Greek drama: Haggling over details may derail deal
Thursday, 25 June 2015
The optimism from last Monday evening, when the Troika welcomed the Greek proposals as a good start for further discussion, was this morning replaced by a more gloomy feeling. No agreement was reached during the night at the meeting of the Eurogroup finance ministers. The proposals have been returned to the level of officials to hammer out a deal with the Greeks.
The main objection against the Greek proposal, which aimed at a reversal of the austerity policy by shifting the tax burden to businesses and high income – earners in Greece, was that they would hamper economic growth in the country.
But judging from a leaked document we cannot expect the officials to do the job. On the contrary, they seem only to have make things worse by their comments on the Greek proposals. The document, called “Table 1. Greece: Prior Actions” includes a list of the proposals under four main headings, together with the staff comments in track changes.
– VAT reform
– Fiscal structural measures
– Pension reform
– Public administration, justice and anti-corruption
The list itself is lacking any background information on the proposed measures. Unless the full document includes explanations and justifications, it’s hard for a reader to understand the measures and be convinced that they will jump-start the Greek economy.
There should have been plenty of time for the Greek government to carry out impact assessments of e.g. proposed changes in taxation and pensions. At least any changes in taxation should have been accompanied by estimates of their impact on tax revenues.
The proposals concerning public administration are few and consist only of simplifications of the salary system in the public system.
But the Troika staff comments aren’t much better and focus on details in the Greek proposals. If these are the only comments the Troika has, then it’s difficult to understand why no deal can be reached. Just to mention a few examples:
Greece proposes to raise the corporate tax rate from 26 % to 29 %. The Troika wants a raise to 28 %. Does it make any difference – especially if tax collection is notoriously inefficient? Neither Greece nor the Troika mention taxation of the shipping companies which largely are exempted from paying tax on their revenues.
Greece proposes to streamline the VAT system and introduce a reduced 13 % rate for restaurants and hotels. This is understandable in view of the importance of the tourism sector. The Troika wants to exclude restaurants. Why – they are also frequented by tourists?
Greece proposes to cut military spending by € 200 million, a figure that the Troika wants to double. It shouldn’t be so difficult considering the fact that Greece today spends more on its military that most other EU members.
As regards pension reform, Greece proposes to increase the retirement age from 62 to 67 years, as in many other countries, by 2025. The Troika thinks that it should be by 2022. Early retirement should of course be phased out and a deal should not fall apart because of disagreement on which year.
Greece is a sovereign country. The Troika should leave some autonomy to the Greek government on deciding on the details in its reform program. Track changes in red are not the best way to negotiate a mutually acceptable solution to the Greek crisis.