Greece: Better Than Expected, But Still Not Good News

June 22, 2015 5:30 PM

The meeting of the Eurogroup of finance ministers on June 22 marked the first time after five months in office that the Greek government of Prime Minister Alexis Tsipras proposed reforms that the Eurogroup considered credible enough to even begin to discuss. This alone is a welcome if incomprehensibly long overdue development. But many challenges lie ahead before European authorities and Athens can pull back from the crisis.

The Eurogroup meeting was the eighth since the current Greek government entered office in late January 2015.1 Because many issues remain unresolved, a ninth session will surely be needed before any deal might be struck on Thursday. The day's events further illustrate that in international politics, it does sometimes pay to hand in your homework late. The most recent Greek reform proposals were received by the euro area ministers only in the morning, forcing an essential postponement of final-final-final meetings scheduled for June 22 to Thursday, June 25, to allow everyone to study the proposals in more detail.

The most welcome development of the day is that finally the Greek government seems to have put all the issues on the table that were demanded by its creditors—the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB)—on pension reform, VAT reform, and sensible primary surplus targets of 1 percent, 2 percent, 3 percent, and 3.5 percent for the next four years. The threat over the weekend of imminent deposit controls on Greek banks seems to have focused minds in Athens.

Yet several problems lie ahead. Judging from leaked available outlines of the new Greek proposals, they seem heavily focused on increasing taxation and employers' pension contributions, while containing very few additional expenditure cuts. A foreseen increase in the retirement age to 67, restrictions in access to early retirements, and increases in retiree healthcare contributions are other important components. Available estimates suggest that €7.3 billion, or 93 percent, of the total of €7.9 billion of the new fiscal commitments by the Greek government are increases in taxation and social security contributions.

While likely few would disagree with the need to shift the taxation burden around in Greek society, it seems doubtful that proposals so heavily skewed towards increased taxation can be approved by the creditors, known as the Troika, and in general be considered helpful to economic growth. The Troika is likely to look askance at proposals that appear tailored to fit Tsipras's ideological imperatives rather than Greece's economic needs. In the current environment of no trust between the Eurogroup and the Greek government, a new tax hike pledge from a government notorious for failing to collect taxes will not likely be enough to unleash new financial support from the Troika.

IMF approval, without which the euro area is also highly unlikely to sign on, is questionable. Long nights of negotiations and further Greek concessions remain ahead.

A separate issue is whether the Greek government's new commitments are politically sustainable within the current Greek coalition. Some doubt is in order over whether the junior coalition right-wing partner Independent Greeks (ANEL) can accept the new proposals on VAT reform. In some ways a walkout by ANEL from the current government would be a good thing for Greece even if it proves to be disruptive, because Tsipras would have to seek his parliamentary majority for any deal toward the center of Greek politics.

The Greek government is likely to initiate a spin-blitz to try to convince everyone that a deal is imminent because Athens has made significant concessions. Tsipras's goal would be to have the ability to blame the Troika for any last minute collapse of negotiations. The Troika is likely to say little while it evaluates Greece's latest offers. The final settlement must ultimately be negotiated in the Eurogroup, i.e. the finance ministers. Little emphasis should be given to any media declarations between now and then.

While the politicians weigh their options, the ECB will continue emergency lending assistance (ELA) at least until Thursday's meetings. The ELA would be scaled back quickly, if there is no final deal.

Further Greek concessions would seem necessary to win acceptance of the full Troika. These would be economically meaningful and certainly politically painful. Though the emergency meetings of June 22 ended without a result, they were not a waste of time. New Greek government commitments have been made, and there can no longer be any doubt among the Greek leaders about the consequences of a failure to reach an agreement on June 25. Dangerous misperceptions may have been erased and wild political gambles avoided.

The trick for the Troika will be to turn the Greek government's new austerity commitments into genuine economic reform commitments by Thursday, while Syriza will have to explain to Greece why it has taken five months and a return to recession to agree to a tax hike.

Note

1. Eurogroup meeting dates in 2015: February 11, February 16, February 20, March 9, April 24, May 11, June 18, and June 22. See the Eurogroup meeting calendar.

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Jacob Funk Kirkegaard Senior Research Staff

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