Those Who Don't Learn from History

The first thing that I learned in business school is how to perform a case study analysis.  For those who have never read a case study, it is an example of a real life company that has been a smashing success or a colossal failure.  The student is then expected to analyze the case and document the best practices of the successful companies or look for lessons learned from the unsuccessful ones.  Harvard Business School has become famous for teaching via the case study analysis and it is now a staple of the business school and corporate worlds.

One place where this methodology is not applied is politics.  With elections coming up this year and politicians on both sides dusting off their ideology and rhetoric, I can’t help but wonder why no one is mentioning policies that have or have not worked in other countries.  More specifically, I wonder why no one is looking at Greece, which is in the midst of imploding economically, for lessons learned.

Since no one seems to be doing this, this post will serve as my own brief case study analysis of Greece’s current economic crisis.

Overview of Greece’s Economic Situation:

Greece just received its second bailout from the European Union (EU).  This bailout was required because Greece did not have enough funds to make the payments on its debt.  As of the writing of this post, Greece’s total public debt is approaching 175% of the size of its economy.  Long story short, Greece owes its creditors almost twice as much as its economy is worth.  This is an untenable situation and it is only a matter of time until the country goes bankrupt.

These economic problems are a direct result of two factors.  First, Greece’s debt load is growing.  This is happening because Greece routinely runs a budget deficit.  A budget deficit means that its government spends more than it earns.  Like any individual, household, or organization that spends more than it earns, Greece has had to offset its deficit with debt.  Over time this debt has grown into the monster that faces Greece today.

The second issue is that Greece’s economy is shrinking.  This is because Greece adds very little to the world economy in terms of value.  Its economic growth was dependent on increased government spending and consumption of imported goods, products, and services by its citizens.  Much of this consumption was financed with debt and, as the availability of debt dries up, the country is left with no more money to spend.  The key economic indicator of this issue is the massive trade deficit that Greece has.

Budget Deficit:
Budget deficits occur when a country spends more than it earns.  Greece’s budget deficit in 2011 was roughly $30B or 11% of the value of its economy.  There are two reasons for this budget deficit.

·         Greek citizens don’t pay their taxes:  It was estimated in 2005 that tax evasion amongst Greek citizens was close to 50%.  This statistic has improved slightly since then to about 40%, but the current Greek Finance Minister still estimates that the Greek citizens and companies owe the country close to $50B (€37B) in unpaid taxes.

·         Greece has one of the most elaborate welfare systems in the world:  Greece’s social welfare expenses accounted for close to 32% of its total expenditures in 2011.  This number doesn’t sound like much, most EU countries have about the same ratio, until you factor in that Greece only reports universal healthcare and pension costs.  Educational subsidies and other social program costs are not reported.  Also, the Greek retirement age of 57-58 is tied with Italy for the lowest in the world, so the government is providing those benefits for a higher proportion of its citizens’ lives.

When you combine the two points above, it is easy to see why Greece continually runs a budget deficit.  Its citizens have grown to expect the state to pay for a large amount of benefits without increasing (or even collecting) taxes to pay for them.  

Trade Deficit:

Similarly, Greece’s trade deficit issues stem from three main problems within the country.  These problems are:

·         Greece joined the EU:  By joining the EU, Greece joined a free trade zone.  This eliminated all trade barriers between the various European countries.  It also placed the Greek workforce in direct competition with work forces in other countries.  This became a problem for Greece and other EU countries because one of the world’s most efficient work forces is based in the EU: Germany.    

·         Greece joined the euro common currency:  By joining the euro, Greece became tied to a currency that was among the highest valued in the world.  This meant that it could no longer compete with other countries based on paying low wages like China does.  It had to either be more efficient than its competitors or go bust.

·        Peculiar Greek economic policies and regulations: Greece has some very usual policies that are aimed at protecting its industries and workforce.  Instead, they stifle growth and produce inefficiencies.  An example is: annual wage increases in Greece are not determined by the companies who pay them.  Instead, they are determined by negotiations between the state and trade unions.  The result is that Greek citizens have enjoyed close to a 10% raise every year for the past decade.

When combined, these three factors have made Greece incredibly uncompetitive from an economic perspective.  The result is that it is cheaper to buy goods produced in other countries than it is to buy domestic goods in Greece.  This means fewer jobs for the Greek citizens and has produced an unemployment rate over 20%.  It also means that the Greek economic decline will continue to mirror cuts in government spending since there is very little else in the country to drive growth.

Lessons Learned:

My big takeaway from this exercise is that all of the root causes of Greece’s economic meltdown are side-effects of running a modern democratic system.  This is because Greece politicians did all of the things that are politically popular in a democratic society.  They cut taxes, reduced the retirement age, increased government spending on social programs and pensions, and put in place numerous policies to protect the interest of trade unions and Greek workers.  Despite the popularity of these programs, Greece is failing.

The lesson learned from Greece is therefore that politicians in democratic governments have a responsibility to their citizens that is similar to the responsibility that parents have to their children.  They need to be the ones who tell the citizens "No", despite how unpopular that may make them.