Bumpy

Today’s negotiations were never meant to be easy. And yet, it is astonishing how far apart Greece and its creditors are. What has been an open secret is now on the table: The IMF is not accepting the plan of the Greek government, and the argument is that the offer is too heavy on increasing state revenues and too low ion expenditure cuts. They have a point; Cuts are done easily and come with immediate effects for the state budget. The target to achieve a primary budget surplus of 1% for this year is easier and more reliable to operate then if the government has to rely on compliance of economic actors to make their contributions. The gap between Greece and the creditors is big as the leaked ‘amended’ red pen document shows.

Revenue-generating tax increases like the rise of the corporate tax rate from 26 to 29 % as proposed by Greece are scaled down by one-percentage point. The proposed one-time 12% tax rate on all corporate profits beyond Euro 500 mil should be taken off the table. Rather then increasing tax rates and social security contributions creditors ask for further spending cuts, including abolishing subsidies for diesel oil purchased by farmers and doubling cuts to defence spending by reducing personnel and weapons procurement. the demanded changes in the pension system definitely show the handwriting of the IMF. The Greek proposal to gradually rise the effective retirement age to 67 by 2025 has been moved to the year 2022., and this should be enacted by July 1, 2015. Even more contentious is the demand to phase out a so-called “solidarity grant” – a special top-up payment given to poorer pensioners – by the end of 2017, opposed to the Greek proposal to phase out this supplement by 2018.

When the Greek offer could be labeled as weak in its economic rationality, the new demands by the creditors would create even more economic havoc. And as important, they would create social and political havoc as they come with a strong social imbalance that would stir political protests, and probably prevent the Greek government to go this route.

My former optimism in regards to a GREXIT may be just that, optimism. Things may take another route today.