BUSINESS

Break over, work on review can resume

NICK MALKOUTZIS

Creditors do not want labor legislation to become an obstacle to recovery, particularly at a time when a number of corporate restructurings are expected.

TAGS: Analysis

Many pupils around Greece will be feeling deflated on Monday as they head back to school and renewed obligations after a carefree two-week break. It will be of little consolation to them that many Greek government officials are likely to share the same sense of disappointment and trepidation as they resume discussions with the country’s creditors.

The unresolved issues in the second bailout review sit right in the middle of the negotiating table like a piece of unfinished homework. The longer they have gone without being tackled decisively, the more difficult they have become to solve.

The three key matters that Greece and the institutions will have to address in the days ahead are labor reform, the fiscal gap for 2018 and the measures that may be required after 2018.

There are other issues that will have to be resolved in the coming days, such as out-of-court settlements for debts to banks and the state, steps to reduce the Public Power Corporation’s share of the energy market, and maintaining a satisfactory pace in the privatization process, especially after the recent collapse of the bid to sell gas transmission system operator DESFA to Azerbaijan’s Socar.

However, it is the former group of three issues that will dominate discussions in the coming days as Athens focuses its effort on concluding the review by February. They are the most politically sensitive sticking points and will, therefore, require the strongest will for compromise.

Of the three, the fiscal gap for 2018 seems the most straightforward to solve. Athens has to find up to 450 million euros in savings or extra revenues to reach a projected primary surplus that will satisfy the International Monetary Fund as well as Greece’s European lenders.

The gap has partly been created by the rolling out of the guaranteed minimum income (GMI) scheme, whose annual cost is estimated at close to 0.5 percent of gross domestic product (around 800 million euros). While some within the eurozone might be willing to accept less robust measures to bridge the gap, the IMF wants Athens to adopt what it sees as reliable and effective measures.

These may come from a recent World Bank report on Greece’s welfare system. The World Bank sets out a number of changes the Greek government can make to reduce the system’s cost by around 0.5 percent of GDP per year and help it deliver more effectively for those who need it most. Although this sounds like a no-brainer, it would involve difficult political decisions for the coalition, such as scrapping around 300 million euros worth of tax credits.

In terms of labor reform, Greece and some of its lenders seem to be approaching the issue from opposite ends of the spectrum. Athens believes that it has to strengthen labor laws after the deregulation of the last few years, while on the creditors’ side (at the IMF in particular) there is a conviction that it is too early for the liberalization to be reversed.

Greece is being pressed to scrap restrictions on collective dismissals, which currently require the approval of the Labor Ministry, and cannot exceed 5 percent of the work force each month. The government is concerned that this might create a free-for-all in the labor market. Instead, it would like to restore collective bargaining rights and allow unions and employers to set the minimum wage.

Finding a compromise on this issue is going to be tricky. On the one hand it is clear that the institutions do not want Greek labor legislation to become an obstacle to recovery, particularly at a time when a number of corporate restructurings are expected, but on the other Greece cannot employ a framework that is far removed from the European norms.

However, it is likely the biggest dispute that must be settled is what will happen once the current Greek program ends in 2018. The IMF believes that Athens will have to take an extra 2 to 2.5 percent of GDP in measures (around 4.5 billion euros) in order to maintain a 3.5 percent primary surplus from 2019 onward. It also wants these measures to be legislated now as it will not have any way to tie this, or any subsequent Greek government, down when the program has expired.

Furthermore, the director of the Fund’s European Department, Poul Thomsen, set out in a recent blog post he co-authored the kind of measures that the Washington-based organization believes Greece should take. His two main suggestions are a reduction in the tax-free threshold for annual incomes from 8,500 euros to 5,000 euros and for substantial cuts to existing pensions.

All three of these demands are deeply problematic for the SYRIZA-Independent Greeks coalition. The prospect of legislating now another 2-2.5 percentage points in new measures, less than 12 months after it passed 3 percent of GDP in fiscal actions is anathema to Prime Minister Alexis Tsipras’s administration. Equally, thoughts of further cuts to pensions, after last year’s reductions and several others in previous years, risk alienating a large part of the Greek electorate.

It is no wonder, then, that Finance Minister Euclid Tsakalotos has proposed a less painful compromise. Speaking to Kathimerini recently, he suggested that the extension of the automatic fiscal mechanism, also known as “the cutter,” beyond 2018 could be acceptable to Athens. The cutter was agreed as part of the first review last year and ensures that the Greek government will be obliged to take corrective action if it fails to meet each year’s fiscal target.

It is unlikely that the lenders would accept a general commitment to make fiscal adjustments if the primary surplus comes in below target. The IMF is adamant that the initiatives need to be targeted and that the pension system is the prime area for intervention. This means that if the fiscal brake does turn out to be a basis for compromise, Tsipras and Tsakalotos will also likely have to accept the detailing of the measures that would be implemented if the budget is off track. The compromise on the lenders’ part would have to be that specific measures are not legislated now but their implementation is made contingent upon Greece’s fiscal performance after 2018.

As all sides return to the discussions after a brief but welcome hiatus over Christmas, everyone knows where the difficulties lie and what compromises have to be made. Playtime is over – now comes the task of getting the work done.

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