In anticipation of the Eurogroup and European Council meetings today and tomorrow, I can only make the following additional comments to posts earlier this week.
1. Adverse Impacts
The Greek proposal submitted yesterday is a carbon copy of the Troika proposal of June 26. The main adverse impacts here are:
- Raising VAT on tourism from 6.5% to 13%
- Unclear status of VAT on some or all processed food categories (but probably raising it from 13% to 23%)
- Cutting certain retirement benefits (depending on how these are implemented)
- Raising other direct and indirect taxes, including solidarity taxes, corporate taxes, shipping taxes.
These measures are, to a certain extent, offset by a lower primary surplus target of 1% in 2015. However, these measures (particularly VAT) are regressive and harm the most vulnerable members of society. The fact that this is being considered in the midst of a very real economic depression is an adequate testament to the failure of Troika-inspired Greek policies over the past five years.
Once again, there are four components of expenditure-based GDP:
Consumption + Government Expenditure + Investments + Net Exports
Consumption, Investments and Net Exports are collectively far higher than Government Expenditure, so raising VAT or corporate taxes for example, directly reduces GDP. Particularly in an economic depression.
2. These Measures are Not Enough
The June 26th measures were agreed before the bank closures, and based on First Quarter 2015 GDP and fiscal numbers. We are now in the second week of bank closures and need to take QII figures into account. These are significantly worse. As a result, I fully expect the Troika counterproposals to be significantly more painful that what was used by MinFin Tsakalotos in his proposal this week. There will be a punitive element to this, and they will be accompanied by a demand for implementation prior to any immediate release of funds.
3. These Measures are an Alibi
The lack of trust between the Eurozone creditors and the SYRIZA-ANEL government means that this entire process of a new loan agreement, as well as the specific measures that will be counter-proposed, are to some an alibi for inaction. While France has been vocal for keeping Greece in the Eurozone, the appetite of other countries is notably less interested.
In particular, it is important to note that Latvia and Lithuania joined the Eurozone in 2014 and 2015 respectively. As such, they have not participated in the previous two Greek bailouts. Both countries have seen a rapid and drastic economic contraction following the 2009 financial crisis: both have emerged relatively stronger for it. However, the leaders of both countries are not keen to be seen to be subsidising a wastrel nation. Latvia and Lithuania are not alone in this approach, however.
This is not a particularly correct approach, but it is impossible to condemn this approach after Alexi Tsipras and Yanis Varoufakis have spent the last two weeks condemning European creditors for being terrorists, pillagers and blackmailers. Rank demagoguery has a price in a union of 19 equal member states.
Conclusions
In the interim, I can only conclude that:
- Absent the irreversibility of Eurozone policies and the threat of a sovereign default within the Eurozone, there is little appetite to sign up a third bailout for Greece. If Greece does remain in the Eurozone, it will be thanks to Angela Merkel’s intent not to ruin her political legacy.
- The policy measures proposed will only contribute to a Greek economic depression—especially given SYRIZA’s policies to date of cancelling all foreign investments while expanding the public sector and its own political control over national institutions.
- Getting to an agreement will require refinancing the Greek public sector loan requirements for the next 3 years, but also recapitalising the Greek banking system. I cannot see how Greek banks can be considered solvent.
- As such, the capital amount at risk is extremely high, and follows on two prior bail-outs which SYRIZA has attempted to renege upon using every tool available to it. Just because SYRIZA has reversed course last night should not convince anyone that other nations will accept this at face value.
I can no longer be certain that a Greek Eurozone exit or suspension is not the right policy. This is a difficult decision to make, but I base this on four points:
- I have closely observed the operations of successive Greek governments since late 2009, on both policy and practical levels. Given this experience, I do not believe this government in particular will implement what it has promised. Given its abysmal economic policies and its willingness to contravene every standard of normal policy, I do not believe Greece is a good credit risk using standard public finance analysis.
- SYRIZA-ANEL have deliberately employed nationalistic rhetoric against Greece’s Eurozone partners as a means of expanding their political power at home. A series of decisions, from releasing Golden Dawn members (against the advice of the public prosecutor) to cancelling all privatisations, to expanding the public sector, to re-establishing policy control over higher education, convince me that these parties share a dangerous appetite for non-democratic measures.
- The European project is supposed to be a unifying one, but politicians in many countries are now employing nationalism to denigrate other European countries and citizens. Much of this misinformation is deliberate political pandering to domestic constituencies. From a relatively simple debt refinancing project, the Greek case has become the Pandora’s Box from which the winds of nationalism and division are re-emerging in Europe.
- Successive Greek governments have been unable to provide basic public sector economic management. I fail to see how SYRIZA-ANEL can implement yet more regressive policies and maintain a nationalistic/communist approach to governance, and simultaneously meet debt reduction and GDP growth targets. This is a contradiction in terms. EU refinancing and structural funds have become an economic crutch that distort real reforms or rational economic management, and have directly and indirectly served to maintain a Greek state captured by political and oligarchical special interests. These interests merely change with each government: they never depart.
There are only three reasons I do not deliberately call for a Grexit:
- Because having serially mismanaged the economy in times of growth, I cannot see how any Greek government (let alone a SYRIZA-ANEL government) will manage an economic depression with an economy in freefall. If anything, this will increase the nefarious control and patronage of the political parties in power.
- Because the sovereign debt owed by Greece to other Eurozone countries or the IMF will not be wiped out. It will remain, and will have to be repaid one way or another, and in a devalued currency.
- Because even after a Grexit, Greece cannot shelter its economy with standard economic measures, such as a rise of import barriers or national regulations. Greece will remain a member of the European Union and the World Trade Organisation, and thus will be unable to take the urgent measures needed to protect its economy and society.
Having seen the dismal rhetoric employed by Greek politicians of all stripes during Parliamentary sessions in the last three weeks, I can only state that if this were my money, I would not be lending to Greece. Most Greek taxpayers apparently feel the same.
At the same time, having observed and documented closely the European policy failures since 2010, I can no longer say that I place any trust or reliance in a European solution. There are too many conflicting priorities in Europe, and there is no supra-national leader with a clear vision of where Europe has to go in order to grow and survive in the 21st Century. Every European country is facing massive economic challenges and distortions, and as many Germans have repeatedly said, Europe is not a transfer union.
© Philip Ammerman, 2015
This post was originally published on the Navigator Consulting website on 11 July 2015 at 15:30. The Troika counterproposals were not released at the time of writing.
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