Friday, 1 July 2011

Back to the Stockades

The debate in Greek parliament this week on a 78bn euro austerity and privatisation package marked a return to the stockades parties dug themselves into a week ago, when the ruling socialists asked for a vote of confidence. Gone was the consensual rhetoric from Prime Minister George Papandreou, who made a highly partisan, almost pre-electoral speech on the evening of June 27. He squarely accused the opposition conservatives of lacking the responsibility and patriotism to back the government's plan. Conservative Leader Antonis Samaras responded by accusing the government of asking him to make up for its pusillanimous performance in negotiating with Greece's creditors.

Even as the parties hardened their positions and abandoned the more genuine exchange of views we had seen ahead of the confidence vote on June 21, they lost control over two of their MPs. Socialist Pasok's Yiorgos Kouroumplis defected to vote against the austerity plan, and conservative New Democracy's Elsa Papadimitriou defected to vote yes. Kouroumplis was stricken from party rosters, while Papadimitriou is now an independent. In the event the plan passed with 155 in favour, 138 against and 5 abstentions. The framework implementation law passed with a similar majority the following day.

Perhaps the partisanship that has helped preserve the appearance of democracy has now become as unpopular in the legislature as it has long been on the street. Traditionally it helps define party ideology, but Greece is now beyond the traditional ideological alternatives that define right from left. It faces existential decisions.

The browbeating Samaras received from European Popular Party leaders last week and the confidence and unity of the socialist pro-memorandum position seem to have had an effect. Samaras conceded that his party was not in principle against the cost-cutting and privatisation measures of the austerity plan, but only against the new taxes. And here is the nub of controversy. The plan dictates 4bn in cost cuts this year and 3bn in revenues from new taxes. Most publicised among them are a "solidarity levy" (read income tax hike) of up to three percentage points for five years; a new tax on the self-employed, who are notorious tax evaders; and a lowering of untaxable income from 12,000 euro to 8,000 euro.

Finance Minister Evangelos Venizelos warned his parliamentary peers not to read too much into these. "Only 43 percent of tax declarations are taxed," he explained. He justified the hikes as a means to get more Greeks to contribute meaningfully. "Two million families aren't affected by the change in taxable income threshold... while the solidarity levy won't affect three million families," out of the 5.46 million families that declare taxes, Venizelos said. "It is vitally necessary for us to become re-acquainted and reorganised as a society, as a state and as a nation through the National Tax System."

Much more biting to taxpayers, however, will be the consumer taxes that are inescapable to rich and poor alike, such as a VAT hike from 13% to 23% on retaurants; and a new rise in petrol and road tax. New Democracy's argument that such revenue measures are squeezing the pips out of a dying economy are not unfounded. Greece's GDP shrank by 4.5% last year, 4% the year before and is expected to shrink by at least 3.8% in 2011. Falling revenues are to be expected, and the more the state taxes people the faster it deepens the recession. It is for this reason that markets don't think Greece's debt is serviceable even if the country reaches primary surplus, meaning that default is only a matter of time.

The only significant argument against default is a 50bn euro privatisation plan. In theory, Greece would pay down a significant chunk of its roughly 370bn debt, lowering interest payments and lightening its load. According to a Financial Times report, however, only 13bn assets are sale-ready, while some selloffs are going to be held up by unions and disagreement within the ranks of the socialist party. In a recent interview, Yannis Stournaras, head of the Institute for Economic and Industrial Research, suggested that the national holding company of saleable property might, in addition to selling, act as collateral for borrowing. Greece might then successfully enter the markets.

Economists have previously proposed solutions like a eurobond (Yannis Varoufakis) or a haircut to creditors that amounts to the discount markets already charge on the face value of Greek bonds. But France and Germany staunchly refused Europeanising the EU periphery's debt when George Papandreou proposed it earlier this year; and markets have told the European Central Bank that any haircut will be deemed a default, and the Greek bond would instantly tumble. The ECB has warned Greece that if it proceeds to any unilateral default of this type, it will cease to accept Greek bonds as collateral. Since the ECB is currently the only provider of liquidity to Greek banks, they would collapse.

So default now seems like a question of how and when, rather than if. The greater problem is that in addition to its economic instability, Greece is now politically volatile as well. For the past decade, the average lifespan of governments has fallen from the standard 48 months to under 20. The premature elections and reshuffles that have marked this period have come mostly as a result of failed attempts at reform.

Still, Greece's fault is not in its numbers but its leadership. Almost none of the country's political leaders have had a career in the private sector, and one suspects that they have no idea what it is capable of. Thus the battle between a statist ideology among politicians and a struggling private sector. Thus, also, the earmarking of the bulk of the 24bn euros in European Union subsidies Greece won in the 2007-23 period for public enterprises and the government. Notwithstanding adverse demographics, which mean a workforce of just 4.5 million people in a total population of 11 million, Greece could, given the unshackling effect of political courage and vision, achieve a revolution in competitiveness. It is precisely that political courage and vision, more than money, that have been missing over the past two decades.

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