The Full Version Of What Greece And Varoufakis Are Offering The Eurogroup, With Comments
The Greek government has released the full proposals that Yani Varoufakis made to the eurogroup. That full version is here and what follows is my commentary on what I think are
We are committed to sound public finances. Greece has made a vast adjustment over the past five years at immense social cost. Its deficit is now below 3% in nominal terms, down from 15% in 2010. Its primary surplus has reached 1.5% at the end of last year, its structural balance, as measured by the IMF, has reached a surplus of 1.6%, the best performance in the EU.
Well, that’s sort of true. As I explained yesterday there’s been a definite falling off. There was that budget surplus at the end of 2014. But the tax revenue collection numbers were falling away in December and the January ones are worse. To the extent that if those rates continue all year they’ll be back to a 5-8% budget deficit. That could be just a result of the election period. Or it could be something deeper, the expectation that austerity would ease once Syriza is in office. Only time will tell on that one.
On privatization and the development of publicly owned assets, the government is utterly undogmatic; we are ready and willing to evaluate each and every one project on its merits alone. Media reports that the Pireus port privatisation was reversed could not be further from the truth. Indeed, quite the opposite holds as foreign direct investment will be encouraged as long as the state secures a stream of long term revenues and a say in labour relations and environmental issues.
Well, that’s one of the things people worry about slightly. Because the state remaining the overseer of labor issue is likely to reduce privatization revenues. As is the insistence in selling for long term revenues rather than a lump sum now in order to pay down debt.
Quick fire sales of public property, at a time when asset prices are deeply depressed, is not something that anyone would advocate.
Well, actually, yes, people would. That’s what we do in private sector bankruptcies and we are at the national equivalent of that. Get the assets out from where they have a low value and move them over to where they have a higher.
Instead, the government will create a development bank which will incorporate state assets, enhance their equity value through reforming property rights and use them as collateral for the purposes of providing, in association with European investment institutions such as the European Investment Banks, funding to the Greek private sector.
Just about no one other than the new Greek government has a great deal of faith in either the Greek government or the Greek banking system being able to add value to anything. That’s sorta the basic problem here, isn’t it?
On two other emotive topics, let me clarify that the restoration of the pension cuts we announced concern pensioners living at or below the poverty line and comes up to less than 2 euros per day per eligible pensioner – at a grand total of around 9.5 million.
OK, that’s a trivial cost, don’t worry about it. But this?
On the minimum wage, the government will phase in its restoration to the 2012 level gradually, from September onwards and after consultation with employers and trades unions. As it applies only to the private sector, its fiscal impact will be, if anything, quite positive, as its multiplier effect is large and likely to boost tax revenues beyond the affected employees. Will it reduce competitiveness of the private sector? The government commits to reforms, e.g. in social security, reducing the tax wage that will ensure it does not.
When you’ve got 50% youth unemployment then no, raising the minimum wage really doesn’t sound like a good idea. We all of us agree that a minimum wage has some unemployment effects, it’s just that some want to insist that modest changes in it do not have large unemployment effects. That’s the academic and political debate in the US and UK at least. One would hope that the Greek government isn’t actually operating on the idea that raising the minimum wage is going to produce such a rise in aggregate demand that it will expand the economy. That might just about work as a Democratic Party talking point here in blog comments and the like but it’s really not a serious policy idea. The reason being that that higher minimum wage has to come from somewhere (it is only the private sector that is going to be affected). So, the addition to demand is not the total amount of the higher minimum wage. It’s the difference between what taxes would have been paid if the wage had not risen and what will be paid if it does, plus the marginal propensity to save of the two groups, those who would have had the money if it didn’t rise and those who will if it does. It’s worth recalling that Jamie Galbraith is advising Varoufakis and Galbraith makes this mistake himself in his analysis of he economics of minimum wage rises.
And that’s too small a number to provide any sort of multiplier that we’re going to notice on aggregate demand.
Continued primary surpluses will remain our mantra. We propose a maximum 1.5% of GDP primary surplus objective, from as soon as the present disturbed economic situation has stabilized and for as long as necessary to achieve the underlying goals. This objective can be shown to be sufficient, under very reasonable assumptions, to put the debt trajectory on a downward path.
