Greece has the worst corruption score in the euro zone, according to Transparency International, which gives Greece a rating of 4.7. Only Greece and Italy (at 4.8) have corruption scores lower than 5 (i.e., high numbers imply less corruption). It is not a coincidence that Greece and Italy were the two euro zone countries that employed fraudulent accounting practices and derivatives trades to mask the size of their growing government debts (which are now far in excess of the debt-to-GDP ratios of other euro zone countries).
How does corruption limit the capacity for tax and spending reform? Tax avoidance, which relies on bribery to avoid prosecution, is a national pastime in Greece – the envelope used in the bribe even has its own name, the “fakelaki,” confirming the age-old adage that the Greeks “have a word for it.” Bribery is so rampant in Greece that real estate developers’ method of obtaining cheap land is to burn down public land, squat on the burned parcels, and pay off public officials to permit this. Greece’s forest fires, particularly in the Peloponnese in 2007, have been a source of public outrage for years, and yet the developers continue to squat on the land with impunity. Is a society that permits that sort of lawlessness capable of tax reform?
According to a recently published study by Katsios (2006), Greece has the largest “shadow economy” (untaxed income base) of any OECD country, which the author argues is related to the corruption of the Greek government through various channels4 . In 2006, Katsios estimates the Greek shadow economy at 28% of GDP. Second in line behind Greece in the extent of its shadow economy was Italy, at 26%. The tolerance for corruption in Greece makes it virtually impossible to imagine a significant increase in taxation via higher tax rates; increases in tax rates will simply increase the size of the shadow economy, and could actually reduce tax revenues.
Without major anti-corruption reform, fiscal policy adjustment must rely on expenditure cuts alone to achieve budgetary balance. With respect to those government spending cuts, however, it is also hard to be optimistic. High corruption is associated with excessive and wasteful spending that is hard to reverse. The existence of corruption reflects a deep inability to coordinate political action in pursuit of policies that would benefit the nation, including reducing wasteful spending.
Greece has one of the highest levels of “social protection” (i.e., welfare) expenditure in the euro zone. Consider a comparison group of the eight euro zone countries with 2008 per capita annual GDP of less than 27,000 euros, shown in Table 1. Within this bottom half of the 16 euro zone countries, Italy (6,226 euros per capita) and Greece (5,139) show the highest per capita spending on social protection; in contrast, the remaining six countries (Spain, Portugal, Slovenia, Cyprus, Malta, and Slovakia) spend an average of 3,730 euros per capita. Not coincidentally, the average corruption score of 6.1 for those six countries is much higher than those of Greece or Italy