From Special Report:
The anatomy of a crisis
Billions have been spent in bailouts and action from central banks, but Europe remains on the brink
Perhaps the euro was always going to be an act of folly. Its aims, like most acts of folly, were undoubtedly laudable: never again would Europe be torn apart by its differences.
A common currency, it was thought, would bring nations together. A convergence of economic interest would, ultimately, lead to closer fiscal and political bonds. But those hopes are fading. Far from aligning Europe, the single currency project has served to further expose the continent’s entrenched social and cultural differences.
The causes of the eurozone debt crisis are well documented. Historically low interest rates allowed governments and consumers to borrow cheaply – and they did so with gusto. German banks, lest we forget, were at the forefront of this lending. The prerequisite fiscal adjustments and tough economic reforms set out by the Maastricht Treaty were roundly ignored, masked by extravagant spending binges. Then Lehman Brothers collapsed, the inflow of foreign capital stopped and the woeful state of many periphery nations’ finances was laid bare.
The result? Billions of euros in bailouts, massive policy action from central banks and lashings of austerity. And yet we remain at the precipice. Politicians have been found wanting, often moving only as quickly as their electorates will allow. That is as much a consequence of ineffectual communication than genuine voter revolt. But there is still time.
If the crisis is to be solved, however, the diagnosis must first be right. For too long policy has been either too small or aimed at the wrong problem. Only once we understand the genesis of the crisis can we fully expect to resolve it. This is not merely a debt crisis: it is a political crisis, a currency crisis, a banking crisis, a social crisis, a property crisis and a tax crisis.
If the euro is to fail, the blame will, rightly or wrongly, be laid at Greece’s door. The Hellenic Republic has certainly become a model for profligacy, inefficiency and, some would say, corruption. No better place is this illustrated than Greece’s approach to tax.
It has been estimated that, prior to the eruption of the debt crisis, Greece lost roughly €19bn (£15.2bn) a year in uncollected tax, some 27 per cent of total revenues. For years, legal loopholes have made tax evasion a national pastime. One oft-quoted fact, courtesy of the former head of the government’s economic department, is that there are more Porsche Cayennes registered in Greece than there are taxpayers declaring income of more than €50,000.
Even now, with the world’s spotlight trained on Athens, little has been done to close these loopholes. To exacerbate matters, since the start of 2012 revenues have fallen by a third. Funding for schools, hospitals and other vital institutions is in danger of drying up. During the days of debt-fuelled extravagance, this wouldn’t have mattered. But that tap has been turned off. A new government may have been sworn in, but its task remains colossal. Even now, a Greek exit from the euro looks a real possibility.