Greek drama: Is there a light in the tunnel?

    Wednesday, 24 June 2015

    Monday the 22nd June was a day when Greece and its creditors oscillated between despair and hope. As the double deadline on 30 June of a debt payment and the extension of the bailout program is quickly approaching, time is running out for reaching a deal.

    The meetings on Monday of the finance ministers and later in the evening of the leaders of the Eurogroup countries was supposed to be the last opportunity for Greece to come up with a credible reform program in return for an extension of the bailout program on new conditions and possible debt relief.

    What happened was that Greece fumbled in forwarding its proposals which did not give enough time for the finance ministers to have them assessed and prepare a decision for the Eurogroup leaders. Still the first impression seems to have been positive and a decision will be taken at the EU summit later this week.

    Quite some time has passed since the decision in February to extend the current program until the end of June. This should have given Greece and the Troika institutions – or the partners as they are called – time to figure out a solution that would keep Greece in the Eurozone and to design a new policy for growth instead of the disastrous austerity policy until now.

    But Greece obviously never specified the structural reform measures that it was prepared to do and the creditors continued on insisting on cuttings in pensions and increases in value added tax that would have hurt any more the 35 % of the population currently living in poverty or at risk of poverty and social exclusion.

    Deadline after deadline passed. A first comprehensive list of reform measures should have been ready by 23rd February, to be further specified and agreed by the end of April 2015. The list was prepared, with promising commitments on tax measures, public spending and anti-corruption measures.

    Greek commitments

    But obviously the partners had heard them before. These were long-overdue measures that should had been implemented since 2011 when the European Commission established a so-called Task Force for Greece and provided expertise from Member States to help Greece design and implement reform measures in a number of policy areas.

    Did it make any difference? There is still no independent tax and customs authority. Several product markets and services are still not deregulated.

    The Greek government promised in February to “work toward drastically improving the efficiency of central and local government administered departments and units by targeting budgetary processes, management restructuring, and reallocation of poorly deployed resources.”

    In fact, there is already a Greek institution for examining the effectiveness of the public administration and contributing to accountability in the country: The Hellenic Court of Audit. The problem is that the audit institution is not independent and does not carry out any performance auditing.

    What emerges now is that Greece deliberately delayed the specification of its proposals to the very last minute, in some kind of “chicken race”, where the partners would give in out of pure exasperation and fear of being accused of forcing Greece out of the Eurozone – or even out of the EU as a consequence.

    The Greek finance minister, Yanis Varoufakis, almost admitted this himself when he at a press conference in Brussels refused to specify the Greek proposals before there was any deal – as if the partners should first commit themselves to a “deal” without knowing what Greece would be prepared to do to justify an extension of the bailout program.

    Past mistakes

    Along all the way both sides have exchanged recriminations and blamed each other for the crisis in Greece. We know that mistakes were committed – the first one in 2001 by admitting Greece to the Eurozone, based on false financial figures. Since then Greece continued to mismanage its finances and left its dysfunctional and corrupt public sector as it was.

    But the decision in 2010 to bailout the private banks who recklessly had lent money to Greece and impose an austerity regime on Greece was also a grave mistake. Most people would admit now that the medicine did not enable the Greek economy to grow – instead it almost killed the patient. Today the country finds itself on the brink of default, surviving on life support from the European Central Bank.

    The figures speak for themselves. The debt ratio to GDP continued to climb in Greece and is now 180 %. Unemployment is among the highest in Europe, especially among young people. The few hopeful signs, such as a small primary budget surplus, cannot hide the terrible fact that GDP has shrunk by a quarter since the crisis started.

    Yanis Varoufakis is no doubt right that the current austerity policy – that has been counterproductive to economic growth and caused a humanitarian crisis in Greece – cannot continue. Greece needs to reform its economy and public administration – the question is how.

    Take e.g. pension costs. They are about 16 % of GDP, the highest in the Eurozone because of generous rules on early retirement. Or so it used to be. During the crisis pensions have been reduced and people have been forced to retire when they lost their jobs. In a recent article Varoufakis asks us the following:

    “Consider this relatively unknown fact: Around 1 million families survive today on the meagre pension of a grandfather or a grandmother as the rest of the family members are unemployed in a country where only 9% of the unemployed receive any unemployment benefit. Cutting that one, solitary pension is tantamount to turning a family into the streets.”

    So what exactly do the new Greek proposals that made the Eurogroup summit end on a positive note include? We do not know. Sooner or later Greek government will of course have to disclose them to its own people.

    Tax burden

    According to the Greek economy minister, who was interviewed by BBC on Monday afternoon, the proposals aim at shifting the tax burden from the poor to the rich by changes in the VAT system and new taxes on businesses, assets and high-income earners. This sounds all good and well.

    But why did it take the leftist government party Syriza so long time to come up with this? And why does the far-leftist wing in Syriza oppose taxing the rich?

    Greece is known for tax evasion and ineffective tax collection – hardly surprising in a country where the government is not trusted and does not deliver. But there is a particularity in Greece: rich people and businesses evade paying taxes and the shipping companies – where Greece is a world market leader – are hardly taxed at all.

    The exemption for international earnings of shipping companies was even enshrined in the Greek constitution in 1967 and is claimed to be in line with international tax law. The only tax paid by them is a standard tonnage tax. In 2013 the companies agreed, on a voluntary basis, to double the tonnage tax over the coming years but this is far from enough.

    It might seem understandable that all governments in Greece, whether rightist or leftist, want to keep the shipping companies happy and competitive, especially when the owners are threatening to relocate to tax havens. With about 16 % of world capacity, the shipping industry accounts for 7 % of the Greek economy and provides 190 000 jobs in Greece.

    But how far can a state go in not taxing a branch without being captured by vested interests? In its first proposal to the partners, the new Greek government committed itself to “work toward creating a new culture of tax compliance to ensure that all sections of society, and especially the well-off, contribute fairly to the financing of public policies”.

    It remains to be seen by the end of this week if a deal, if it will be forged, has something concrete to offer on this point. Greece needs to mobilize its own resources. Tax immunity for shipping companies and their owners has an opposite effect on tax compliance. Why should ordinary people pay taxes if the well-off are legally exempted?

    Mose Apelblat