18 February 2015

The Greek government has confirmed that it will request an extension of its ‘loan’ tomorrow morning. However, as German Finance Minister Wolfgang Schäuble pointed out on ZDF last night, “It’s not about extending a credit programme but about whether this bailout programme will be fulfilled, yes or no.”

The first thing to note is that this does not necessarily bring the two sides that much closer together. This whole suggestion seems to be based off of the draft communication which EU Economic and Monetary Affairs Commissioner Pierre Moscovici (along with European Commission President Jean-Claude Juncker) discussed with Greece at Monday’s Eurogroup and which Greek Finance Minister Yanis Varoufakis said he was willing to sign there and then. There is just one problem. No-one else was willing to.

The Moscovici proposal then is a bit of a red herring as an alternative. Yes, it was clearly discussed by the Commission, but even the Commission says he was only “contributing ideas” and never suggested it was an alternative deal ready to be accepted by the Eurogroup.

It seems likely that it will still form some of the eventual agreement but it seems to sorely miss some of the crucial points desired by the Eurogroup. So how might the agreement look then? Below we outline briefly what each side wants but more importantly which conditions in the current programme the two sides could find agreement on.

What does the new Greek government want?

We have laid this out in detail here, so we won’t rehash it all. In short, Athens wants:

  • An extension of funding – be it via the current loans, the leftover in the bank bailout fund or by an extension in the level of short term debt which Greece can issue).
  • No continuation of the current ‘Memorandum of Understanding’.
  • Swap 30% of the current reform programme for a looser agreement around some key principles, such as: not taking unilateral action, not undoing reforms, broadly sticking to fiscal targets and committing to repay creditors in full.

What does the Eurozone want?

As we saw at Monday’s Eurogroup, the rest of the Eurozone is surprisingly and unusually united in wanting Greece to:

  • Request a short term extension of the current programme, including all commitments, allowing for longer term negotiations.
  • Maintain the current progress in reforms and not allowing fiscal slippage which would require more money.
  • Repay all of the money it borrowed.

What are the key conditions and could agreement be found?

The documents showing Greece’s negotiating position at the recent Eurogroup meetings (published today by the Greek Finance Ministry in an admirable transparency push) give an idea of where agreement can be found, saying Greece supports the current reform programme on:

“Tax reform, revenue administration reform, public financial management, fighting corruption, e-government, public procurement reform, business climate improvement, judicial system reform, implementation of EU legislation on network industries and competitive sectors.”

However, there other crucial areas where agreement seems some way off – if even achievable at all.

Labour market reforms
One of the ‘non-papers’ released this morning makes it clear that “the Greek government considers the current labour market reform agenda as unfit to the current situation of the economy.” Tsipras has already announced plans to reverse the Troika deregulation, restore collective wage bargaining and increase the minimum wage. For the Commission and IMF labour market reforms are crucial for restoring competitiveness, there is a widely held belief that the Greek labour market remains dysfunctional.
Chance of Syriza getting what it wants: None. The two sides are currently worlds apart.

Pension reforms
As with other parts of Europe, there is serious concern about the sustainability of pensions and the contingent liabilities for the state. The IMF has pointed out that pension spending is running at 17% of GDP and that the link between contributions and benefits for each individual is weak. The Greek government sees any pension cuts as “recessionary” and has basically refused to countenance any further cuts. In fact it wants to increase pensions for the hardest hit, though the fiscal cost of this should be minimal.
Chance of Syriza getting what it wants: Slim to none.

