Anna Visvizi is an associate professor at the American College of Greece.
On 1 August a long-awaited VAT reduction (from 23% to 13%) for hotels and restaurants was introduced raising hopes for the revival of this sector in the peak of the holiday season.
At the same time, the Troika of Greece’s creditors remain sceptical about this measure arguing that the VAT reduction constitutes a risk to the fiscal consolidation programme. This argument is representative of a set of wrong assumptions underlying the way the crisis in Greece has been addressed since 2010; a malicious false logic as a result of which the Greek economy was ruined.
At the core of this logic lies the assumption that by increasing taxation, the economy will be fixed. This is obviously an awfully wrong assumption! Rather than liberalising the economy and reducing taxation so that the market mechanisms can re-start and the government revenue can increase; and instead of downsizing the public sector so the government expenditure is slashed, the Troika of Greece’s creditors is oblivious to that.
On the contrary, preoccupied with fiscal consolidation targets agreed back in 2010, the Troika keeps the current government hostage to politically driven commitments of previous governments, effectively blocking efforts at restoring growth in Greece.
Prime Minister Antonis Samaras had to make several personal pleas to the Troika for them to allow him and his government to proceed with the VAT reduction.
After a nearly year of Samaras’ efforts, the Troika finally agreed to decrease the VAT level but only for a limited period.
This shows how surreal the situation in Greece is. The government wants to move towards reforms, yet the Troika – insisting on numbers rather than on reforms – blocks the government.
As a result, four years into the crisis, the public sector in Greece remains untouched and the private economy is ever more squeezed by new regulation and immense taxation. The result is more than 1.5 million of unemployed originating solely from the private sector.
This translates into an exorbitant unemployment rate of above 27%, the highest in the EU. Europe used to be a free-market economy, at least in line with the 1993 Copenhagen criteria defining the EU membership conditions. In light of what is being done to Greece, is the EU still a free-market economy?