64 Finance & economics The EconomistOctober 5th 2019
2 zone crisis, borrowers defaulted, saddling
lenders with bad debts. A bank run in 2015
led to a liquidity crunch and capital con-
trols. The last of the controls were lifted
only in September. Gross non-performing
loans (npls) have fallen by a quarter since- But they still amount to €80bn, or
45% of exposures. As banks have been
forced to make provisions for these assets
and deprived of income from interest,
lending has seized up. The stock of credit
has shrunk every year since 2010, starving
productive projects of capital.
Mr Mitsotakis wants to lower the npl
ratio to single digits by 2021. That would
imply a big acceleration in the pace of reso-
lutions. He plans to copy Italy, where banks
securitise bad loans with government
guarantees. But that alone is unlikely to be
enough to do the job.
Even if businesses could access credit
easily, a thicket of regulations deters ex-
pansion. It keeps foreign investors out,
too: the stock of inward direct investment
relative to gdpis much lower than in the
rest of the eu. The government is trying to
improve Greece’s image. One investor re-
counts how a friend who complained
about red tape on Facebook was rung up by
a senior civil servant promising to solve the
problem. A lawyer recalls being phoned up
late on a Saturday by a minister inquiring if
the approvals he needed had been received.
The first hurdle businesses face is regis-
tering property, which, according to the
World Bank’s “Doing Business” report, is as
complicated in Greece as in Somalia. Some
of the delays at Hellinikon, for instance,
were because of uncertain land-use desig-
nations. The country has begun work on a
land registry. But it is already delayed, and
resolving any ownership conflicts uncov-
ered along the way will take years.
Others require root-and-branch reform.
Most businesses will become ensnared in
litigation at some point, says Alexios Pa-
pastavrou of PotamitisVekris, a law firm,
because starting legal action is largely cost-
less, and judges will hear even frivolous
cases. Disputes that have supposedly been
settled can be reopened: he recounts a case
where former employees sued their em-
ployer, even though they had signed a deal
outside court. The courts are clogged up.
On average, resolving a business dispute
takes over four years.
By far the biggest complaint from busi-
nesses, however, is about high tax rates.
Alexis Pantazis, co-founder of Hellas Di-
rect, an online car-insurance platform that
operates in Cyprus and Greece, says that
more than half of gross pay goes on taxes
and social-security contributions. The re-
sult is that the cost of workers is 30-40%
higher in Greece. It therefore makes sense
to locate senior staff in Cyprus whenever
possible. That is dismal news for a country
already suffering from brain drain. Accord-
ing to Ms Muehlbronner, the number of 25-
to 34-year-olds shrank by 380,000 between
2010 and 2018—equivalent to 6% of the
workforce—mostly as they left the country
in search of better fortunes abroad.
Mr Mitsotakis says most of the reforms
needed are “win-win”. The budget will in-
clude corporate- and income-tax cuts, and
he hopes that the euwill grant him some
fiscal space to do so.
But austerity alone is not to blame for
high tax rates. They also reflect choices
made by successive governments. Al-
though the rates of income and value-add-
ed taxes are higher than the euaverage as a
share of gdp, the revenue collected is low-
er,thanks to what the imf tactfully calls a
“weak payment culture”, and a narrow tax
base. The gap between the expected rev-
enue from value-added taxes and the actu-
al sum raised was around 30% in 2018. The
tax-free threshold for income tax is set at
60% of average pay, nearly three times the
euaverage. The result, says Miranda Xafa
of the Centre for International Governance
Innovation, a think-tank, is that over half
of Greeks pay no income tax at all.
Mr Mitsotakis has shown little interest
in widening the tax base. Instead, like sev-
eral predecessors, he has set up a tax-am-
nesty scheme, allowing taxpayers who
come clean about past underpayment to
pay their arrears in instalments in order to
boost revenue. But such schemes perpetu-
ate the weak payment culture, says Ms
Xafa. Taxpayers wait for the next amnesty,
rather than coughing up straight away.
On the spending side, better-targeted
benefits could make growth more inclu-sive. The imfpoints out that Greece spends
more on government wages and on old-age
pensions, as a share of gdp, than the aver-
age euro-area country. Meanwhile relative-
ly little is spent on benefits for the young
and the unemployed, who are more likely
to be poor. In the run-up to the election the
previous government worsened the imbal-
ance when it restored the pre-crisis prac-
tice of a bonus “13th month” pension.Hermes be my guide
Mr Mitsotakis’s government is still in its
honeymoon period. Businesses are de-
lighted by an avowedly centre-right ad-
ministration. Economic sentiment is at a
12-year high. Investors are bullish: the gap
between Greek ten-year bond yields and
those on German bunds has halved since
the start of the year. It is easy to imagine
that optimism starting a virtuous cycle. As
the economy grows, reforms become easi-
er. Being brought into the tax net is less
painful when your pay is rising. Similarly,
rebalancing public spending by ratcheting
up working-age benefits at a higher rate
than pensions would be more politically
palatable than making cuts to pensions.
But if fixing a country were easy, Greece
would already have caught up with the rest
of the eu. And a government’s honeymoon
period can be wasted—particularly when
the payoff from many of the needed re-
forms will take years—much like the com-
pletion of building work at Hellinikon. Mr
Mitsotakis’s government has managed to
get Greece’s economy as far as the runway.
What happens next will determine wheth-
er it finally takes off. 7Greekbanks,grossnon-performingloansHydra-headedSources:IMF;HaverAnalytics;DatastreamfromRefinitiv;BankofGreeceGreeceGeneral government budget balance,%ofGDP 2007=100Ten-yeargovernment-bondspreadsover
GermanBunds,percentagepoints €bn %ofexposuresFORECAST-16-12-8-4042004 10 15 20 240204060801002007 09 11 13 15 18GDPFixed investment2009 11 13 15 17 19010203040502004 06 08 10 12 14 16 190204060801001200102030405060