The Eurogroup is on Monday likely to endorse the progress made in the negotiations between Greece and its creditors in the last couple of weeks but the conclusion of the last review of the second bailout program is not in sight yet. History teaches the two parties may be able to agree on measures to fill the estimated fiscal gap but it will be harder to agree on other structural reforms. To bridge the gaps, it requires mutual concessions and political statesmanship, especially in Greece.
No strategy of buying time has a good end when there is no big plan, say people who have experience in negotiations. Analysts and others had been wondering for some time whether prolonging the negotiations with the European Commission, the International Monetary Fund and the European Central Bank was part of the Greek strategy. Many found it hard to believe this was the case because the delay was hurting economic activity and the state coffers were running out of money.
On the other hand, this strategy could be used domestically to show the leftist-led government was negotiating harder with the lenders unlike its predecessors. Some in the government appeared to be aiming at a partial, interim agreement with the lenders that would secure some funding to the state. The remaining thorny issues, such as pensions and labor market reforms, could be packaged into the new, big agreement which would also contain debt relief measures and a European Union-funded investment initiative. The proponents argued this way the latter deal could have been sold more easily to the public and would have been resisted less by the most anti-bailout deputies of the ruling party.
The events at the informal Eurogroup meeting on April 24 in Riga, Latvia, illustrated how isolated Greece had become by following this route. The creditors insisted that the review of the second bailout program be completed before there was any new agreement, killing the idea of an interim accord. A number of things have changed since then. The Greek negotiating team was reshuffled and talks with the official lenders have intensified, leading to a convergence of positions on a few topics. Still, the distance separating the two sides seems to be quite large on important ones, such as the fiscal gap, the pension system and the labor market.
In this regard, a statement by the Eurogroup, confirming the progress in the negotiations, is expected on Monday. This statement may be enough to dissuade the ECB from increasing the haircut on the value of the collateral posted by domestic banks to get emergency liquidity assistance (ELA) from the Bank of Greece. However, pundits believe it will not suffice to facilitate the funding of the Greek state via T-bills bought by local banks or other means.
Undoubtedly, more progress has to be made in the days ahead and in our opinion this is more likely on the fiscal side rather than pensions or labor reforms. Greek governments find it politically easier to raise tax revenues to meet primary budget goals. Spending cuts is a tougher cookie with the public investment budget and procurements being among the first to be targeted. This is more so with the leftist-led administration, which wants to use the tax system to redistribute income as well. Therefore, it is not surprising tax hikes on luxury items, the overhaul of the value-added tax with the introduction of a unified VAT rate, a windfall tax on people earning more than 50,000 euros per year and a tax on the 500 wealthiest families are on the table. Even if a shortfall arises, there are ways to cover it.
It will be harder for this government to go the distance with some of the pension and labor market reforms demanded by the lenders to make the Greek economy more competitive and the public finances more sound.
Finance Minister Yanis Varoufakis had told the Eurogroup on February 11: “We are committed to deep structural reforms... Our government will be the most reform-oriented government in modern history, and among the most enthusiastic reformers in Europe,” adding: “We are not tied to any interest groups. We will deliver results for the people, not for friends or patrons.” Still, even the simple pension reform of raising the effective retirement age by closing the loopholes for early, voluntary retirement is not easy because it affects tens of thousands of people. They may not be an organized group but their votes count.
Respected economics professor Jean Pisani-Ferry had said a couple of years ago, when he was still heading the Bruegel Institute, that “bold leaders start with challenging prescriptions and apprehensive leaders with politically expedient items… Political energy may be consumed in pushing through measures that deliver too little. Instead, [leaders] should start with the most binding constraint to performance.”
I think political leaders, especially in Athens, should take note of his advice. It is only then they may be able to make up for the lost time in the negotiations with the official lenders and deliver the kind of structural reforms that will make the difference. There is not much time left.