All the indications are that everyone is willing to agree to this.
We wish to discuss with you this home-grown agenda that reflects both our potential and specific constraints. We wish our growth to be inclusive, based on investment, and productivity gains. Growth based on further labour cost compression cannot work in Greece and has been rejected by our people.
That’s also pretty much OK with everyone. Greek unit labor costs have declined by some 20% relative to eurozone averages which is probably enough.
Moreover, we propose to work urgently on a bridge financing mechanism to ensure Greece’s liquidity position over the coming months.
This is one of those code words, that “bridge financing”. The Greeks are taking bridge financing to mean enough money to cover needs while a different and better deal is worked out. The Eurogroup would be happy with an extension of the current deal while a new deal is worked out. The difference between the two phrases being that an extension would mean Greece has to hold to the old deal while the new deal is worked out, a “bridge” that they would not. And that is one of the major sticking points here.
We propose the bridge program to cover the period until end-August.
The Eurogroup wants to hold Greek feet to the fire while they negotiate, not relax conditions while they do.
That was the February 11 paper.
Then there’s a paper from the government itself, not the Varoufakis talk.
Uncertainties surrounding the electoral period in Greece and the ultimate status of Greece with respect to Europe have affected economic activity and fiscal performance over the last two months. As a first step, it is essential to stabilize the banking system immediately and to restore confidence in Greece as a full and permanent member of the Eurozone. The Government of Greece requests immediate affirmation and assistance from its Eurogroup partners to this end.
OK, that’s the government admitting (although without indicating the scale of the problem) that tax collection has fallen off a cliff over the past two months. The banking system part is that Greek government paper is no longer acceptable at the ECB as collateral. They’re (in code) arguing that this facility should be granted again. Although, with Greek debt barely reaching junk levels it’s difficult to see why this would be done on economic grounds. Political grounds, maybe, but not economic. That’s what they’re arguing for here:
The government expects that an agreement with its Eurogroup partners on a bridge program will allow the Governing Council to renew the waiver for eligibility of Greek paper to Eurosystem refinancing operations.
Before June, Greece faces €5.2bn repayments to the IMF. The government is fully committed to honor these payments. The government looks forward to a positive discussion with the IMF on renewing a financing agreement based on an updated DSA.
To meet its immediate payment obligations, the government asks the Eurogroup to disburse to Greece the outstanding €1.9bn SMP bonds related Eurosystem income, in accordance with Eurogroup previous commitments. After June, €6.7bn repayments are scheduled over the summer to the ECB as the holder of
SMP bonds. This repayment creates very exceptional pressure on Greece’s funding needs in 2015.
The government expects that an agreement regarding the issuance of T-bills will be obtained to cover these exceptional needs. This would not raise the amount of debt, but only change its composition.
There is a limit on how many treasuries Greece is allowed to issue. On the grounds that no one really wants them to go out and keep issuing yet more new debt. They’d rather like some of the old debt to be paid down in fact. What Greece is asking for here is that it be allowed to issue more treasuries in order to pay off those other loans. Not the point of the exercise at all: the Eurogroup wants to see debt levels declining, not just changing in form.
The Greek Government is working on a new agenda for growth and structural reforms. The new agenda will address the causes of Greek economic decline and help to modernize the Greek socioeconomic model.
Well, yes, OK, that’s all very fine. Which is exactly what everyone is arguing Greece needs to do anyway. But given the rather backsliding nature of previous Greek governments there’s a certain desire not to loosen up on the pressures for the current one to do all of this. Syriza do have on advantage here though, on the only Nixon could go to China principle, that really only a hard left group could take on that task of reforming the Greek public sector.
Over the bridge period during which this new contract will be prepared and negotiated, the government will put a priority on the implementation of those actions listed in the existing agreements that are fully consistent with its political mandate. Altogether, they would represent more than 70% of the whole list of previously-agreed actions.
That’s quite cute really. Yes, we know we’re going to go bust unless we keep to he deal we’ve already got with you so, umm, we’ll keep to 70% of that deal. Is that OK with you? Dropping the other 30% of it?
