Domestic Politics

I may have been overly optimistic in assuming that it is a done deal. Still, all signals indicate that green light between Greece and its creditors, at least the European ones, will come soon. The compromise paper of the Greek government entails quite some steps beyond the often cited ‘red line’ by getting rid of VAT advantages for Greek islands; changing the early retirement age in January 2016; increasing VAT rates on main products; re-introducing the previously abolished luxury tax for househoild with an annual income above Euro 30,000; reducing defense spending, and the likes.



Those measures will definitely hit Syriza voters at their hearts. It is a further element of austerity, and in this respect it is a huge defeat for the Greek government. Soon we will learn whether the Greek bending to the demands of the creditors is seen by them as sufficient, or whether they would like to use the opportunity and go for more demands. In my view this will not happen, even though we will definitely hear more statements like the one from the Lithuanian President who spoke of Greece feasting on the costs of partners. It will be the job of Merkel, Hollande, Juncker and a few others to deal with those objections.

Problems lure on the domestic sides. At this point, the left-wing fundamentalists of Syriza cried out loud and indicated that they would not vote with ‘yes’ for such a program. According to some estimates, this group makes up around 35 out of 149 Syriza parliamentarians. Also, Syriza’s coalition partner hinted to problems as the abolishment of VAT privileges for Greek islands was one of their pet promises. The compromise would not fail in Greek Parliament, though, as the opposition parties are in favor of any deal that keeps Greece in the Eurozone. However, moving this kind of compromise through Parliament without own majority would in all likelihood result in new elections. The pressure is high, also because the German government seems to have made clear to Tsirpas that all the mesures the Eurogroup and Greece may agree on at their Wedenesday meeting mist be ratified by the Greek Parliament by Monday. Even in this case, Greece will probably miss the payment to the IMF as she will not have access to the Euro 7.2 bin from the currently restricted bailout funding. This would not the end of the day but still show how crotical the situation is, even after the new package would pass Parliament. The task to get a coalition majority of its own would be easier if the heads of state would come up at their Thursday and Friday meeting with a plan for a serious debt restructuring.

Any deal between the Eurogroup and Greece will meet resistance on the side of Parliamentarians of the creditors. This holds across the board but is especially true in the case of Germany where Chancellor Merkel will meet resistance on the side of her party friends who sail on a broadly entrenched political sentiment in Germany that sees any further concessions to Greece as counterproductive. It will require quite some pressure to get support for the compromise, not to speak about a third program and/or a debt restructuring plan.

Is the Greek offer worth it to fight for its acceptance, in Greece as well as in the Eurozone? The answer is a clear ‘yes’ if one believes that this compromise will save the integrity of the Eurozone. A GREXIT would reduce the Eurozone to a fixed exchange rate systrem, and thus would be nothing less then a system change. Keeping Greece in the Eurozone avoids such a change. From a Greek perspective, the offered measures would avoid a probably chaotic changeover to a new national currency and thus provide some minimal stability, in particular if the offer would allow the ECB and the EU to provide further assistance. To sell this to the electorate as success will not be easy. The offered primary budget surplus of 1 % in 2015 and of 2% in 2016 will be difficult to achieve. Most of the proposed measures are targeted to increase state receipts. Making the 23% rate for VAT to the standard rate is supposed to roughly double state receipts. This rate is still below the EU-average but already a huge step forwards in the Greek context. Given that low income households have higher shares of consumption expenditures than households with higher income, measures of tax incidence refer to socially unbalanced effects: Low incomers woukd contribute relatively stronger to the increase of state income. In a situation of depressed incomes, such a tax increase will further constrain consumption, and thus put downward pressure on economic growth. The planned increase in social security contributions and the increase of the corporate tax rate will put competitiveness pressure on the business sector and even deteriorate the already destroyed business and investment climate.

All in all, the Greek government surrendered. It may be only a tactical defeat, though. First, the offer many be sweetened by a debt restructuring plan that follows much more closely the Greek alternative plan. This plan comes with a strong dose of economic rationality, and also, more important, with the strong support of the IMF . Second, the compromise may allow Greece to pay off ECB and IMF credits, and by this increase its room of manoeuvre towards the EU. Don’ forget, this is a long game, and we have by far not seen its end.