Greece and Europe as a whole are teetering on the brink. A flurry of proposals and counter proposals as been made – and rejected. This column discusses the main features of the recent proposal by the Greek government, grouped roughly under the headings macroeconomic policies, fiscal measures, and structural reforms. It asks how realistic are they and how appropriate to resolving the crisis? It identifies missing commitments. Where appropriate, suggestions for possible lines of compromise are indicated as are areas in which one side or the other needs to shift position. The analysis suggests that the Greek proposal offers a good basis for an “honourable compromise” that would permit Europe to finally move on from the endless, debilitating horse-trading, permit Greece to remain within the euro area, and to kick-start a growth process that would enable it to pay its debts to the creditors without substantial haircuts.
The basic thrust of the Greek approach is correct in macroeconomic terms. Only if a longer-term perspective to maintain Greece’s membership of the currency union is in place can there be the necessary recovery in confidence and investment; without that certainty Greece and its partners will never emerge from short-term crisis management. Further austerity will kill growth as it has patently done over the last five years. Declining debt ratios must be achieved primarily based on positive rates of (nominal) GDP growth and investment, rather than further spending cuts. Greece needs outside support for investment – which will generate positive returns as the economy closes its huge output gap. Crucially, the Syriza-led government has climbed down from its insistence on massive debt restructuring. Instead it is arguing, rightly, that the debts can and should be repaid, provided and once a growth process has been set in train.
Specifically, Greece is proposing, not additional loans, but the conversion of existing ECB and IMF loans, many of which need to be redeemed in the short run, into ESM loans of long duration bearing a low interest rate. This is eminently sensible: in fact it would have been in the enlightened interest of all parties if Greece had been offered financing on favourable conditions from the outset. It is a precondition for the European institutions (and thus taxpayers) to “get their money back” in the longer term. The provision of additional ESM loans to make such a swap possible does not pose legal difficulties, but will require approval by national governments. It is not a haircut, but more like a homeowner refinancing a loan at better conditions in a favourable interest-rate environment.
Also sensible in principle is the proposal to make the volume of debt servicing contingent on Greece’s growth performance; the precise modalities are not specified, but they surely cannot be a sticking point for negotiation once the principle is accepted. This proposal stabilises the economy – payments increase if growth accelerates and decline if it stalls – and aligns incentives, giving all parties a stake in Greek recovery. Importantly, by reducing ECB holdings of Greek bonds, the country would be able to benefit directly from quantitative easing policies by the ECB, removing a highly undesirable anomaly, the exclusion from the program of the country facing the greatest difficulties.
The Greek government is proposing a major push to raise domestic investment, a precondition for a sustainable recovery. Two main mechanisms are foreseen for this purpose. The first is innovative and potentially interesting, but raises a number of questions and will require further specification. The stock of public assets (currently valued at more than €70 bn) is to be transferred to a holding company and used as collateral for an international bond issue of around half the claimed asset value. The revenue is to be used to develop these public assets through investment, boosting the economy generally and raising the value of the assets. These can then be privatised in more favourable conditions and achieve higher returns. Two things are attractive about this proposal. It overcomes a highly problematic one-sidedness of European policy that focuses only on the liability and not on the asset side of the public balance sheet. It also addresses the understandable frustration of Greeks that their “family silver” is being hawked off at fire-sale prices (for which the Troika was responsible) and in an intransparent, not to say corrupt, manner (for which previous Greek governments were responsible).
Question-marks remain over the potential value of the assets for development under public ownership and, related to that, the interest rate on the bonds that international investors will demand for a claim on such illiquid assets. In the current environment interest rates could be very low, but only if the investments are seen as safe; a results-oriented negotiating strategy on both sides should be seeking to establish the conditions that such bonds would have (close to) safe asset status. Are the assets in question of a “commercial” nature, that is delivering revenue streams? Is the four-year period during which restructuring is supposed to take place adequate? A final question would be whether at least some of the funds raised should not be invested in new areas not currently under public ownership. In short this is an interesting idea requiring further work. Probably not too much emphasis should initially be placed on it as a source of finance, i.e. the scheme should be smaller. (See also below on privatisation revenues.)
The second proposal is a more traditional call for an investment initiative by the European Investment Bank, approved by the European Council, which dispenses with national co-funding. The ECB could purchase the bonds as part of QE, helping to keep interest rates extremely low; financing cost should anyway not be a problem given markets’ hunger for high-quality assets. Many observers have been calling for various investment initiatives for a long time now. It is noteworthy that no volume is suggested by the Greek government for this programme. Clearly there is a possible trade-off between the two investment-related proposals: the size of the two packages would need to be set in such a way as to be appropriate overall. Until the question-marks over the first proposal are resolved, it is better to rely on external funding to do the heavy lifting.
It is certainly vital that investment by both domestic companies and foreign direct investment increases. The ending of fundamental uncertainty over euro membership is a basic precondition. In addition to the two main measures discussed, attempts should be made to derive as much benefit from the Juncker investment plan (despite its weaknesses) as possible. And it is vital that measures are taken to unblock access to credit for Greek SMEs. The Greek government could set up an institution to channel external financing (e.g. from the EIB) that supports lending to cash-starved businesses.