Europe is whole and indivisible, and the government of Greece considers that Greece is a permanent and inseparable member of the European Union and the Eurogroup. The government is committed to a relationship between Greece and its partners based on good faith, mutual trust, and a common commitment to the
European project. It is confident that a relationship firmly built on this basis can work to restore the Greek economy and to anchor Greece’s future as a prosperous member of the Euro Area.
That’s the European Union equivalent of saying that you’re in favour of Mom and apple pie. Pay it no heed therefore.
And then here’s the Varoufakis statement from this Monday. When, as we all know, nothing also happened.
Nevertheless, there is much that we can deliver that is of mutual benefit. To do so, we need a short-term (three to six month long) agreement that will allow us to establish the “common ground” mentioned by President JD and Prime Minister AT last Thursday. It is in no one’s interest if, over the next days and weeks, as a result of a political failure on our part Greece languishes under a collapse in activity, a collapse in revenue and continued deposit outflows.
That’s a further admission that tax collection has collapsed. And also that there’s a slow bank run going on. There’s also a subtle underlying line here. Because we’re all sitting around talking about a deal instead of you giving in to us then the situation is going to get out of the control of all of us. So, give in to us now and the situation might be saved. Rather a clever negotiating position. Unfortunately, we’re not getting to see the responses to these lines but the fact that this didn’t work, as in there was no agreement, might indicate that no one bought this line.
Similarly, we are eager to find ways of writing off the accumulated penalties on taxpayers in arrears that
have mounted up to €70 billion. Naturally, the Greek administration understands that any such write offs must be designed to avoid rewarding strategic defaulters and, most certainly, to prevent a long term tendency to
delay paying debts and taxes. Still, we think that the backlog of arrears and NPLs are a major impediment to recovery.
That one won’t have gone down very well. Not that anyone thought that those tax debts were all going to get paid but some would have hoped that at least some of them would have been, so that their own loans would be paid off.
The Greek authorities are determined to use these few months effectively, as opposed simply to buying time for the purpose of doing little. We propose to concentrate on a few reforms that are essential and which can be implemented immediately, with the assistance of the institutions plus of the Organization of Economic Cooperation and Development. Among them, we intend to: Cut the Gordian Knot of bureaucracy – through legislation that bans public sector departments from asking of citizens or business information, certificates or documents that the state possesses already (and which reside in some other department)
That’s an exceedingly good idea. Although quite how long it will take for the Greek bureaucracy to live up to this is anyone’s guess. One can imagine the following: “But I don’t have to give you that form. It comes from the government anyway!”. “But I am not asking you for that form. I am asking you for the form from the same office which says that they have that form!” I actually saw this, live, in St Petersburg in 1991. Sobchak, the Mayor, said you don’t need permission or a license to set up a new business. Just go do it and write us a letter telling us so and we’ll catch up later. So, the next day, the office that issued business licenses was mobbed. “But you don’t need a business license.” “Yes, but we need a license saying we don’t need a business license!”
Similarly with foreclosures of non-performing mortgages. Independently of our ideological differences (and whether you agree with our government that family homes should not be auctioned off in the midst of a depression on ethical grounds), the fact remains that it would be non-sensical to throw hundreds of thousands of families on the street at a time when there are no buyers and, as a result, such foreclosures will yield no capital for the banks, will fuel the already hideous humanitarian crisis and, in the end, destroy what is left of the real estate market.
That does actually make some sort of sense: but also doesn’t in another way. The great trick that efficient capitalism manages is dealing with bankruptcy. The more brutal it is, the quicker, the better in almost all cases. Agree that a mistake was made, bankrupt the company/individual and then wipe the slate clean for a fresh start. To put it mildly, that’s not what happens in Greece.
Then we get the Greek government’s address to that meeting of last Monday. Which has a real corker in it:
Technical discussions revealed real differences of logic on a limited number of issues. The Greek government considers current labor market reform agenda as unfit to the current situation of the economy. It will promote a
different approach, with technical assistance from ILO, to ensure workers’ protection in a way that is consistent with economic growth.
