Monday, 23 February 2015

Where Greece now stands

Greece fought hard through two Eurogroup meetings on February 11 and 16, to avoid an extension of its current arrangement with its European partners.

This consists of a loan agreement, upon which rides a memorandum of austerity measures. The latter consists of a mixture of spending cuts and legal reforms to better streamline the Greek economy. The two are considered legally inextricable, but decisions at the Eurogroup are made on political, not legal, criteria, so the Greek side felt there was hope of separating them.

Greece asked for an extension of the loan agreement but not the memorandum, which the current leftwing government has promised to abolish. Finance minister Yanis Varoufakis briefly succeeded in severing the two. On February 16, European Finance Commissioner Pierre Moscovici delivered a draft statement offering “an extension of the current loan agreement, which could take the form of a [four-month] intermediate programme, as a transitional stage to a new contract for growth for Greece.”

The Moscovici statement invited Greece’s institutional creditors, the European Union and Central Bank, as well as the International Montetary Fund, to “identify intermediate financing needs, how they will be covered and the appropriate conditionalities.”

This suited Greece well. It would win a truce, or “bridge period” as finance minister Yanis Varoufakis called it, in which creditors would finance the renegotiation of Greece’s arrangement.

“Unfortunately,” Varoufakis later told the media, “that fine document was replaced by the Eurogroup President, minutes before the Eurogroup meeting, with another document that took us back… we were pressurised [sic] to sign up to an extension not of the loan agreement but of the programme itself, being offered only the nebulous two word phrase ‘some flexibility’.”

Varoufakis explained why Greece could not do so.

“To many, our reluctance to accept the phrase “extend the current program and successfully complete it” stems from the determination of this government never to issue a promise that it cannot keep. We fear that if we accept the priorities, the matrix, of the current program, and only work within its overarching logic, even if we change some aspects of it, I fear that we shall be giving the debt-deflationary spiral another boost, we shall lose our people’s support, and, as a result, the country will be very hard to reform henceforth.”

Yet this phrase – “The purpose of the extension is the successful completion of the review on the basis of the conditions in the current arrangement,” - is included in the document the Greek side was prevailed upon to agree to at a third Eurogroup meeting on February 20. It was not a Waterloo for the Greek side; the statement also speaks of “flexibility which will be considered jointly with the Greek authorities and the institutions,” and allows the Greek government to propose the reforms and measures it intends to perform over the next four months, which will effectively form its new interim contract with the EU.

What does this mean? That the Greeks will get their four-month negotiation period, but the Eurogroup will hold them to the commitments of the last government if what they propose on Tuesday appears outrageous. 

Based on statements Varoufakis made at the three Eurogroup meetings, one would reasonably expect the Greek proposals to include the following:

Taxes – the ruling Syriza party has promised to create an Independent tax authority, something the IMF is keen on, and to make tax collection more efficient and transparent.  It also wants to create a tax court system to bypass the backlogged judicial system, and create a new scale of tax brackets transferring more of the tax burden to high net earners.

Public spending
– The government has pledged not to create deficits. It will maintain a balanced budget until June. However, it wants creditors to agree to reduce its primary surplus for this year – the amount of cash it needs to give creditors in repayment of debt – to 1.5 percent of GDP.  

Debt
– The government is committed to repaying the debt in full, and will not ask for a discount to its face value – though after the bridge period it may ask for an extension to the repayment period.

Private sector, business climate
– Varoufakis has suggested creating an Asset Management Company to absorb bad bank debt. Greek businesses and households owe banks an estimated 80bn euros they cannot repay. This keeps both money and human resources tied up in a holding pattern. He also wants to settle tax arrears. Alternate finance minister Nadia Valavani on February 18 said the government would offer taxpayers discounts of up to 50 percent of their arrears if they sign onto an instalment plan. That, however, may now be up for review.

Public sector
– Varoufakis has famously said that no public authority will ask individuals or businesses to provide documents and information that exist elsewhere in the state machinery. It is an example of how Syriza wants to make the state more internally connected and externally efficient. It wants to promote e-government to reduce contact between individuals and he state, limiting opportunities for corrupt practices. The number of public employees has fallen from 920,000 before the crisis to 620,000 today, the ministry of administrative reform says. It intends to replace the evaluation system introduced last autumn with one that state workers are more likely to cooperate with.

Privatisation
– Varoufakis has declared himself in favour of some privatisation. Each project, he says, will be evaluated on its merits, and Foreign Direct Investment will be encouraged as long as state secures revenue streams, and a say in labour relations and in environmental concerns. Syriza wants to ban quick fire sales. It has also promised to abolish TAIPED, the body overseeing privatisation at present. If it does, it may rplace it with a development bank, which would incorporate public assets.

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