Fiscal Targets And Tax Revenue Measures
It is hard to take the debate on primary fiscal surpluses seriously, although it has dominated public discourse in recent weeks. The two sides moved very close together over recent weeks, both foreseeing a 3.5% surplus in the medium-term, differing somewhat on the path to that goal. Much more fundamentally, contrary to the impression given in the media and in the proposals, the (primary) budget surplus/deficit is not a variable that governments can target with precision, even in fairly predictable economic waters and with stable institutional framework, never mind in the state in which Greece finds itself. This stand-off makes as much sense as two skippers of small sailing boats arguing whether to meet a nautical mile north or south of an unlit buoy that neither can find in the fog – and the crew of one boat is repairing the sails during the voyage. The debate is only sensible to the extent that it sends a signal about the government’s intentions; broadly the Greek proposal to seek small, but increasing surpluses initially, and more substantial ones once the economy has recovered is appropriate. In the medium run substantial primary budget surpluses are indeed required. They are also feasible once growth has returned. In the short run it would be ridiculous if negotiations were to fail on this issue.
Regarding the controversial debate over changes to VAT bands and rates, the Greek government is seeking to raise revenue by moving some consumption categories from the middle to the higher band. It is right for both economic and social considerations to try as far as possible to avoid further pressure on consumption of basic necessities by, in particular, low-income households (although this is primarily the task of specific redistributive policies). Reducing the lowest rate (even if marginally from 6.5 to 6%) seems hard to justify, though, and appears to be primarily symbolic. Postponing the VAT increase in the hotel trade until after the summer holidays is odd: most holidays will already have been booked, so price increases will not affect demand, and VAT revenues in this area will largely be paid by foreign tourists.
All in all the government is expecting these changes to generate €1.3bn (around 0.7% of GDP), a substantial proportion of the total additional revenue it hopes to gain by fiscal measures. Most of the other revenue generating measures proposed are extremely specific (increases in specific categories of luxury goods taxes) or, conversely very vague (notably increased revenue from combating tax evasion). The institutions doubt that the measures proposed will raise the promised revenue. They may well be right about this. Still the issue cannot be allowed to derail the negotiations. Ultimately higher tax revenue needs to come from additional growth, not changes in rates and bands. And the return to growth requires a longer-term agreement.
The proposal by the Greek government contains a large tableau of privatisation receipts envisaged over the next eight years. With the single exception of regional airports in the current year, the figures are all very small, however, very rarely exceeding some tens of millions. It is striking to compare this to the €70 bn at which the government values state assets. Moreover, a set of conditions is set out for privatisation in future, including (vague) social and environment considerations and investment commitments. These are not unreasonable in themselves. As the experience in eastern Germany after reunification showed however, there is an unavoidable trade-off between revenue generation from asset sales and the imposition of conditions on purchasers. It is not clear whether, if such conditions are actively imposed, the sums indicated can be actually realised. Nor is it clear from the paper how the privatisation receipts that are pencilled in relate to the proposal, discussed above, to first invest in state-owned assets, and then sell them at a later date but for a higher price.
What is certainly welcome is that the Greek side appears convinced of the need to invest in effective institutions in this area; a tax and customs authority and a fiscal council are to be set up; details are sketchy, however. Other important areas for institutional reform include the management of the social insurance systems.
The most worrying issue, though, is what is not mentioned in the Greek offer in the area of fiscal measures. Syriza rightly insists that it has a mandate from the Greek people to end austerity policies the burden of which is primarily borne by “the little people”. Finance minister Varoufakis talked after the election about smashing the oligarchy that has gripped the country. A program of fiscal measures that clearly targeted wealthy Greeks would kill at least three birds with one stone. It would shore up domestic support for the government. It would convince policymakers and taxpayers in creditor countries that the Greek government was doing all it could to resolve the fiscal problems facing the country. Last but not least, measures targeting the wealthy would have smaller negative effects on domestic demand. A rise in the top rate of income tax would be an obvious place to start, as would broader-based and more substantial luxury-good taxes than those offered. The inheritance tax could be increased and greater efforts made to focus the real estate tax on the highest-value properties.
On the spending side a very substantial cut in defence spending would also appear consistent with Syriza’s left-wing credentials (although perhaps not with those of its coalition partner). Much military procurement is spent on imported hardware so the multipliers would be small, and Greek defence spending was traditionally one of the highest in the EU as a proportion of GDP.
Structural And Welfare Reforms
The section of the Greek proposal devoted to structural reforms is quite detailed. Agreement has already been reached with the institutions in a number of areas. This Wednesday (17th June) a reform agenda that has been agreed with the help of experts from the OECD is to be announced. Similarly, in the area of labour market institutions, the government intends to agree on reform with experts from the International Labour Organisation (ILO). Last year the ILO produced a wide-ranging and detailed strategy to create, so the title, Productive Jobs for Greece. Bringing in these external expert bodies is a smart approach, signalling a commitment to ongoing reform – which in any case will need to be spread over a number of years – while avoiding the impression of a “diktat” by the creditor institutions.
