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george papandreou keynote speech

This is an extended version of the speech that appeared in the paper edition of the magazine. It includes sections on the Greeks’ willingness to pay tax, and the interesting solution Papandreou found for dealing with corruption in the medical profession. For those who just want to read the extra material, it is on the third page under the headline: ‘Paying taxes’.

George Papandreou comes from a political dynasty – his grandfather and his father were both prime ministers of Greece and he was brought up with a sense of social and political responsibility. In his early political career, he distinguished himself in his fight for human rights and as the minister for foreign affairs was largely responsible for the rapprochement of Greece and Turkey.

However, his final political job was far less attractive – he became prime minister of Greece in October 2009, in the middle of the debt crisis. He resigned two years later, crushed between the demands of Brussels and the anger and frustration of his own people. 

“Europe is being sorely tested, and we can think of it as oscillating between two Greek myths. When asked to take protection and for Greece to be under the support mechanism, it is like the Odyssey: we will meet monsters and be tempted to abandon our journey for mirages or beautiful sirens but, if we stay the course, we will make it to our Ithaca.

“However, many Greeks and fellow Europeans feel it is more like the Sisyphus myth where the punishment is to push a stone to the top of a hill, only for it to just roll back down and we have to push it up again and again and again, because it continues to roll back down forever.

“My decision was to stay the course, despite the political costs and, as I said at the time, my success will not be measured by simply remaining prime minister.

“Well, what is that measure? Over the past three years we’ve had both successes and failures. We’ve applied remedies but we’ve also misdiagnosed some of the problems. So let me lay out what I would see as two or three of the wrong narratives which I think need to be changed.”

Re-writing history

“Three years ago, on March 7 in 2010, I visited France under very different circumstances, I talked to the then-president Nicolas Sarkozy. My mission was to rescue Greece from imminent default. A few months earlier, my party had won the elections on a landslide victory. I campaigned with the slogan that was very simple – either we change or we sink.

“Just before the election – actually three days before the election – the government had reported a deficit of 6%. Upon taking office, I was shocked with what I found. I immediately reported publicly that I had found the deficit to be much higher, closer to 12.5%. Actually, it was even higher. It ended up being 15.6%.

“Some have criticised me for going public. But I think this is a naive criticism. First of all, this would have been a very short-lived lie. Sooner rather than later this would be uncovered and had I tried to hide it, any credibility that Greece and my government had would have been wiped out completely, and I would, of course, have been complicit. Secondly, the EU authorities were already asking for a full review.

“But most importantly, going public was for me the proof that we were ready to change, because I felt that the deficit and debt was only the tip of the iceberg of the problem. Underneath were real structural problems. And I felt I was given a mandate of change by a nation which was tired of the inefficiencies, the injustices, the cronyism that was the problem. Inefficient public administration, loaded bureaucracy, lack of transparency, patronage politics, corruption.

“These phenomena were sapping our energy, and our resources as a society, even our competitiveness. And this had to be changed.” [Article continues below]

Punishment ratings

“However, rather than being rewarded for this new attitude, Greece and I took quite a beating in the markets. Rating agencies were the first to react. I don’t know what your view of rating agencies is, but what I saw was that simply they were going with the flow.

“Greece was rated AAA at a time when everyone knew there were some deep fundamental problems in the Greek economy. And as soon as the government came out and said we’re ready to change, and here are the facts, we were continually downgraded.

“Let me just give you two perspectives, two leaders: Sarkozy and Angela Merkel. I have my differences with Sarkozy, but he did plead for a strong European response. He said: ‘I told George Papandreou the eurozone must always stand by a country that faces speculative attacks. Today that country is Greece, tomorrow it might be another country – so my position is absolutely clear; you must have solidarity with the other eurozone members otherwise what’s the point in having a monetary union?’

“Actually, a few days before I had visited Sarkozy in March 2010 I had visited Angela Merkel in Berlin. She too, of course, understood the need for support but in a very different way. I had already taken unprecedented measures in Greece, even before we entered the support mechanism, and this I did with the cooperation of the Commission and the IMF, and the programme was approved by everyone. So I had been led to believe that I would have the full backing of the German government.

The German angle

“According to Berlin, I said to Angela: ‘OK, we’ve done what was necessary, I need a strong statement to calm the market fears. Say that you will back Greece if necessary, a sense of a guarantee. No money upfront but a sense that there’s a guarantee there’.

“Her answer was: ‘Well, this was a great programme but you don’t need my support other than just a general support, the markets will understand and soon everything will correct itself’. I responded to her that this was very risky. The markets were still in deep fear after the 2008 crisis, we had Dubai which was then calmed by the Emirates, and I said if we didn’t take action and we didn’t show the markets that we were ready to take action, then the problem could spiral out of control and the costs would be much higher for everyone. And that’s actually what happened.

