With another election set to take place this Sunday in Greece, it’s worth having another look at that country’s desperate need to get its public finances in order—and, for purposes of illustration, at one example of the kind of policy that won’t help it turn things around.
The fact that Greece’s main creditors wished to impose certain measures in exchange for yet a third bailout this summer is hardly surprising. Creditors always lend their money on certain conditions, which may vary depending on the perceived financial health of borrowers.
And Greece, to put it mildly, has seen healthier days. Over the past 25 years, the Greek government has registered budgetary deficits averaging 9.5% of GDP—nearly three times the eurozone average.
The cumulative result is that today, the country’s public debt amounts to over 177% of its GDP. This path was clearly unsustainable, and the Greek people are now paying the price for their government’s largesse.
As for the country’s international creditors, they are not, of course, responsible for the choices made by the Greeks. They are, however, responsible for their own decisions to lend to a government that was never willing to reform itself. And some of their latest imposed measures—like higher taxes for Greek shipping—risk doing more harm than good.
The shipping industry is tremendously important to the Greek economy. According to a 2013 Boston Consulting Group report, the Greek-owned fleet ranks first in the world in total capacity with over 4,000 ships, which represents 16% of worldwide cargo capacity.
The sector employs around 165,000 people, representing 3.5% of the country’s total employment, and contributes some $13.4 billion to Greek GDP, or 7% of the economy in 2012.
Up until now, ships flying the Greek flag have enjoyed special fiscal treatment, and were taxed according to their tonnage.
Under the latest agreement between the government and its creditors, though, Greece will be required to phase out this special tax treatment, and the tonnage duty rate will be increased. And from a certain point of view, it may make sense to demand that wealthy shipping magnates pay their fair share.
One problem with this line of thinking, however, is that shipping is a sector that is truly globalized. Ships and corporations can leave their current tax jurisdictions at the drop of a hat, and there is intense competition between countries in terms of providing the best tax incentives for the lucrative shipping business.
Already, several countries are openly courting Greek shipowners in the wake of these announcements: first Cyprus, then Singapore and England, and now Dubai and even Canada’s west coast maritime hub of Vancouver.
Even if relocating were not such a live option for the businesses concerned, the fact is that raising taxes on one of the few sectors in which there is some actual vitality and vigour is the wrong way to jump-start an economy. Yes, the Greek government has to learn to live within its means.
But this “austerity” through higher taxes is just a way to shift the burden of austerity onto taxpayers, which will further depress economic activity that is already moribund.
It is the government itself that needs a strong dose of austerity, which means tightening its own belt—in other words, cutting public spending.
In fairness, the bailout deal also includes some commitments to curtail spending and requirements to simplify the tax code, which are the kinds of measures that Greece needs. But it also contains far too many of these tax increases that risk taking the remaining wind out of the Greek economy’s sails.
Michel Kelly-Gagnon est président et directeur général de l'Institut économique de Montréal. Il signe ce texte à titre personnel.
* The author wishes to thank Michael Iakovidis, of the Greek Liberal Monitor, for his insights on the Greek shipping industry.