George Alexandridis is an Associate Professor at the ICMA Centre and specialises in Corporate Finance and Shipping Finance. He is also the founder and Director of the MSc in International Shipping and Finance.
In Greece and elsewhere many rushed to label the deal attained at the Euro-summit on Monday morning a coup and a product of “gunboat diplomacy”. The Greek government is already facing a rebellion from more than 30 hard-left MPs who openly declared they will vote against the bill; the parliament speaker is considering resignation; unions are setting for strike actions; and the leader of the junior partner of the coalition government has again used strong language, although in yet another U-turn, vouched to keep the coalition alive and vote in favour of at least some of the measures on Wednesday. Most importantly, the Greek people remain largely divided and many of those who voted for NO in the recent referendum feel saddened and sold-out by the Greek PM and enraged by some European leaders. Sounds like more trouble ahead.
Although it would be near impossible not to perceive some of the deal’s terms as particularly harsh, we shouldn’t forget that many of these measures were originally approved back in 2012, but were never implemented. While most of the reform related terms are not new, further fiscal measures designed to meet certain budgetary targets have been introduced. And one may argue that they have been the result of the government’s catastrophic 5-month-long chess game resulting in extensive delays and the dry up of the economy and the banking system. An outcome that could be largely credited to the ingenious ex-finance minister Mr Varoufakis. The tax hikes will indeed do more harm than good, but in retrospect, they are the price the Greek government and people will have to pay for these delays and tactics.
It might be worth considering that fiscal measures in the form of taxes and budget cuts would be introduced anyway, irrespective of whether Greece stayed in the EU or opted for an uncontrolled exit and printed its own currency. Since the country is now running a primary deficit, and a Grexit would inevitably further deteriorate its economy, the gap would have to be bridged by even stricter tax hikes and deeper budget cuts. Printing excessive amounts of new currency (instead) is not a panacea and would only result in severe inflationary pressures spiralling out of control. Unfortunately for us the Greeks there is now no way to avert austerity. We are between a rock and an even harder place and this is exactly what Mr Tsipras seems to have realised even at this very late stage.
It makes sense to assume that if the PM had seen an easier way out for the Greek people, who voted against austerity in the referendum only days ago, he would have taken it. Therefore, although some of these measures are considered unfair, intolerable tax hikes and budget cuts are now on the way irrespective of which path Mr Tsipras had chosen. That is the truth. And while many argue that, had he opted for the more “honourable path” of an EU-exit then people would have regained their sovereignty and pride, I seriously struggle to understand how being poorer and more isolated would make a nation prouder.
So we could perhaps go as far as assuming that these kinds of views and behaviours are also driven by overreaction to the significant deterioration of living standards for the vast majority of Greeks. I hope and pray those who cherish and disseminate those views will not have to realise this the very hard way if things don’t work out in the end. Even if re-gaining sovereignty and pride was the ultimate aim, still there are certainly more balanced routes to achieve those and come back with a vengeance. But let’s be honest, all possible paths ahead are full of thorns. Mr Tsipras is up for yet again another bumpy ride. And if his government loses majority after the vote by Thursday it remains uncertain what he might come up with next.
But for now, it might be worth looking into some of the pre-conditions to the new bailout programme as part of a bill set to be passed this week in Greece.
Increases in VAT
Overall, this will generally reduce purchasing power and affect low income families more. It will hamper the catering industry and impede the competitiveness of Greek tourism. So although this might bring more revenue in the short-term, it is in fact a deeply inflationary and recessionary measure which is unlikely to benefit the economy in the medium or long-term. Instead, I would have liked to see a significant VAT hike in tobacco and alcohol, which strikingly, have been left untouched, as well as a more sizeable tax increase for a “luxury” basket of goods. Combined with appropriate measures to crack down tobacco and alcohol smuggling (costing the government €800mil a year) they might have had a similar end-result, not to mention any health related benefits! In all, I would like to think the new VAT regime is temporary and will soon be re-visited.
Increase in extraordinary tax rates
This is inevitable since it is only fair that higher incomes carry more of the weight. However, an emergency tax (even as low as 0.7%) to people earning €12,000-€15,000 a year is quite unfair and has already brought discontent among those with lower incomes. This could have been waved in favour of building a sense of justice and replaced with a higher rate for incomes above €100,000 and €500,000 (currently at 6% and 8% respectively). It might sound extreme to increase taxes further within these two categories but, in these turbulent times, perhaps protecting the low earners more might end up being a good strategy.
Increase in corporate taxes
The measure was originally proposed by the government itself in an effort to re-distribute the weights, but it could have a boomerang effect. Yes, it might bring more income in the short-term. But in a neo-liberal economic system and for a country that is craving growth, investment and competitiveness related gains, it might be a bad idea. I also wonder if it should have been combined with disincentives for companies to move their tax base off-shore. If 10% of Greek businesses were to move abroad, the effect of this measure would be nullified. The government intends for this to be a short-term measure but the long-term adverse effects might be significant. And of course the creditors can’t possibly think such moves will do anything to foster economic growth!
Abolishment of early retirement and increase in pension contributions.
The Greek pension system is unequivocally unsustainable and would soon collapse, especially given Greece’s ageing population and high unemployment rate. Clearly, pensioners have suffered more than enough already and the adjustment is deeply distressing. But unfortunately a series of bad past choices and policies means that more needs to be done now. If the government manages to crack down on uninsured labour while at the same time some of the €35bn ECs “growth package” is channelled, even indirectly, towards tackling unemployment and increasing birth rates, then at least, the pension system might have a good chance of regaining its viability many years from now and after Greece returns to the path of growth.
Independence of the Statistical Authority (ELSTAT)
It was about time! Let’s not forget that previous governments exploited this institution to forge data on a number of occasions which is the very reason why nothing was done to avert disaster earlier. It is a positive reform and we should be glad it is finally taking place.
New code of civil procedure
This should sound like music to our ears. Speeding up the judicial process, in order to free up a deadlocked system, overburden with cases and reducing costs is a long awaited reform. As part of a wider plan to depoliticize the Greek administration in an effort to tackle clientelism and corruption it could turn out to be among the most significant reforms of the entire package. Mr Tsipras should also take own initiatives and pass additional legislation and reforms that will mark a new era in Greece. A far-reaching overhaul of the country’s broken educational system should be among his ultimate priorities for a number of good reasons.
All in all, there are undoubtedly some positive reforms within this week’s bill but at the same time the burden on the shoulders of the Greek people is now becoming even more unbearable. And unfortunately there is more to come as part of the actual bailout programme yet to be agreed. Wasting valuable time and draining the economy exacerbated the situation. Let’s hope at least that lessons have been learned this time around. It looks that this generation will have to “pay the bill” either way irrespective of how unfair this might sound. It is the only way our children can live and prosper as part of a new era in Greece. It is thus important that this government (or perhaps a new one by Autumn!) stands to the occasion and implements deep reforms, manages to re-gain trust and, as a result, is then without delay offered the opportunity to revisit some of the recessionary measures. Otherwise the future might be bleak for us the Greeks.