Structural considerations for a prosperous Greece
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In a sense, there is very little point in evaluating Greece’s agreement with its lenders. After all, it is not as if there were a variety of other options available.
Seeing the economy’s growth prospects diminish and anxiety grow among depositors, consumers and investors, Prime Minister Alexis Tsipras had little choice but to conclude discussions with the institutions.
The protracted nature of the review and the damage it has done (Greece’s growth forecast for 2017, for instance, has been reduced from 2.7 percent of GDP to 2 percent) is down to intransigence, indecision, shifting goalposts and the sheer complexity of getting so many parties with such divergent interests to agree on anything.
All sides must take a share of the responsibility but the cost will be shouldered exclusively by the Greek people and this means that Tsipras and his administration must ultimately carry the can.
Apart from accusations of timewasting, Tsipras must also face criticism for agreeing to exactly the kind of measures that he and his ministers had previously indicated he would never sign up to. Finance Minister Euclid Tsakalotos had once said he would resign rather than reduce the tax-free threshold, but he now finds himself having to cut it by around 3,000 euros to around 5,600 euros.
Tsipras had also pledged to protect pensioners but will now preside over the latest (the 24th since 2010, according to a pensioners’ association) reduction to their income. The weighted average of the cuts will be 9 percent, although some pensioners will see up to 18 percent of their earnings disappear. The number of people affected is not yet clear, although Kathimerini estimated that 1.1 million out of 2.7 million pensioners would be affected. Labour Minister Efi Achtsioglou claimed only one in three pensioners would lose money.
The impact of these measures, which amount to 2 percent of GDP in total, is cushioned to some extent by the agreement between Athens and the creditors for a set of expansionary counter-measures (also worth 2 percent of GDP) to be implemented in 2019 and 2020 if the government meets its 3.5 percent of GDP primary surplus targets.
The coalition has been somewhat disingenuous in suggesting that it is certain these interventions will be adopted, given that the fiscal target is high and meeting it depends greatly on whether the Greek economy will recover in the coming years. On the other hand, the government has been encouraged by the fact that the 2016 primary surplus came in at 4.2 percent of GDP under the programme criteria, compared to a target of 0.5 percent, even in the absence of any growth. This, though, has to be tempered by the indications that some of last year’s primary surplus was non-recurring, as underlined by the fact that the figure for this year is seen at around 2 percent of GDP.
Either way, the counter-measures form a significant part of the package. They might not do much to directly alleviate the force of the cuts that pensioners will feel or to dampen the impact on low-income earners as far as the reduction in the tax-free threshold is concerned, but – if implemented – they can have a positive effect. The reduction in the corporate tax rate from 29 percent to 26 percent, the lowering of the basic rate of income tax from 22 to 20 percent, a decrease in the solidarity levy and a small reduction in the ENFIA property tax are relatively minor steps but in the right direction, at least.
There are also potentially positive interventions on the social spending front to come, such as increases in housing benefits, more free school meals and a reduction in the contribution patients have to make to their medicine costs.
Tsipras is correct to insist that the counter-measures should not be dismissed out of hand, although he cannot expect this disparate collection of contingent interventions to directly counter-balance the pension cuts and lowering of the tax-free threshold.
The ultimate political prize for the Greek prime minister is still debt relief. As is the case with the counter-measures, Tsipras has talked up this side of the deal more than he should, especially given the ongoing tug-of-war between the International Monetary Fund and Berlin and the fact that any restricting measures will not be implemented until the summer of 2018 and even then only on the conditions that Greece has successfully exited the programme and the eurozone deems debt relief necessary, as the European Stability Mechanism reminded everyone this week.
However, behind closed doors, Tsipras knows that a commitment which is detailed enough to satisfy the IMF but vague enough to ensure that it does not cause anxiety in Germany before September’s elections, is possible. That pledge is likely to be enough for the European Central Bank to revise its position on whether Greek bonds are eligible for its QE programme. Inclusion in QE can have multiple benefits for Greece, and would facilitate the government’s plans to make test return to the markets in the coming months.
While debt relief will be vital for regulating the level of fiscal pressure that is placed on the Greek economy for the years to come, it is the return to the bond markets that gives the government of exiting the programme next summer without the need for further funding. It is then that Tsipras will be able to stand before voters and say that it was under his, albeit flawed, premiership that Greece left the so-called “memorandum era” behind it. This represents a much more attractive legacy than the one he currently has, even if it is unlikely to be enough to get him re-elected.
There is, of course, plenty that can go wrong between now and then. In fact, the history of the Greek crisis tells us that events rarely go according to plan. For starters, the lenders will have to live up to their side of the bargain and produce a binding promise regarding debt relief. We are not there yet. This means that although Tsipras and his government have made it over a high hurdle, they are in no position to celebrate. The best they can do is look on and wonder whether they have done enough.