Monday, June 8, 2015

Greece: the trap set by creditors – The

The proposals submitted by the institutions are clearly unrealistic . “Friday, June 5 in the gallery of the Vouli, the Greek Parliament, Alexis Tsipras, the Greek Prime Minister, (which can be read here the speech translated into French) clearly rejected the proposed agreement five pages submitted by creditors Greece to his government. “ I never would have thought, especially that of politicians, and not technocrats fail to understand that after five years of devastating austerity it does not find a single Greek MEP to vote, in this House, the repeal of the allocations granted to the poorest pensioners or 10-point increase in VAT on electricity , “said host Maximos the Greek Matignon. This reaction triggered cries of ospreys in the camp of creditors who have not tasted the dry rejection of these five pages they had worked so hard to develop. Jean-Claude Juncker showed his bad mood by making one of his usual moral lessons.

A low consumption and just stabilized.

Is the wrath of creditors justified? Are Creditors proposals realistic and rational? Can they actually give a new chance to the Greek economy to rebound? To answer this, we must first recall the situation of the Greek economy. This situation is difficult to read today because of the deadlock between creditors and government, but it is certain that Greece is facing a demand problem and consumption is its weak point. Household consumption in 2014 was lower than in 2005. It decreased in constant prices by 17.5% since 2008 and 0.4% compared to 2013. So there was a stabilization at a low level n ‘assured little basis for a real recovery of the Greek economy with consumer spending accounts for two-thirds of the total.

Proposals VAT

In this context, Creditors certainly suggest lowering the intermediate rate of 13% to 11%, but they seek to meet the burden of the VAT by eliminating the reduced rate of 6% and expanding, particularly in the restoration and energy services and property affected by the higher rate of 23%. In all, the increase will amount to 1.8 billion euros as of 1 January. The effect of this measure may be sensitive to the extent that energy is an incompressible household expenditure and that its increase will be directly felt in other expenses. We saw a contrario that the decline in energy prices in many European economies, such as Spain and Italy, enabled a rapid recovery in consumption.

Circle deflationary

Certainly, if agreed, initially, there will be compensation to the extent that the consumption of the Greek households will probably inflated by expenses that were restricted during the “negotiations” with the creditors: households currently hoard to guard against a possible “Grexit. “But, ultimately, the effect of this increase in VAT is likely to be severely felt on the Greek economy. It would actually maintaining a deflationary logic. Companies will not be able to meet this new demand down by price declines. However, Greece is still in deep deflation (prices fell 1.8% in May over a year). This portends a further increase in unemployment to offset these price declines. Hence a further decline in household demand to wait …

Tourism in danger

This increase is all the more sensitive as it touches one of the last strengths of the Greek economy: tourism. With the crisis, Greece has become more dependent on tourism, which represents 18% of GDP against 16% in 2009. However, the creditors and the Greek authorities propose to remove exemptions enjoyed the tourist services in the Aegean islands. The creditors also want to make from 11% to 23% VAT on the restoration. This is jeopardizing the competitive advantages of Greece on the Mediterranean tourism market. Again, the only solution will be to develop the informal economy, either (and both options are not exclusive) to dismiss. At stake is the risk of seeing this important sector return less to the economy but also to the state coffers. This is why the Greek government proposes to raise the exemption to the islands after 1 October, to save the tourist season this year.

Choices have learned nothing Errors in 2010-2012

This policy of rising burden of VAT seems against-productive. Creditors renew here clearly their mistakes of 2010 and 2012, even as the IMF had acknowledged its mistakes. By practicing additional taxation of weakened demand, it is ensured for sure lower than expected revenue for the state. Accepting this logic to Athens would accept the logic of the three previous governments: that would accept in advance of further cuts to “get into the nails. “

The issue of primary surpluses

This is why the government refuses goals too high primary surpluses. The economic weakness in the first half makes obsolete necessarily the goal of the 2012 memorandum (3.5% of GDP this year), which, moreover, seemed to be even before the elections on 25 January. The surplus of 1% of GDP or € 1.8 billion proposed by the creditors seems an achievable goal. From January to April, the Greek primary surplus still amounted to 2.41 billion euros. But it should be taken into account in this figure arrears of the government, ie the invoices not paid within 90 days, which rose between December and April 2015 from 157 to 478 million. We need the government to pay suppliers quickly, or, again it would be a blow to the economy. Everything will depend on the evolution of income to see if it will or not practice new clean cuts. But in May, tax revenues have been misdirected. The Greek goal of 0.6% of GDP, or 1.1 billion euros, helps guard against a nasty surprise in recipes. More importantly, it is able to release a few hundred million to carry out support policies, including social. These surpluses are guarantees for creditors but are of no use to the Greek economy. Athens trying to save a few ways of shares. Nevertheless, there can be no doubt on this subject possible discussions bases on some points of GDP.

