The Greece model: May it forever rest in peace

Greece’s political and monetary future in Europe remains uncertain, even as the continent’s leaders rallied this weekend with the goal of starting new bailout negotiations with the embattled and indebted nation.

The threat of Greece leaving the Eurozone has loomed larger and larger in recent months, with the worst fears being that a so-called “Grexit” could trigger a contagion that infects the foundations upon which the European Union has been built.

Greece’s present dilemma can be summed up simply: Greece owes hundreds of billions of dollars to creditors and says it is unable, or unwilling, to pay that money back.

Though Greece (with a population of 11 million) is the reigning poster child for fiscal irresponsibility on a national scale, it is far from being alone in terms of governments grappling with hangovers from decades of overspending. For example, on this side of the Atlantic, the United States territory of Puerto Rico (population 3.5 million) has run up more than $70 billion in debt and is now lobbying the U.S. Congress to pass legislation that would allow the island to declare bankruptcy – a move to which the city of Detroit famously resorted in 2013.

Greece, Puerto Rico, Detroit and other political jurisdictions in similar financial straits share several common denominators. These are: The civil service grows in number until it is way out of proportion to the size of the population. The oversize civil service organizes into a singularly powerful special interest group that is able to negotiate overly generous pensions, healthcare and benefits packages that are locked in for the long term. Lawmakers must then raise taxes, cut back on services and, often, borrow massive amounts of money, just to preserve the agreed-upon arrangements and appease the civil service.

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(Note that the pattern described above is not purely a public sector paradigm – but, with the substitution of the appropriate terminology, also outlines what can happen over time to large private sector entities as well, such as American automotive companies, or, though we are loathe to admit it, American newspaper publishers.)

Let us now retreat from the outside world, and cast an introspective eye over the Cayman Islands. How are we doing in regard to these measures?

As of June 2014, Cayman’s public sector employed more than 5,800 people, about 10 percent of the islands’ population. That number has remained virtually unchanged since mid-2010, when government embarked on its period of “austerity” following the onset of the 2008-2009 recession. Since the 2011/12 budget year, the government personnel costs have grown from $213.3 million annually to $252.4 million.

In regard to pensions, the government seems to have contained a future crisis, thanks to abandoning “defined benefit” plans in favor of “defined contribution” plans for civil service workers hired after April 2000. The same cannot be said about healthcare, however, as the Cayman Islands National Insurance Company is on track to accrue some $1.2 billion in liabilities over 20 years.

On the debt front, our country’s lawmakers and taxpayers should spend a moment on bended knee each night at bedtime, out of gratitude for the firm-handed guidance from United Kingdom authorities, who thrust the Framework for Fiscal Responsibility upon Cayman’s budget writers in 2012. Thanks to Mum, the temptation to indulge in “credit card-fueled” spending sprees has been removed from our local leaders, and Cayman’s budget outlook has grown healthier every year since.

Beware, though, Cayman may no longer be required to gain U.K. approval for our budget, starting next year (which, we remind our readers, is the budget preceding the 2017 election). While some lawmakers have said they would like more freedom to stimulate the economy and construct capital projects – that, in our opinion, is the sort of political independence that Cayman is better off without.

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  1. While it is fair to raise concerns about government expenditure it is irresponsible to compare the Cayman Islands with Greece. The comparison indicates a clear lack of any in-depth understanding or historical perspective of the Greek economy and any true understanding of the economic impact that fiscal union has had on countries like Greece; especially when they are put together with a country like Germany.

    We can all agree that the Greeks are the main architects of their own destruction, but this editorial is clearly using the Greek crisis to over sensationalize the problems that we have in the Cayman Islands.

  2. Mack, that is correct. This is nowhere near as simple as the editorial tries to make out and involves fundamental issues about whether a faltering economy like Greece should ever had been encouraged to join the Eurozone in the first place.

    One the major problems this editorial skates round, albeit one that might conceivably have implications in the Cayman Islands, is the impact of irresponsible lending in the private sector on the Greek economy.

    Based on some of the material published about this crisis, the wide-spread tax evasion that hit public sector funding was probably at least in part caused by the fact that tax-paying individuals and businesses were struggling to pay off loans they probably should never have committed to in the first place. It was a classic case of boom and bust but here it happened in an economy that was already teetering on the edge of bust before the cycle started.

    The problem with this unregulated lending was that, thanks to the euro, the bulk of the borrowed money was spent outside Greece so very little of it went into the local economy. In a recent TV interview a Greek store owner admitted that 99 percent of the stock on their shelves was imported, something that they would never have done in pre-euro times.

    The whole currency change over has been a complete mess. Friends of mine had been visiting Greece every year for two decades because it offered them sensibly priced holidays. After the euro came in prices rocketed. They told me that basics like a cup of coffee went up from about 100 drachmas to 3 euros, a ten-fold increase, so they stopped going and I am sure that was no isolated incident.

    If you dig deep enough there are possibly messages for the Cayman Islands here but I can think of much safer ways to bash CIG than using the Greek crisis.

  3. The Greek Model?
    1) In Greece you are thought of as a fool if you pay your taxes.
    2) You expect a full salary pension after 25 years of work.
    3) The public sector work force is very large and very well paid.
    It is their job to collect government revenue to support this massive
    Pension scheme. They do a very poor collecting this revenue.
    Their economy is riddled with corruption and a total lack of support for buisness.
    No business wants to hire employees they can’t fire.
    It’s a recipe for economic unstability and is not sustainable. Greece was the bargin vacation
    Destination. Germans, Brits, & Americans used to flick to the Greek Islands. Raising the VAT will destroy this stream of revenue. Greece should go back to its old currency.
    It will mean years of pain and devaluation but will be better in the long run.