On pension reforms the Greek government has made it clear that there can be no further cuts to pension levels, which are extremely low for many pensioners following severe cuts. This can be justified both for social reasons and because pension cuts are partially self-defeating, generating demand losses that depress employment and wages which in turn reduces contribution revenues. The pension crisis reflects not only institutional failings, but also the impact of austerity and severe losses of reserves by the pension funds as a result of the 2012 haircut. More problematic is the very sluggish pace at which effective retirement ages are supposed to rise. In the public sector the effective retirement age is not expected to creep above 60 years until 2022. With such sluggishness the Greek government makes a rod for its own back that is happily wielded by unscrupulous politicians in creditor countries (who are not above suggesting that public-sector conditions apply to the economy as a whole). Retirement ages in the private sector (in the IKA-ETAM scheme) are already considerably higher, above 60. But the pace of upward adjustment is slow. Consequently the proposed overall expenditure savings are small. If an agreement is to be reached, Greece will have to give ground on the upward adjustment of retirement ages.
There is a more fundamental issue that neither side is giving due attention. The Greek pension insurance system is clientelistic and has redistributional effects that cannot be justified and should be anathema to a reforming left-of-centre government. Similarly to the fiscal measures, Syriza should be presenting, at least in outline form, a proposal for a fundamental pension reform to modernise the system and render it more effective and socially just.
Labour market and collective bargaining institutions have been a controversial issue during the crisis. There has been a wholesale destruction of the collective bargaining machinery in the country, with four major reforms passed between 2010 and 2012. Collective bargaining institutions are complex structures that interact with other national institutions, such as the welfare system. The Troika/institutions have no particular expertise in this field, and appear to have been guided by an ideological view that such institutions are simply a “rigidity” that prevents needed market adjustment. That this view has no basis in the extensive social science literature on collective bargaining has been of little importance: “reforms” were imposed over the jointly expressed opposition of the Greek social partners. It is therefore sensible to commit to a longer-term reform process, negotiated with the Greek social partners and in conjunction with the expertise from the ILO. Greece’s partners need to accept this and move on.
At odds with this sensible approach, on the other hand, is the commitment to unconditionally raise the minimum wage back to 2010 levels by the end of 2016. Given the huge economic losses and also falling prices since then, this smacks of political symbolism for which it is hard to make a sensible economic case. It should be withdrawn or replaced with one that – analogous to the proposal on debt repayment – sets out the principle that the minimum wage will be increased (in real terms) in function of a return to economic growth.
On product market reforms and opening up the professions, similar considerations apply as noted above in the context of fiscal measures. Some very detailed proposals – the procedures to set up and operate a gym will be simplified, for example – have been tabled, in many cases following technical recommendations from the OECD. But the Greek government appears to have passed up an opportunity to enact radical egalitarian reforms that, by reducing the ability of privileged groups in Greek society to extract “rents”, would redistribute real incomes downward, while at the same time by reducing price pressures helping with competitive rebalancing without a need for demand deflation.
Chancellor Merkel recently emphasised with reference to the need for agreement between Greece and its creditors that “where there is a will there is a way”. This column suggests that an honourable compromise is within reach. Broadly the proposals made by Greece in the macroeconomic area are sensible and in some cases innovative; the latter need further work. Key to fiscal consolidation is reigniting nominal GDP growth. The Greek side has moved a lot and shown evidence of a willingness to pursue further reforms. Most notably it no longer insists on a major sovereign debt haircut. Matters are more complex and nuanced regarding fiscal and supply-side reforms. It has moved too little in a number of areas, notably on pensions. More seriously, it has failed to take the initiative by putting forward a “progressive consolidation” strategy that takes the axe to entrenched monied interests in the country.
On the other side, the “institutions”, for far too long simply in denial, have gradually sought ways to back down from the failed policies of radical austerity. They now need to accept the principle of the macroeconomic proposals made by the Greek government, as the best way to keep Greece in the euro area, finally emerge from the debilitating crisis and, ultimately, to enable them to get their money back. As much the stronger party the onus must be on the EU institutions to make the necessary adjustments while finding ways to ensure that the longer-term reform process is maintained: bringing in the OECD and ILO seem helpful in this regard.
Importantly, alongside the deal on reforms and financing in Greece itself, Greece’s EU partners also need to do their own homework. Not least, it is hard to insist that pacta sunt servanda in Hellas while European institutions, in this case primarily the ECB, are not adhering to the most important “pact” of monetary union – that inflation will be kept close to but below 2%. Resolving the Greek crisis is a precondition for strong growth in the euro area as a whole – but the reverse is also true.
Overall, the differences between the two sides appear reconcilable, with the important proviso that both sides are genuinely struggling to keep Greece within the euro area while offering Greek citizens the prospects of a growing economy and rising living standards and all are interested in a stable euro area that wants to move on to other challenges than perpetual crisis management. Unfortunately there are those, on both sides, for whom this is not, or no longer, the goal.
 See T. Müller and T. Schulten (2015) ‘European economic governance and its intervention in national wage development and collective bargaining’, in. S. Lehndorff (ed) Divisive integration. The triumph of failed ideas – revisted, ETUI: Brussels.
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