Frustration grows over policy mix

Frustration grows over policy mix

The government and the country’s European lenders have strong incentives to successfully conclude the first program review ahead of the UK’s referendum on continued European Union membership in June and the ongoing, albeit receding, migration crisis.

However, the reported mix and size of the measures appear to have raised the degree of pessimism in the business community and households, undermining the presumed positive impact of the first review.

Greece was back in the headlines recently, following an unsubstantiated report by WikiLeaks which revealed a conversation between top International Monetary Fund officials on the ongoing program negotiations. Although the conversation did not shed any new light on the IMF’s known position that the fiscal targets have to be lowered and debt relief provided, they revealed something else: that diverging views between the country’s creditors are as much of an obstacle to the program as the usual disagreements between Greece and the creditors.

It is clear that the European Commission and the other European institutions (the ESM and ECB), have taken a softer line on the size of the measures needed to meet the highly demanding primary surplus target of 3.5 percent of GDP in 2018. This is largely explained by politics. First, the European lenders appear reluctant to agree to the kind of debt relief that would be needed to lower the primary surplus target to 1.5 percent of GDP in 2018, as advocated by the IMF at this point. Perhaps they are concerned this kind of debt relief would not be approved by some national parliaments on certain grounds, i.e. moral hazard, some countries are poorer than Greece, etc. Second, they are afraid the review negotiations could affect the result of the UK referendum. This is more so after the Dutch recently rejected an EU-Ukraine trade deal.

Having said that, we should stress something else we have detected by talking to various Greek businessmen and households. Of course, we are not in a position to know whether this is a trend or just noise. However, it looks as though a growing number of people who have been traditionally pro-bailout, are disappointed by the apparent willingness of the European Commission and others to accept that fiscal adjustment should almost solely rely on taxes and social security contributions.

In their view, the Commission’s approach leads nowhere but economic stagnation and is a recipe for failure. It was surprising to find out that even staunch supporters of the euro are now openly questioning whether the economy can grow at a satisfactory pace in the medium-term with this kind of economic policy. They argue that the completion of the first evaluation, with the barrage of tax measures being planned, will not have the kind of positive impact on the real economy anticipated by some analysts.

These businessmen are even willing to discuss whether a return to the national currency could be a catalyst for growth given the strong, internal resistance to structural reforms, the reliance on taxes and the ever-changing tax environment. They express exasperation, pointing to tax audits spanning many years back. This is forcing them to rent storage areas to keep boxes with invoices and other files going back decades, they say, adding that their colleagues abroad do not believe them when they describe their tribulations with the tax authorities and social security fund audits.

Of course, their attitude also reflects disappointment over the protracted economic slump and pessimism over the endless measures required to attain the fiscal targets and control the debt dynamics. In a recent memo, the Finance Ministry reminded that Greece has taken austerity measures worth 62 billion euros, or 36 percent of GDP from 2010 to the present. It did so to argue that taking an extra 5.5 billion euros in new fiscal measures is no a big deal compared to the magnitude of the interventions undertaken by previous governments. It was directed at political opponents and critics of the leftist-dominated SYRIZA government for the new tax-loaded austerity package it is reportedly negotiating with the country’s international lenders.

It should be noted, however, that Greece recorded a huge primary budget deficit of more than 10 percent of GDP in 2009, the year before it sought the EU/IMF bailout, and managed to post a primary surplus in 2013 after adjusting for the financial support to the banking sector. It was on track to attain a primary surplus of 1.5 percent of GDP in the third quarter of 2014, according to the lenders. However, it settled at 0.4 percent of GDP due to political developments initiated by the current ruling party, which derailed the second bailout program and brought the country to the exit door of the eurozone last summer. Eurostat is expected to confirm later this month that the primary budget balance was in a small surplus in 2015, seen ranging between 0.2 to 0.4 percent of GDP.

There is no doubt that the parties involved in the program review talks have strong reasons to want to conclude them as soon as possible. This concerns the European lenders and the government, which has shown it wants to stay in power. Public opinion polls favoring the conservative New Democracy over leftist SYRIZA, also point to the same direction. However, a tax-loaded package of austerity measures may alienate traditional bailout supporters in Greece, who will be convinced that the European lenders only care about getting as much of their loans back as possible rather than restructuring the economy. This tax package could also hurt the Greek economy down the road if they are right.

[Kathimerini English Edition]

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