“Now why did she take such a stance? First of all, there was a belief that markets are omniscient, they will simply do their job. Secondly, a sense of moral hazard, not to make it too easy for the Greeks as this would give a wrong example. And third, there was a sense of punishment – you guys made a mess of things, you are going to have to suffer. Fourth was a sense I think at some point that this might be a blessing in disguise: let’s get these southerners in line – we’ll use the market forces and we’ll really pressure them into changes. And of course a fifth was local politics.

“However, what this meant in practice was quite simple. While in dire need of support in order to make the changes, Greece would be saddled with even greater pressure, greater burden and greater pain. And this in the end would endanger the programme itself.”

Downward spiral

“Let me give you an example: our debt sustainability. When we eventually entered the support programme we were given loans with very high interest rates and this therefore made servicing our debt even more difficult. This was seen by the markets and they said that the programme would fail. So they continued to mistrust the programme and mistrust Greece.

“My response then had been we need better terms so we can achieve debt sustainability, and I said that we were paying higher interest rates than countries outside the eurozone who were getting loans from the EU such as Romania, Hungary and Lithuania. So in fact we were being penalised simply for being part of the eurozone.

“When I called for a referendum, one of the basic reasons I did that was not to stay in or out of the euro, it was basically to ask: do we want to move forward and make these major changes?

“I had a lot of opposition – not just from the demonstrators, but the media, banks, powerful trade unions and so on. There were a number of very strong vested interests that were against us. So I said: ‘I want to ask the people’.

“Why did Merkel not publicly back me? I think that was sort of more out of courtesy to Sarkozy. I had talked to her earlier, some months earlier, I’d gone to Berlin and I had said: ‘Listen, I’m thinking of a referendum as a possibility’. I talked to Juncker about it, I talked to Rompuy about it, I talked to Barroso about it, I informed the Élysée, I hadn’t talked to Sarkozy personally about it, but everybody understood that this might be a possibility.

“Merkel said: ‘You know I’m thinking of a referendum in Germany too – but if you do it, do it after the debt agreement’. I came back on 27 Oct with a huge haircut and a €100bn bailout programme – but the opposition called me a traitor to my country and I realised that I wouldn’t be able to convince my parliamentary group to continue reforms if I didn’t have a wider consensus.

“There were two ways of getting that consensus. One was a coalition government and the other was a referendum directly to the Greek people. Actually, I think the referendum would have been even better because if they people had said ‘Yes’ then all the extreme groups who claim to speak for the people would have been undermined.

“When I got back, everyone said that I’d made a terrible agreement with Brussels and that I was a traitor to my country. But as soon as I suggested a referendum, everybody switched and said that I was endangering this amazing agreement.

“At that point we polled and it was 40/40 – 40 in favour, 40 against. I think had we had a little time, which was a month, to explain what this was, and really put the dilemma to the Greek people we would have won. And I think the elections that came afterwards bear that out. Because in fact even though – and these were party elections – the parties that won were the ones that said we must continue on this programme and stay in the euro. So that was the majority that won. But I think we would have had a much more resounding victory through a referendum.”

Should Greece exit the euro?

The room was polled and the result was 62% in favour of Greece remaining in the euro.

“Well, at least that’s better than it was a few months ago! We’re improving.

“If we don’t move toward a banking union, a fiscal union, all that has actually been discussed, then I think there will be a wider question about how the euro will survive. And, of course, there have been all kinds of suggestions: two euros; Germany exiting the euro; Greece exiting the euro. But if Greece exited the euro, then what would happen is sooner or later, another crisis anywhere, even today or tomorrow or down the road, people would say well, if Spain is a problem maybe they should exit the euro too.”

Political comeback?

“Well in my own mind after three years of politics I am enjoying this break! In any case, I’ve never seen politics as a goal in itself. When I was prime minister, my goal wasn’t to be prime minister but to change the country. When you talk about a political dynasty and I go back to look at my grandfather and my father, what they did in their lives, they were always fighting for a better country, and for democracy.

“My grandfather died during a dictatorship, and he was called the Old Man of Democracy because he had gone to jail six times in his life and my father was exiled and jailed twice. I lived through dictatorship, I had a gun held to my head when my father was arrested to reveal his hiding place, so this is not sort of a simply a royal kind of a handed-down thing, this is a real struggle for change in Greece. Now where it takes me, no one knows. But it’s been an interesting odyssey.”