The ILO is about three decades behind the times in how to protect workers’ protection while allowing economic growth. They’re a bit like asking the Teamsters how to make America a better place. The response “Pay Teamsters more!” is about the best you’ll be able to get. The actual reforms that have worked were the Hartz IV reforms in Germany and they’re roughly the opposite of the policies that Syriza wants to enact.
The government will also promote a different approach for managing public assets. Privatizations will not be stopped but assessed on a case by case basis to ensure that they are consistent with public interest. Fire sales must be prevented, and a longer time horizon, in particular with respect to the banking sector, must be considered.
This is exactly what no one outside Greece actually wants. At this point the revenue to be raised from privatisations is near irrelevant. Get those behemoths out of state control and into something like the efficiencies of the private sector at near any price. That will do more for Greece than whatever the revenues might be.
On public administration reform, the government supports the goals to make SoEs more efficient and establish a more efficient civil service but systematic dismissals will end. On taxation, the government will review current policies to protect the poorest segments of the population. It will review the brackets for income tax to increase progressivity and replace the current property tax by a wealth tax.
A wealth tax instead of a property tax is absolutely the wrong way to go. Wealth can be hidden easily enough, property cannot be. Further, we know that wealth taxation is highly distortionary and has very high deadweight costs. Property taxation, on the other hand, can have deadweight costs that are so low they are actually negative. Bad, bad, idea.
Privatization receipts can contribute to improve the debt trajectory. However, past commitments made by the previous Greek government fell short of the targets. Quantitative objectives should be realistic. Forcing sales of public assets in a depressed environment is unjustified. The authorities will stop all sales that are not in the public interest.
Sadly we know how that one turns out. “Not in the public interest” becomes “whatever the governing party doesn’t like.” Which is another reason why the Eurogroup is so keen for those privatizations to go ahead at full speed.
On the revenue side, the previous period was dominated by political interventions, of varying intensity and from numerous sources that promoted uncertainty and thus affected economic activity and tax collection. Revenue
shortfall as of end-January reached €2 billion compared to MoF forecast.
There’s the admission that Greece does not in fact currently have a primary budget surplus because tax collection has fallen off that cliff.
The authorities contemplate exceptional action in terms of revenue mobilization in 2015.
But we’ll do better! Not, it has to be said, hugely convincing.
In 2011, under the first program, the MoU agreed with the Eurogroup expected €50 billion of privatization receipts over the period 2011-2016, with a €5bn target for 2011, €10bn for 2012 and €5bn in 2013 (€20bn total receipts at the end of 2013 and €35bn at the end of 2014). In 2012, the second MoU stated that the €50bn target was maintained, but over a much longer time horizon. The end-2020 target was revised down to €22bn in April 2014 considering the “unsatisfactory privatization process”. In practice, privatization proceeds amounted to €1.6bn in 2011, zero in 2012, 1bn in 2013 and were expected to reach 1.5bn in 2014 and 2.2bn in 2015. These figures demonstrate the practical inability of privatizations to bring sizeable resources to repay public debt in the current Greek context.
Oh, and we’re going to blow out the borrowing anyway simply because we’ll not be able to, or at least aren’t going to, sell off those public assets. There’s then a fascinating (to wonks only) discussion of the point that Greece doesn’t owe as much as everyone thinks anyway. Thus it doesn’t need to have as large a budget surplus as everyone is saying. It does have to be said that this argument depends on the rather heroic assumption that growth will be 4% in nominal terms for the next few decades.
But don’t just take my rather cynical word for all of this. It’s actually very interesting that these sorts of documents are being released publicly in near real time. We don’t usually get to see these sorts of things, at least not until the history books are written decades later.
My own take on this is that, rather more than I thought this was true before, Syriza are wrong here. They’re not grasping some of the reasons for the actions they’re being asked to undertake (for example, privatization isn’t really about revenue raising, it’s about getting those organizations out from underneath the state) and they’re proposing some not very good ones (that ILO framework of workers’ protection). And their assumptions about the debt path look heroic to me.
But it’s still a fascinating document.
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