The agreement in principle at Friday’s Eurogroup to extend the program reached by the government and the lenders was a major step in the right direction. Yet even if the agreement is successfully concluded by finding a mutually accepted list of reforms to be ratified by national parliaments in the next few days, there should be no doubt the road ahead will be bumpy.
With billions of euros reportedly leaving the banks last week, the government led by SYRIZA with junior partner Independent Greeks (ANEL) was clearly under pressure to reach an accord at the Eurogroup meeting. ECB President Mario Draghi’s intervention helped highlight the risks to the finance ministers of other eurozone countries as well. The Irish finance minister was clear when he said Greek banks would have faced sudden death if there were no deal.
No doubt the government will face opposition from within leftist SYRIZA’s party ranks and the right-wing ANEL. But Prime Minister Alexis Tsipras has repeatedly demonstrated his ability to weather political storms and keep his party united. Minor defections by one or more ultra left-wing factions should not be a big deal. They may even help strengthen his hand. Still, one should not underestimate the seriousness of the situation as the government is called upon to shelve some of its pre-election promises.
Undoubtedly, the government has based its communication strategy on the “constructive ambiguity,” as Finance Minister Yanis Varoufakis put it, about the “appropriate primary surpluses” this year and beyond. The government hopes it can avert unpopular pension and other spending cuts and tax increases while increasing social expenditures. Instead, it claims it can fill the budget gap by collecting billion of euros in revenues from the fight against illegal trading, tax evasion etc. The non-papers released to the press by the Finance Ministry speak volumes.
“The authorities look forward to maintaining a 1.5 percent primary surplus over the year,” Varoufakis said in a non-paper, acknowledging “the revenue shortfall at end-January reached 2 billion euros compared to the Finance Ministry’s forecast.”
The bailout program calls for a 3 percent of GDP primary surplus target this year and 4.5 percent next year and beyond. Many analysts think these targets are unrealistically high. Even the previous government tried to convince creditors to lower it to 2.5 percent from this year on, according to two participants in negotiations.
The non-paper added that the government expects revenues up to 5.5 billion euros over the year, through fighting illegal trade, tax evasion and corruption, better control of transfer pricing in companies active abroad, reforming the arrears collection process and implementing more progressive taxation on the wealthiest.
However, many economists doubt the government can collect this amount over 2015. Its best chance may lie with the scheme where people can repay their tax and social security arrears in up to 100 installments. The new scheme is more generous than a similar one legislated by the previous government to which the troika had raised serious objections, demanding fewer installments and the introduction of income and property criteria. So it is going to be interesting to see whether the creditors have changed their minds over the effectiveness of this scheme now.
There is also scope for results by combating illegal trading in oil and tobacco. Several governments have vowed to fight it since 1981 but ended up empty-handed. Shipping and the armed forces are the two main areas where illegal trading in oil is reportedly taking place on a large scale, according to experts. Under creditor pressure a previous government hiked the special tax on heating oil to bring its price close to that of diesel. The goal was to combat illegal trading by making arbitrage unprofitable, to raise over 1 billion euros.
However, the outcome turned out to be worse since the consumption of heating oil collapsed, reducing tax revenues. This prompted the previous government to unilaterally cut the special consumption tax on heating oil and relax the conditions for subsidies to households last fall. SYRIZA committed during the election campaign to cut the consumption tax even further to relieve households and impose stricter controls to stop companies from exploiting the spread between the cheaper heating oil and the more expensive diesel. Experts say there is the potential for collecting more revenues by combating illegal trade but warn it will take longer than a year and the revenues may not be as big as hoped for.
The government also wants to go after some “oligarchs” and others for tax evasion. This way it hopes to collect billions in taxes, boost its popularity by keeping the high moral ground and gain creditors’ trust. It is hard to estimate how much such a crusade may fetch, but it will definitely help its image at a time it may not be able to deliver on other promises.
A few economists have already shrunk this year’s GDP forecast from 2.9 percent to 0.6 percent according to the latest Bank of America revision. This coupled with an ongoing sizable revenue shortfall means that repeating even last year’s 1.5 percent primary surplus looks challenging. So even the government’s strong card of a lower primary surplus may not be that strong after all. The road ahead will be bumpy.