That was the end of the feature as it appeared in the Expert Investor Europe Pan-European Congress Special Edition. However, due to limitations of space, we missed out:

Paying taxes

“Many people say of course, Greeks don’t pay taxes. Well, that’s not actually true. According to KPMG tax revenue in Greece as percentage of GDP is 6% higher than the US. But there is a problem. The problem is that this burden is unequally distributed. That’s why we needed time to deliver fundamental changes in the actual system of the tax services.

“So massive tax hikes across the board which were demanded by our creditors as a condition of the bailout, have actually made it harder for tax reform. It increased the sense of injustice and inequality, because of the tax system which was lacking and even partially corrupt.

“Let me just give you some numbers, according to the government figures in 2010 there were fewer than 5,000 Greeks declaring income over €100,000. The finance ministry released figures that said that 56% of self-employed people in Greece declared income below the tax-free ceiling of €5,000. Out of 347,304 self-employed people, only 2,443 of them declared income above 100,000 euros.

“So the problem was very much that wealthy Greeks siphoned their money offshore, or tax havens, while hard-working taxpayers were hit harder with income tax, fuel tax, VAT and property tax.

“As a matter of fact, I think I had much more opposition which was not so apparent from this sort of oligarchic and wealthy parts of Greek society.”

Polar opposites

“But why do I make this point? Because if we look at the countries that are now in adjustment programmes, for those such as Italy and Spain, we need to differentiate between austerity and reform. I think this is very key in how we move forward. For example, Financial Times writer [Wolfgang] Münchau on Italy says: ‘austerity and reform are the opposite of each other. If you are serious about structural reform it will cost you upfront money. These costs may outweigh the financial benefit of reforms in the short run, but the reforms will still pay off in the long-run.’

The doctor problem

“So this was much more a structural issue than it was an issue of simply cutting costs and austerity. I’ll just give you a short story to highlight this. We knew there was corruption in the health sector. Doctors getting kickbacks from pharmaceutical companies for prescribing extravagant and very expensive treatments and medicines.

“We didn’t really know how to deal with this and finally we came up with the idea: why don’t we put all prescriptions online? And let’s do a pilot project with one of the public funds, the pension funds, to see how we can organise it.

“When we announced it, the ministers came to me and said it wasn’t going to work, and I said why? And they said ‘doctors don’t know how to use computers’. I said well, it was lucky their contracts were up, were going to be renewed, and I said ‘only hire those who know how to use computers’. In two weeks, 95% learned to use computers. And we saved 30%, we cut costs by 30% in medicine.”

A Southern problem?

“But there’s a second false narrative which still lingers, which is that this started as a Greek problem, then a PIIGS problem. These lazy southerners, punished for their profligacy. Well let me go and ask a question here, what your perceptions are, if you were to put Greece on a scale compared to all other countries in the European Union, would you put them on the number one lowest, as far as working hours are concerned, that is the pure working hours, would you put them in the middle, about average working hours in the European Union or would you put them at the top of the working hours in the European Union?

“We actually are number one in working hours in Greece. That means we don’t have to stop drinking Ouzo and we don’t have to stop dancing Zorba! There are other problems in Greece of course, but not that they are lazy.

“Another problem is that the Greeks aren’t reforming. That is untrue – we have slashed government spending and red tape, opened up dozens, hundreds actually of closed professions, put checks and balances in place to make our public sector more productive.

“We’ve been changing the tax system quite a bit, to open up accounts if necessary – we confiscated 550 yachts the first year – we overhauled our pension and health care systems, education systems, we cut our budget by 6.5%. If you put that in terms of, let’s say the US budget, that would be $1trillion in two years.

“We’ve recovered 50% of our competitiveness lost under the euro, our current account balance is the lowest that we’ve had under the euro, and we expect to have a primary surplus this year. In 2013, our exports are record high, we’re opening up to new markets for sectors where we have natural competitive advantage, high quality tourism, our Mediterranean diet, reorganising our agriculture, renewable energy and a booming tech sector.

“Also, now that the risks have receded from the so-called ‘Grexit’, we have quite a few countries coming to invest. Qataris who had left who are coming back to invest in Greece, Hewlett Packard signed a deal with a Chinese shipping company COSCO, they have invested in our port of Piraeus as a hub for Europe, for China but also for India and the Gulf states to the European market.

“Exports in particular hit a record of €24.5bn in 2012, in 2009 they were only €14.4bn, a 70% rise. And the current account deficit in 2012 was 2.9% – compared to 15% in 2008.

“Recent reports from Berenberg Bank and Euro Plus Monitor – plus the OECD report last November all put Greece as the number one reformer compared with all other OECD countries. Now of course we have quite a distance to walk, but we are making those changes.”

Dylan Emery

Dylan Emery is the group editorial director of Last Word. He is one of the founders of the company and he created International Adviser, Portfolio Adviser and Expert Investor. His primary responsibilities...

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