Europe Economy

Greeks Work Hard, So Why Is There a Debt Crisis?

ATHENS—From the German press to Stephen Colbert’s hit show on Comedy Central, Greece has been the butt of jokes throughout the financial crisis. The implication is always the same — that the Greek people are lazy and don’t like to work.

Greek Red Cross workers demonstrate in front of the Greek Parliament the Greek Parliament on October 11, 2011. New strikes hit Greece on October 11 as the government finalized talks with its EU-IMF creditors on additional spending cuts to secure payment of a bankruptcy-saving loan. Civil servants blocked the entrance to several ministries, teachers and municipal staff walked out and a key refinery began a protest shutdown ahead of a general strike on October 18.
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The stereotype makes Michalis Chrysochoidis, Greece’s minister of development and competitiveness, bristle.

“There is a myth that the Greeks don’t work many hours. This is a big lie," Chrysochoidis said. "The reality is that the Greek people work more than any other country in the European Union.”

He’s right: Greek workers put in longer hours than any other Europeans or Americans, according to a new report by McKinsey. (Click here to read the full report) The consulting firm’s 60-page brief, “Greece 10 Years Ahead,” examines what makes the Greek economy so uncompetitive relative to its neighbors and offers advice on what to do about it.

Within the McKinsey report, however, there are two additional data points that explain why more hours worked by Greeks haven’t led to a growing economy.

First, Greece has the lowest labor participation rate in all of Europe — just 66 percent of the employable population have jobs, compared with 73 percent in the European Union and 70 percent in Southern Europe.

Second, not only are fewer Greeks working, those who do are far less productive: A Greek worker’s productivity comes in at $35 an hour, compared with $49 an hour in the EU, $55 an hour in Central Europe, and $58 and hour in the U.S.

Put it all together and it led McKinsey to one inescapable conclusion: "A relatively smaller percentage of Greeks work longer and harder hours than their European peers to support a generally unproductive system.”

Therein lies the problem—the Greek economy is uncompetitive, and until that changes it will be unable to grow at a sufficient rate to generate enough tax revenues to pay its bills.

Having combed through the databases of the International Monetary Fund , Eurostat, Global Insights, and the Conference Board, McKinsey paints a vivid picture of why the Greek economy is so uncompetitive — primarily, its extensive bureaucracy and rigid labor rules. Both are strangling Greece’s ability to compete in a global economy, whether in the shipping industry, tourism, or even exporting its high-quality olive oil and famous yogurt.

Chrysochoidis, the minister of competiveness, agrees with this assessment.

“The Greek economy was not competitive during the last decades,” he said, adding emphatically, “We are going to create a new Greece.”

The first step, Chrysochoidis said, is to “reform the business environment.”

Chrysochoidis used to be the minister of public order, and is credited with shutting down two Greek terrorist organizations. His new task may be even more daunting — eliminating the mountains of bureaucratic red tape that hinder entrepreneurship and business investment.

Greek indignants chant slogans at central Athens Syntagma squar in front of the Greek Parliament during a demonstration on October 15, 2011. Inspired by the Occupy Wall Street movement in the United States and Spain's 'Indignants', people began taking to the streets across the world, targeting 951 cities in 82 countries. AFP PHOTO/ LOUISA GOULIAMAKI (Photo credit should read LOUISA GOULIAMAKI/AFP/Getty Images)
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He’s taken some key first steps. Beginning in April of this year, his ministry established a new streamlined electronic registry system for new businesses called One-Stop Service (OSS). “A new firm can now be established through a single procedure, in one day, with significantly lower costs,” according to a ministry statement.

Before the OSS, it would take at least 38 days to register a limited liability corporation in the country. Now, it takes as little as 38 minutes, according to the ministry. The cost of registering a new business has dropped by more than two thirds, as well — to 910 euros ($1,243) from 2,377 euros ($3,248).

Chrysochoidis adds that the ministry has identified 72 additional obstacles to entrepreneurship and has introduced new legislation that will eliminate them.

Among those obstacles are the role the government plays in many sectors of the economy — either through outright ownership of assets, such as a utility; price controls; and high barriers to entry, such as strict limitations on the number of players in a profession, and/or difficult licensing requirements, according to the McKinsey report. Add to all that very tough labor restrictions on large enterprises.

The result is that very few businesses have been able to get started or grow in size, and among those that do small family-owned businesses still dominate — 30 percent of manufacturing employment in Greece is in firms with nine or fewer employees. In Italy, that number is 15 percent, while in Germany it's just 5 percent.