Strong surpluses for years

The main problem is goals for following years. The creditors and the government agree on a primary surplus target of 3.5% of GDP in 2018 (against 4.5% in the Memorandum), but creditors want to go faster than the Greeks (2% against 1 5% in 2016, 3% against 2.5% in 2017). Note, however, that Athens accepted the principle of an increase in the primary surplus. This will involve or a sharp rise in revenue growth or tax or cuts. There there an acceptance by the Greek government to a certain austerity, even if it is “softer” than that proposed by the 2012 Memorandum and by creditors. It is a painful concession by Alexis Tsipras who somehow accepts the principle that some of the wealth of the government must be reserved for the repayment of debt. There is no “break” with what economist Costas Lapavitsas left Syriza called “ debt peonage . “

How Alexis Tsipras wants to offset the austerity he accepted

But Alexis Tsipras hopes to counter this criticism by two phenomena. First, this concession would be accompanied by European investment (creditors refuse any such plan) and the integration of Greece to the repurchases of the ECB, which should promote growth, thus reducing weight the effort of the government. Then this “effort” will be better distributed as the government intends to change the scale of the solidarity levy to do cover the wealthiest. Revenues of more than 100,000 euros per year and this contribution will increase from 2.8% to 6%, those over 500,000 euros from 2.8% to 8%. Note however that the weight of this contribution will also greatly relieved for the middle class since the level of contribution will be raised from 30,000 euros monthly income (from 1.4% to 2%) and will almost pure doubled those earning from 2.1% to 4%. The effort will be better distributed, but it will affect a large part of household and this can also have a negative effect on consumption. However, this increase will contribute only EUR 220 million in 2015, which is below the heavier billion euros of VAT contained in the plane of creditors.

Tax Justice

Finally, the Greek Government also intends to help large companies by an extraordinary tax and a tax on advertising. In all, this should bring 1.16 billion euros. Besides his commitment to the fight against tax fraud. In addition, the government maintains tax Enfia the property, which is a weight on the Hellenic consumption without revenue target. Creditors require the maintenance of the recipe in 2014, meaning an increase in the rate since there is a decline in the value of property. Nothing more wrong about so that creditors who feel that the Greek proposal contains no “effort. “Alexis Tsipras made great concessions to the logic of austerity required by creditors. It is probably gone as far as he could and he wanted in this area. One more step and he would accept nothing other than to take the place of his predecessors …

The Gordian knot of pensions

It remains one last point: pensions that are has already seen it constituted the Gordian knot of discord with creditors. These have been heavy handed in this area, even though he knew that this was a sensitive issue for the Greek government. They demand not only a decrease of 1% pension, or 1.8 billion euros of revenue to households removed, but the postponement of the legal retirement age to 67 years. In March, the unemployment rate in Greece was 25.6%, with a rate of 19% for the age group 55-64 years. In case of postponement of the retirement age to 67, so there will be less mechanically released jobs and it will focus on the younger age groups where unemployment is higher. Furthermore, if it is lower than in other age groups, unemployment for 55-64 year olds had the largest increase between March 2014 and March 2015: while unemployment shrank 15-34, the 55-64 years grew by 1.6 points. In short, we will do more work more people who are unemployed in posing a risk to the rest of the employees. All without incentives for employment. On the contrary, as we have seen with VAT.

The social role of pensions

Meanwhile, pensions have an important social role in Greek society. They clearly hinder the social effects of austerity by offering income including relatives of unemployed. In Greece, only 14.4% of the unemployed are compensated. This would be especially, again, to pay the most fragile since, although considered “ generous ” by creditors, 45% of Greek pensioners receive less than 665 euros, the level of the poverty line defined by Eurostat. The Greek average pension is also of 664.7 euros to which we must add supplementary pensions, on average 168.40 euros. Creditors want, besides the pension decreases gradually remove this by the end of 2016. These system requirements creditors would be very negative on Greek growth. But remember, everything is connected. A weakening of growth would result, to take the targets set by cuts. As from 2010 to 2013. This is precisely what the Greeks want to avoid because their strategy of “acceptable” austerity would collapse then. They find themselves the logic of previous governments.

The trap of creditors

So the Creditors plan is clearly a “politically. “He intends to maintain a strategy that failed to be able to put the knees politically Greek government erase the Greek austerity vote against on 25 January. No economic logic can not really support such a plan. Even the desire to “take security” for future debt repayment does not hold. The weakening of Greek growth can not in any way constitute any guarantee. Both 2011 and 2012 restructurings prove it. Furthermore, we saw that Alexis Tsipras accept concessions that he, himself, described as “painful” (one could also mention the acceptance of part of privatization). The creditors have already achieved a lot and Alexis Tsipras will already struggling to rehabilitate the country with these concessions.

Wizards Apprentice

But the maximalism of creditors to impose their will past mistakes, prove that they do not target a financial or economic objective. In reality, this plan of creditors is only a trap. By accepting it, Alexis Tsipras would fall into the error of his predecessors. Caught in the vicious circle of targets and low or negative growth, it should pass under the forks Caudine budget cuts. The political “alternative” advocated by the Greek Executive would become impossible. If the government of Syriza therefore does not fall immediately, he will suffer the fate of all left governments “managers of austerity” and the party will disappear as Pasok, the maintenance of the Vouli is now uncertain. Will then face to face parties assuming the output of the euro (Communist Party and Golden Dawn) and “friends” of New Democracy Europe of Brussels. The goal is to prove that there is no alternative to fiscal austerity policies. This tactic of “scorched earth” made of creditors today very dangerous sorcerer’s apprentice for the future of Europe.


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