Greece Should Give up Cash, Not the Euro

The problem in Greece has never been only about debt. Sure, Greece is living beyond its means with an unsustainable debt burden, but in large part the debt is unsustainable because Greece is so bad at collecting taxes.

Greece’s economy is a lot larger than it appears since so much of it is unrecorded. The London-based Institute for Economic Affairs puts the size of the Greek shadow economy at 24% of GDP, which is far higher than the European average and correlates to the equally high self-employment rate of more than 35% of the Greek labor force. However, in Greece the shadow economy doesn’t just involve shady activities like selling counterfeit handbags, but might even occur when someone goes to a doctor.

According to a University of Chicago Booth research paper, in 2009 the self-employed in Greece underpaid their taxes by some €28 billion. The researchers point to evidence such as that many in the professions, like doctors, lawyers, and accountants have monthly debt payments that exceed their reported monthly incomes. These absurdly high consumer debt ratios are just a fiction of course. Greek banks recognize that the self-employed grossly under-report their income, and the banks make them loans accordingly. The under-reporting is so extreme that many professionals with obvious and substantial wealth claim incomes of less than €12,000, a level at which no taxes at all are due.

Between these seriously under-reporting professionals and those who are counted as officially unemployed but who work for cash, the only ones paying official tax rates are salaried workers, who as a result have heavy and unfair tax burdens that make such work less desirable, compounding the problem.

The issue is so well-known that Germany’s finance minister, Wolfgang Schäuble, has made repeated offers to send Greece 500 German tax officers. Greece’s Prime Minster Alexis Tsipras of course recognizes the problem himself and said in Parliament earlier this year “The great struggle is the struggle against tax evasion, which is the real reason our country reached the brink.”

Going back to the drachma would not solve the problem, nor would creating a parallel currency, nor would staying in the Euro. The problem isn’t about which currency Greece uses, but how the currency is implemented.

The benefit of a cashless system is that payments and income could be much more easily tracked and taxed. To be effective, a digital currency would not be an alternative to cash, but would replace cash as the only way to make and receive payments for goods and services.

If Greece moved to digital payments, it wouldn’t even be the first country to do so. On December 24, 2014, the government of Ecuador established what it calls the first state-sponsored, digital currency. In fact, it isn’t a currency as much as it is a voluntary payment system, not unlike PayPal or Apple Pay.

Having given up its own currency, the sucre, in 2000 in favor of the US dollar, Ecuador is keeping the dollar, but is allowing its dollar reserve holdings to be represented digitally in payment accounts. Given that more than 40% of Ecuadorians are without bank accounts, this is seen as a way to increase economic efficiency. Further, while a digital payment system is not a cure for corruption, money-laundering, or tax evasion, having the ability to track economic activity is seen as better than the cash alternative.

Imagine for example, if even only Greek government payments were made digitally. These huge pools of funds for salaries, pensions, and government contracts would then be spent digitally, and traceably, on goods and services elsewhere in the economy. Revenue that previously went unreported deep in the shadow economy would now be a perfectly visible part of the system. Once corporate payments were added to the digitally visible realm, you would be capturing the overwhelming majority of the Greek economy. There would no longer be large supplies of cash to allow the minority, which many in Greece would say includes the wealthy minority, to evade taxation.

Moving to a digital Euro would certainly demonstrate to the European Central Bank, the IMF, and Greece’s harshest critics that Greece is serious about reforming its tax collection. A cashless Greece isn’t the entire solution, and it may be a solution with its own problems, but it could also be a way for Greece to increase the fairness of its tax system and raise desperately needed revenue.

While the concept of a digital currency may seem unlikely, it may be even more unlikely to think that we will still be using cash fifty years from now.

Claude Cicchetti is Program Director of Bentley University’s Masters in Finance and is also a Lecturer in International Finance. He was formerly head of Global Fixed Income at SBC Global Asset Management (now UBS GAM) in Basel, Switzerland.