Without what economists call “economies of scale,” such as the advantages achieved when you have a large factory versus a small one, it is impossible to achieve higher levels of productivity. That means lower profitability and fewer jobs — something desperately needed in a country where unemployment is at 16 percent.

It’s tourism industry is also beset by red tape, which has lead to fewer large-scale hotels and resorts being built.

“Cumbersome licensing processes and a volatile tax framework discourages investments,” according to the McKinsey report.

Bracing For a Mass Strike in Greece

Hence Greece hasn’t been able to cater as effectively to modern demand patterns in tourism, such as integrated resorts, vacation homes, large ports for cruises, and marinas for yachting. That leads to an industry based on mass-market travelers rather than the affluent, and hence a loss in revenue: In Greece, tourists spend on average 146 euros ($200) a day, while in Turkey they spend 162 euros ($222) a day, and in it's Italy 200 ($274) a day.

McKinsey also takes aim at the power of unions in the country and the collective bargaining agreements struck over time. Greece, because of its location on one of the largest intercontinental routes, ought to be a good place for cargo port hubs. Yet the country is losing customers to Bulgaria, Turkey, and Romania, because they offer “better operational stability (e.g. fewer non-operating days due to strikes),” the report said.

Perhaps the most difficult hurdle for Greece to overcome, at least politically, is the size of the public sector versus the private sector.

“We cannot serve this huge public economy," said Chrysochoidis. "The small private sector cannot serve the huge public sector.”

That kind of talk, unheard of by a member of the government just six moths ago, will be welcome by the country’s leading business people.

In June, Dimitri Papalexopoulos, the head of Titan Cement, one of the largest publicly traded companies in Greece, said the country needs to reduce the size of the public sector, and “take a hatchet to this bloated system that pervades all economic activity, cut it down, reduce regulatory burden, (and) cut red tape.”

Civil servants occupying the Greek Finance Ministry building wave Greek flags and shout anti-austerity slogans in Athens on October 14, 2011. Greece's finance minister urged trade unions not to 'play with fire' as hundreds of angry taxi owners marched in Athens where strikes crippled transport and piled uncollected garbage in the streets. Public sector staff have regularly taken over state buildings in recent days to protest against a new round of layoffs and pay cuts adopted to trim the country
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The size of the public sector isn’t known for certain. For the first time, the government took a census of government workers and estimated the number at 800,000, but not all municipalities provided data. The Athenian Chamber of Commerce puts the number at 1 million.

Downsizing the public sector is going to be enormously difficult, because the mere notion violates a long-held social compact between the government and the Greek people. The Greek Constitution states that once you are an official government worker, you have a job for life. This rule is the result of a well-intentioned labor reform from early last century—at the time government workers were fired every time there was a change in the party in power.

The government's attempts to lay off a mere 30,000 workers out of 800,000 is already meeting stiff, and sometimes violent, resistance.

Wednesday, a massive two-day strike will get under way, in which thousands of government workers and union members are scheduled to descend on Parliament to protest the layoffs, as well as a new law that would effectively eliminate the mimimum wage and reduce the influence of collective bargaining agreements.

For the most part, the public sector has stopped functioning already: Garbage collectors have stopped collecting garbage; tax collectors have stopped collecting taxes; and the permitting office isn’t issuing permits. The city is set to run out of gasoline in a few days because workers are on strike. (These are known as “white strikes,” when employees go to the office but don’t actually do any work.)

Greek police officers stand on October 17, 2011 in front of the Panathinaiko Stadium during a demonstration in Athens. Greek sailors, customs officials and other government employees went on strike on October 17 and magistrates were to follow suit to protest cutbacks ahead of nationwide strikes this week. Greece's two main unions are staging a two-day general strike on October 19 and 20 to denounce the new government austerity cuts intended to resolve a debt crisis that has shaken the eurozone.
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The leader of one of the nation’s Communist parties refutes the notion that the government sector is too large. Alexis Tsipras, leader of the Syriza coalition for the radical left, says the government is just too inefficient.

McKinsey agrees: The report found that northern European countries have even larger governments relative to their sizes—however, they're far more efficient.

In addition to contributing to a lack of efficiency, giving government workers a job for life has led to another tough economic consequence — Greece has the lowest employment turnover rate in Europe, the sign of a stagnant economy.

It contributes directly to high levels of youth unemployment, which minister Chrysochoidis acknowledges: “Imagine that in Greece we have 45 percent of young people unemployed," he said. "It’s a defeat for Greece because the economy could not employ and absorb those people.”