burke is a former senior international economist with Citibank. This article is adapted from a piece that first appeared on socialisteconomicbulletin.blogspot.com