 

150218GreeceGraph2 itemprop=Source: Eurostat (spr_exp_pens)

Privatisations
The Greek government wants to drop the “unrealistic” IMF target of raising over €22bn from privatisations by 2020 and says it will assess the sale of public assets on a case-by-case basis from now on. Crucially, the government admits that “this new attitude will inevitably deteriorate the debt sustainability over the short run” – meaning that Greece will not meet the “arbitrary” public debt target of 124% of GDP by 2020. The Eurozone has previously shown flexibility on the privatisations with revenue regularly falling well short of targets. However, that also means its aims have been scaled down substantially already, and the Eurozone may therefore not be willing to move further.  The case by case approach creates very uncertain cash flows and therefore increases funding needs and reduces debt sustainability.
Chance of Syriza getting what it wants: Low. The Eurozone is likely to insist on some privatisation schedule.

Debt sustainability
This has been notoriously malleable throughout the crisis, with Troika forecasts proving to be largely a political exercise in illustrating sustainability to allow for funding to be released. That said, the Greek government wants to fundamentally change the approach to focus more on the ‘net present value’ than the nominal debt. The IMF is unlikely to change its modus operandi but there is some support for this within the Commission and the ESM, the Eurozone’s bailout fund.
Chance of Syriza getting what it wants: Medium, but will need to be fudged with the IMF.

Fiscal targets
As we argued in our previous blogs, it should be possible for Greece to reach an agreement to lower the primary surplus target to 1.5% of GDP and keep it on that level over the coming years. The real negotiations will be on how this impacts debt sustainability and Greece’s funding needs (see above).
Chances of Syriza getting what it wants: Medium to High.

Public administration
Again the Troika has been pushing for reform here for some time and welcomes the new government’s desire to press ahead, though it’s also clear successive Greek government have struggled to implement changes, and by most standards, the public sector remains bloated. The government has also said “systematic dismissals” in the civil service will end and that it may also seek to rehire those fired previously. This could prove a sticking point, since it may impact fiscal targets.
Chance of Syriza getting what it wants: Medium to High.

Tax collection and corruption
Tackling this has been a long standing aim of the Troika (as for every government everywhere ever). However, the Greek government’s assertion that it will collect an extra €5.5bn in tax this year is very ambitious. The Troika – or whatever its successor is called – will be happy to work with Greece on this but will not accept it as a nailed on funding source, which the government is trying to present it as.
Chance of Syriza getting what it wants: High.

What does Greece actually need? – Open Europe’s take
As we have said before, there is plenty of blame to go around for Monday’s Eurogroup negotiations descending into farce. As we’ve also said before, charting a path between these two sides is possible but will require compromise from both sides, though probably mostly from Greece.

Fundamentally, absent a central government and single democratic constituency for the single currency – something which is light years away – a balance must always be struck between what is economically desirable and what is democratically sustainable. The Greek election represented a tipping point, meaning that the rest of the Eurozone will also have to consider some trade-offs. Syriza does have some points: the primary surplus target is currently ridiculous and impractical, this should be lowered. This should also be combined with an extension of debt maturities and an interest rate reduction. As we have argued since the beginning of the Eurozone crisis, in the end some debt reduction could well be needed for Greece. Syriza is also right to take on the many vested interests in the economy, though they should be careful about overestimating the ease to which these can be changed, particularly from a tax revenue perspective.

Having said that, Syriza has clearly campaigned on a series of unrealistic promises, leaving the impression that it can somehow take Greece back to the order that existed prior to 2010 – the period during which the country racked up a debt-to-GDP ratio of 148%.  The new Government has also somewhat over-reached in these negotiations and struggled with coherence, which has caused plenty of annoyance – even amongst countries more sympathetic to Greece’s plights.  At the end of the day, the Troika is broadly correct on the reform programme. The labour market in Greece is based on unsustainable entitlement culture and is holding the country back. Progress has been made, but further reforms are needed to reduce costs, make work more flexible and tackle undeclared/informal work. The pension system is also a drain on the government and largely unsustainable. Reforming it can also help boost the labour market by making outcomes better linked to contributions. The option of assessing privatisations on a case-by-case basis seems logical, but our concern is that Syriza will struggle to ever support any sales of public entities for political reasons – while the funding stream would be very uncertain, something the country can ill afford.