A financial tour of two ancient civilizations

Photo: Moyan Brenn / Flickr

Rome and Greece dominated Europe and much of the known Western world for hundreds of years, and it is interesting to see how they have progressed in the 2,000 years since then.

Our financial tour starts in the former Roman Empire. During the last New Year’s holiday, the new Italian government sent some of the employees of its national tax authority to Cortina d’Ampezzo, the exclusive ski resort in the Dolomites that is the winter playground of Italy’s rich and famous. They were not sent as a reward for a job well done. In fact, a recent government study estimates that tax evasion in Italy amounts to 275 billion euros a year, or 17.5 percent of the country’s GDP.

The tax inspectors simply walked around the snowy streets and noted the license plate numbers of the Lamborghinis, Ferraris, Maseratis and other expensive cars. They then went back to their office and looked at the income tax returns of the owners. They found that nearly one-third of the owners reported annual incomes of less than 22,000 euros. It is amazing how much a frugal Italian homemaker can save from the housekeeping money.
The winter vacation for tax inspectors was so successful that the government is planning to send their inspectors for summer vacations in exclusive resorts such at the Costa Esmeralda in Sardinia and Capri. The sports car drivers in Cortina are not alone. Apparently two-thirds of Italian taxpayers report annual incomes of 20,000 euros or less, but manage to buy nearly 200,000 high-powered sports cars, 42,000 yachts, and over 500 aircraft. An interesting side effect of this new tax focus is the sudden desire of owners to sell low-mileage used Ferraris and buy Fiats. Economists have estimated that if Italy had enforced its tax laws as well as the U.S. or U.K., its current national debt would be cut by one-third.

The next stop on our financial tour is Greece, the cradle of democracy and the birthplace of modern mathematics. In the 1980s and 1990s, the Greeks did not have consumer credit loans or credit cards. Because they were considered poor credit risks, their interest rates were often much higher than Northern European countries. In the late 1990s, the Greeks looked at the Germans with envy and saw a chance to be treated like the rest of the adults. All they had to do was get rid of the drachma and convert their currency to the Euro.

In order to be admitted to this club, they were required to meet certain targets. They needed to have budget deficits under 3 percent of their GDP, which was a major problem. But they tackled the problem in the same way as they tackle their personal income tax returns – they lied. To improve their balance sheet, they simply removed all sorts of government expenses such as defense and pensions from their books. To show a temporarily lower inflation rate, they arbitrarily froze prices for electricity and water and cut taxes on gas, alcohol and tobacco. To make the consumer price index look lower, they removed high-priced tomatoes and lemons from the index and replaced them with oranges. Lastly, they only recorded about half their actual borrowings.

This was the kind of mathematical sleight of hand that would have made Pythagoras and Euclid turn in their graves, but it was convincing enough for Greece to be admitted to the European Monetary Union in 2001. In order to stay in the eurozone, the Greeks had to maintain budget deficits less than 3 percent of GDP. To achieve this, they turned to those modern mathematical financial marvels – Goldman Sachs. For a reported fee of just $300 million, Goldman Sachs temporarily removed $1 billion of debt from the Greek books and taught the Greek government how to take future receipts from highway tolls, airport fees, and the national lottery and sell this future income stream at a heavy discount for cash that would help balance their books. They even capitalized future loans expected from the European Union to show sufficient current assets to justify the very loans that they
had just capitalized.

Government management of the Greek economy makes the Italians look efficient. The state-owned railway has annual revenues of 100 million euros, but a wage bill of 400 million and 300 million in other expenses – for an annual loss of 600 million euros. Jobs in the state railway are jealously sought patronage positions – paying an average of 65,000 euros a year. Tax collection is worse than in Italy. Two-thirds of Greek doctors reported annual incomes of less than 12,000 euros – hardly enough to pay for the maintenance on their swimming pools.

When the inspectors from the International Monetary Fund and the European Central Bank finally arrived in 2010 to inspect the books, they could not be-lieve their eyes. The total debt was $1.2 trillion, which is more than $250,000 for each working Greek (of which there may not be many). They had no way of tracking actual expenses and they found 17 government departments that were not even recorded in the budget.

When the new Greek government announced the austerity measures demanded by the European Union as a condition of the proposed bailout, the Greeks took to the streets. The focus of their anger was Germany. The apparent logic was: even though we lied on our membership application, once you have admitted us to the club it is not reasonable to ask us to obey the rules.

At least the European debt crisis has given rise to some ironic humor. For example, Greece appears to be heading for a double-dip recession – sales of taramosalata and tzatziki have both fallen.

And the joke that appears to sum it all up:

A Greek, an Italian and a Spaniard go into a bar and order a drink. Who picks up the bill?

Answer: The German.

Alan Silverman can be contacted by e-mail at [email protected].
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