A Noble Prize Winning Economist Nails the Big Problem in Greece (And has a warning for the rest of Europe)

Edmund S. Phelps, the 2006 Nobel laureate in economics, says:

Too many politicians and economists blame austerity – urged by Greece’s creditors – for the collapse of the Greek economy. But the data show neither marked austerity by historical standards nor government cutbacks severe enough to explain the huge job losses. What the data do show are economic ills rooted in the values and beliefs of Greek society.

Greece’s public sector is rife with clientelism (to gain votes) and cronyism (to gain favors) – far more so than in other parts of Europe. Maximum pensions for public employees relative to wages are nearly twice as high as in Spain; the government favors business elites with tax-free status; and some state employees draw their salaries without actually turning up for work...

Astoundingly, young Greek entrepreneurs reportedly fear to incorporate their firms in Greece, lest others use false documents to take away their companies. According to the World Bank, Greece is one of the hardest places in Europe to start a business. The result is that competition for market share is weak and there are few firms with new ideas...

And Phelps has a warning for the rest of Europe:

The truth is that Greece needs more than just debt restructuring or even debt relief. If young Greeks are to have a future in their own country, they and their elders need to develop the attitudes and institutions that constitute an inclusive modern economy – which means shedding their corporatist values.

Europe, for its part, must think beyond the necessary reforms of Greece’s pension system, tax regime, and collective-bargaining arrangements. While Greece has reached the heights of corporatism, Italy and France are not far behind – and not far behind them is Germany. All of Europe, not just Greece, must rethink its economic philosophy.

This very important Phelps' essay is in full here.


-RW