Parliament approves austerity: Rescued Greece, euro will live for now to die another day

(Editor’s note: Republishing after the Greek parliament approved the austerity measures)

The leaders of the Eurozone have decided to bailout Greece for the third time. Eurozone is a term used for the 19 countries which use the euro as their currency.

The Euro Summit statement released after a deal with Greece was reached, said that over the next three years Greece would get anywhere “between EUR 82 and 86 billion.” This money is subject to certain terms and conditions.

By Wednesday (i.e. 15 July 2015) the Greek parliament has to agree to further austerity measures. The Euro Summit statement points out that: “It welcomes the commitments of the Greek authorities to legislate without delay a first set of measures… the streamlining of the VAT system and the broadening of the tax base to increase revenue.”

This basically means that the top tax rate of value added tax (VAT) in Greece will now be applicable to more sectors. As a news report on BBC.com points out : “It seems that more items will be subject to the country’s top VAT rate of 23%, including restaurants, while popular holiday destinations in the Greek islands will no longer benefit from a lower VAT rate. Corporation tax will also go up, to 28%.”

The Euro Summit statement further points out that the Greeks need to legislate on: “upfront measures to improve long-term sustainability of the pension system as part of a comprehensive pension reform programme.”

This is essentially trying to bring down the cost of running the generous welfare system that Greece has. Some jobs, which are categorised as arduous, allow men to retire at 55 and women at 50.

As John Mauldin and Jonathan Tepper write in their 2011 book Endgame—The End of the Debt Supercycle and How it Changes Everything: “As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, musicians.” After retirement these people are paid a government pension.

The retirement age is now likely to go up to 67. This move will bring down the expenditure of the Greek government. With the expenditure coming down, the Greek government can hopefully run a budget surplus (i.e. its revenue will be greater than its expenditure), and that surplus can be used to repay the 240 billion euros that Greece owes the economic troika of European Commission, International Monetary Fund (IMF) and European Central Bank (ECB). At least that is the hope.

The third point is very interesting. The European Union has asked for “the safeguarduing of the full legal independence of ELSTAT”. ELSTAT is the Greek statistical service. What is the logic behind this condition? In the years up to 2009, Greece was fudging its budget deficit data. Budget deficit is the difference between what a government earns and what it spends.

In October 2009, then finance minister George Papaconstantinou started trying to figure out the actual level of the budget deficit. The budget deficit for 2009 came out at 15.7% of the GDP, which was the highest in the world. The Eurozone doesn’t want further such surprises and has thus insisted on an independent statistical service.

The fourth condition is the most-tricky of the lot. It talks about the “introducing quasi-automatic spending cuts in case of deviations from ambitious primary surplus targets.” What does this mean?

Greece is expected to achieve a primary budget surplus of 3.5% of GDP by 2018. Along the way it is expected to achieve a primary budget surplus of 1% of GDP in 2015 and 2% of GDP in 2016.

Primary budget surplus is essentially a situation where the difference between what a government earns, and what it spends, is in positive territory. While calculating the government spending the interest that it pays on its outstanding debt is not included. What the condition is essentially saying is that if the Greek government does not achieve the primary budget surplus targets then automatic spending cuts will start to come in.

On the face of it this sounds very straightforward. Nevertheless, the condition goes against the entire idea of democracy and an elected government. If an elected government does not even have control over its expenditure, then what else is left?

The Greek parliament needs to agree on these four conditions by Wednesday (i.e. 15 July 2015). If these conditions are agreed on, then Greece will receive an immediate loan of 10 billion euros, a part of which it can use to make a 3.5 billion euro payment to the IMF, which needs to be made by July 20, later this month.

And it doesn’t end here. The Euro Summit statement has also asked the Greeks “to develop a significantly scaled up privatisation programme with improved governance; valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means.”

So what does this mean? The assets of the Greek government will be sold to generate a total amount of 50 billion euros. Half of this money will be used to recapiltalise Greek banks which are in a bad shape. Of the remaining amount, 12.5 billion euros will be used for investments within Greece. The remaining 12.5 billion euros will be used to repay the debt that Greece owes to the economic troika and help decrease the current debt to GDP ratio of 175%.

The Euro Summit statement points out: “This fund would be established in Greece and be managed by the Greek authorities under the supervision of the relevant European Institutions.” In simple English this means that the fund will be managed by the economic troika of IMF, ECB and the European Commission.

Further, what is the chance that the Greek government will be able to generate 50 billion euros through asset sales? As Larry Elliott writes in The Guardian: “In truth, there is not the remotest prospect of Greece raising €50 billion through privatisations in the next three years. The €50 billion target was first announced back in 2011, since when the value of the Greek stock market has fallen by 40%, making its assets far less valuable. In the past four years, privatisation proceeds have raised just over €3 billion.”

Over and above all this, the Greek government has committed “to reduce further the costs of the Greek administration, in line with a schedule agreed with the Institutions (read the economic troika).” So, employees will be fired by the Greek government in the months to come.

Alexis Tsipras was elected as the prime minister of Greece in January earlier this year. The main electoral plank of his Syriza party was “lesser austerity”. In fact, towards the end of June, Tsipras had called off the negotiations and called for a referendum in Greece on increased austerity. The Greeks had voted against the bailout terms and in support of lesser austerity. And this ‘No’ vote seems to have cost them dearly.

The referendum outcome had angered the Eurozone leaders in general and Germany in particular. They said that the “trust” that was required to negotiate with Greece had broken down. And a few weeks later, the Euro Summit statement talks about “the need to rebuild trust with Greece”.

Further, as Jeroen Dijsselbloem, the Dutch finance minister, who heads the group of 19 finance ministers of the Eurozone, said in a press conference yesterday (i.e. 13 July 2015): “The Greek parliament will very quickly legislate on a number of issues and in that way will also work to bring back trust in the whole process and between the member states.” This need to build trust has led to harsher austerity measures this time around.

The question is how will this bailout pan out? The austerity measures that accompanied the last two bailouts have clearly showed that austerity hasn’t worked. The government debt-to-GDP ratio has jumped to 175% of GDP from 133.2% of the GDP in 2009.

The domestic credit to the private sector has jumped from 88.1% of GDP in 2009 to 115.9% of GDP in 2014. This has primarily happened because the Greek economy has contracted by 25% since the bailout, and this has pushed up the debt-to-GDP ratio. The current rate of unemployment is close to 25%. Among youth it is greater than 50%.

As a news report in The Guardian reports: “[The> country…has lost a quarter of its national income since the financial crash, has to cope with an unemployment rate of 26% and is owed 76 billion euros in unpaid taxes…An estimated 8,500 small and medium-sized businesses have closed since the start of the year.” Something that hasn’t worked in the past is being tried all over again.

To conclude, the 82-86 billion euro bailout of Greece has essentially managed to kick the can down the road. It has ensured that Greece and the euro will live today, to die another day.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)