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How Corruption Costs Southern Europe

Former International Monetary Fund chief Rodrigo Rato (L, behind) leaves after testifying in a trial at the High Court where he and some 66 executives and former board members of Bankia and its founding savings bank Caja Madrid are accused of illegally spending 12 million euros ($13.48 million) for personal use on so-called "black cards" between 2003 and 2012, in San Fernando de Henares, outside Madrid, Spain, October 4, 2016. REUTERS/Susana Vera
Former IMF chief Rodrigo Rato leaves after testifying in court outside Madrid where he and 66 former Spanish bank executives are accused of illegally spending €12 million for personal use.
  • Why it matters

    Why it matters

    Despite legal reforms and a rising number of cases going to trial, South European countries are still being held back corruption. Studies show that more corruption means less investment, and therefore lower economic output.

  • Facts

    Facts

    • The Spanish bank Bankia had to be rescued from insolvency in 2012 with €22 billion in European financial assistance.
    • The Spanish Antitrust Agency estimates that awarding public contracts to friends of politicians costs the country €48 billion per year because of lack of competition among bidders.
    • Spain, Greece and Italy rank in the bottom third of Transparency International’s corruption perception index.
  • Audio

    Audio

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Managers and supervisors at the Spanish bank Bankia had a good life. They were issued company credit cards to send with apparently no monitoring.

On a single day in March 2011, Bankia’s former chief executive Rodrigo Rato, previously Spanish economics minister and head of the International Monetary Fund, used his card to buy alcoholic drinks worth €3,547. Altogether he charged €99,000 to the card.

His predecessor, Miguel Blesa, used his card to spend €9,000 on a single night at the Ritz Hotel.

“Germans consider public resources to be common property, which should be respected. Spaniards proceed from the premise that public assets belong to no one – and hence are available for all to take a piece of. ”

Monica Oltra,, deputy governmental head of Valencia

From 2003 to 2012 the credit cards cost the bank about €15 million, or $16.8 million. In the meantime, Bankia went bankrupt and had to be rescued in 2012 with €22 billion in European financial assistance.

Mr. Rato and 64 others went on trial in Madrid on fraud charges at the start of last week. This week, Mr. Rato claimed in court that using the credit card was legal and constituted part of his salary. But state prosecutors are calling for four and a half years in prison.

The case is one of the many corruption scandals filling Spanish courtrooms this fall. In all, 3,000 persons stand accused.

One of the biggest scandals, the so-called Gürtel case, came to trial this week after years of investigation. The name is a reference to the alleged ringleader, the lobbyist Francisco Correa, whose last name translates to “Gürtel” in German or “belt” in English.37 defendants are charged with bribery, money laundering or tax evasion, including leaders of the conservative ruling People’s Party (PP) and a circle of prominent businessmen. Mr. Correa’s events firm is said to have organized exclusive events for the PP for years, and to have offered bribes in order to set up opaque real estate deals.

The many corruption scandals in Spain are concentrated in particular around the PP, which has been in power for 12 of the last 20 years. That makes it difficult for the right-wing party to form a government, because other parties don’t want to enter a coalition with PP head Mariano Rajoy, who many blame for the misdeeds.

And Spain is not the only country rocked by corruption scandals, which are also widespread in Italy and Greece. The three Southern European countries rank in the bottom third of Transparency International’s corruption perception index. Compared to the corruption-plagued countries of Eastern Europe, these countries have long been E.U. members.

This lamentable state of affairs is proving expensive for Southern Europeans. Studies show that the more corruption means less investment, and therefore lower economic output.

The Spanish Antitrust Agency estimates that awarding public contracts to friends of politicians costs the country €48 billion per year, or 4.6 percent of gross domestic product, because of lack of competition among bidders.

The roots of Southern Europe’s courruption problem lie in a culture that often mixes friendship and business, as well as a lack of criminal prosecution.

“In Southern Europe, relationships are strongly based on trust,” said Monica Oltra, deputy governmental head of Valencia, a stronghold of corruption in Spain. “An entrepreneur tends to hire someone he knows instead of an applicant with an excellent résumé.”

That frustrates those aspring to success on the basis of their performance. 40 percent of young Greeks emigrants cite “corruption and a lack of recognition for talent and achievement” as a reson for leaving.

In Greece, a common practice is to offer “fakelaki” — or little envelopes filled with bank notes. They are handed over in state hospitals in order to move up operation waiting lists, for example, or at tax offices so tax returns won’t be examined so thoroughly.

In Italy, corruption is a fact of daily life, as evidenced by the Mafia. Every politician or government official who allows his palm to be greased, or who pays bribes himself, opens the door for organized crime.

Southern Europe also has a different notion of public assets.

“Germans consider public resources to be common property, which should be respected,” said Ms. Oltra, who grew up in the Rhineland and is among the best-known fighters against corruption in Spain. “Spaniards proceed from the premise that public assets belong to no one – and hence are available for everyone to take a piece of.”

As a result, recipients of bribes often feel no guilt.

José Luis Peñas, a former city councilor who helped uncover the Gürtel scandal in Spain, said “no one thought he was stealing money. They thought, “We’re doing it for the party, so it can’t be a bad thing.’”

In Italy too, a sense of wrongdoing is often absent. The problem of corruption there is culturally underestimated, said Raffaele Cantone, a former magistrate from Naples and headf of a new anti-corruption agency. Moreover, slow Italian bureaucracy frequently hinders companies’ work and sometimes drives them to bribery.

In all three Southern European countries, tough punishments to deter corruption have been lacking for years.

Italy also has a slow judicial system. Verdicts only go into effect after three courts of appeal have had their say. Former Prime Minister Silvio Berlusconi, accused of corruption in several legal proceedings, is among those to have benefitted from gaps in the system.

According to Italy’s Chamber of Deputies, 10 percent of cases are abandoned because of the statute of limitations. The Italian parliament is currently debating legal reform that would see the limitation period in corruption cases extended to as much as 15 years, and suspended for three years during appeals. The anti-corruption laws follow on the heels of sucessful anti-Mafia legislation.

Spain and Greece have also undertaken reform. Greece revised several laws in 2012, and significantly raised penalties for accepting bribes.

High profile cases, like that of former Greek Defense Minister Akis Tsochatzopoulos who was sentenced to 20 years for accepting bribes, have sent a signal. Accusations  of bribery are given scheduling precedence by the courts, and Prime Minister Alexis Tsipras has appointed a deputy justice minister to fight corruption.

Ever since the economic crisis, the judiciary has become significantly stricter, as evidenced by a high number of court cases. The crisis has also made citizens less tolerant of corruption.

But according to experts like Valentina Rigamonti of Transparency International, it is not yet enough.

“Promising beginnings have been made toward reducing corruption,” she said. “But much remains to be done.”

 

Sandra Louven is Handelsblatt’s Madrid correspondent, Gerd Höhler is a Handelsblatt correspondent based in Athens, and Regina Krieger is one of Handelsblatt’s Italy correspondents. To contact the authors: louven@handelsblatt.comhoehler@handelsblatt.comkrieger@handelsblatt.com

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