It's Time for the EU and Greece to Do the Deal

As the G7 summit in Germany wound down, world leaders showed increasing impatience in their warnings to the Greek government. German Chancellor Angela Merkel bluntly said that time is running out if Greece wishes to avoid defaulting on its debts : “I can only say: every day counts now to complete the necessary work. One must work with all intensity.” US President Barack Obama called on both Greece and European countries and institutions that are Greece's creditors to be flexible and willing to find a deal. “What it’s going to require is Greece being serious about making some important reforms, not only to satisfy creditors, but more importantly, to create a platform whereby the Greek economy can start growing again. Greece is going to have to make some tough political choices,” Obama said. European Commission president Jean-Claude Juncker, until now more accommodating than many of the EU’s leaders, blasted Greek Prime Minister Alexis Tsipras in an angry public speech. Juncker accused Tspiras of misrepresenting his government’s discussions with the EU when he addressed the Greek parliament last Friday. Further, he said Tspiras has not been a reliable negotiating partner, failing to deliver what he promises. Juncker is quoted as telling EU leaders that more meetings with Tsipras would be "a waste of time." His comments came as depositors continue to withdraw funds from Greek banks, fearing that capital controls may soon be put in place to prevent all but minimal withdrawals. ~~~~~ Greece is a small country, with a tiny population and economic output compared to the rest of the EU. However, a debt default could have consequences extending well beyond its borders. The European economy is already weak, and a Greek default, combined with the inevitable political crisis that would follow, would almost certainly make EU economic matters worse. And the fallout would cross the Atlantic. For example, Michael Hicks, an economics professor at Ball State University and economics and director of the Center for Business and Economic Research commented to the media just for the state of Indiana : “Even a mild European recession will have repercussions here. About 2.5% of Indiana’s GDP is exported to the rich nations in Europe. That means perhaps 75,000 direct jobs linked to the manufacture and transport of these goods and another 45,000 indirectly across the state. A meaningful downturn affecting northern Europe will cost tens of thousands of Indiana jobs. What happens in Greece will impact us, and so we ought to care about the economics of a debt restructuring.” And, the Massachusetts Institute of technology’s Observatory of Economic Complexity says that more than 20% of total US exports flow to Europe, meaning that a further slowdown there will have consequences in the US. ~~~~~ According to the New York Times, Greece’s big creditors -- mainly other Eurozone countries, the International Monetary Fund and the European Central Bank -- have done little to solve the Greek debt problem. Instead, they have forced deep pension cutbacks, as much as 48% in some cases, and further weakened Greek pension funds by forcing them to accept huge losses as part of the country’s debt write-down. In Italy, in an interview published today by the Italian newspaper Corriere della Sera, Tsipras suggested that a deal on Greece’s debt was within reach if the creditors scaled back their demands for cuts to pensions and other social services. Tsipras said : “There just needs to be a positive attitude on alternative proposals to cuts to pensions or the imposition of recessionary measures.” he said. ~~~~~ The battle over what to do with Greek pensions poses difficulties because Greece, like most of the EU, has an aging population, with relatively fewer young workers to help pay the bills for the growing numbers of retirees. The Greek age imbalance is even worse because of the chronic unemployment among young people since the financial crisis started in 2008, with estimates of up to 50% of young Greeks unable to find any job. Another big problem is that in 2012, the pension funds, which were obliged under Greek law to own government bonds, were hit by a huge debt write-down as those bonds plummeted in value. As a result they lost about €10 billion - 60% of their reserves. At the same time, Greece’s creditors, in an effort to make the Greek labor market more competitive, insisted that the government reduce the amount companies and workers had to contribute toward pensions, and that Greece reduce its minimum wage so that those who contributed would have smaller outlays. ~~~~~ At the same time, the pension system was becoming a key and growing component of the social safety net, absorbing thousands of people who retired early -- either because of the sale of state-owned companies, because they feared their salaries would be cut and their pensions become smaller, or simply because their businesses failed. Few Greek retirees are living comfortably, and many support unemployed children. For example, 45% of Greek pensioners live below the poverty line, wth 60% living on €700 per month. ~~~~~ So, with that reality to somehow manage, Tsipras has negotiated with Greece’s creditors, and the two sides have presented various proposals that have been far apart. The creditors want substantial early-retirements penalties for those who still choose that option, and they want to cut existing pensions even more -- including the smallest ones. The EU proposals also demand unifying the many Greek pension funds and establishing a closer link between contribution and benefits, which Greeks see as a move toward yet more cuts. But, something must be done because pensions are a big chunk of the government’s budget, equivalent to about 16% of Greece’s shrunken gross domestic product, up from 13% in 2009, making it proportionally the most expensive pension system in Europe. ~~~~~ The Greek To Vima news network reports today that the EU is examining a new Greek proposal. Reuters reports that the 3-page proposal may unlock new funding for cash-strapped Greece by bridging the differences on critical issues such as pensions and VAT reforms. Bloomberg spoke to two international officials with direct knowledge of the discussions regarding the document. The first official said it was a “rehash” of earlier proposals and only covered fiscal targets. But, a second 3-page document outlines how Greece will address its financial needs and includes a request to use funds from a special EU fund, the ESM, to pay off €6.7 billion worth of bonds due in July and August. The second official revealed that the EC, ECB and IMF are currently assessing the plan that they received this morning. Corroborated sources say the Greek government has raised the primary surplus target for 2015 from 0.6% GDP to 0.75% (when the institutions demanded a 1% target) and to 1.75% for 2016, with the institutions demanding a 2% target. Regarding the VAT reform, Greece accepts measures aimed at making it more efficient (such as increasing the 11% VAT rate to 12%), but rules out the introduction of 23% VAT on energy. As for the pension system, Greece only considers the ending of early pensions and has ruled out the abolition of the non-pension low-income EKAS solidarity grant. In the new proposal, Greece has also asked for EU coverage of €10.9 billion intended for the refinancing of Greek banks that had been returned to the EU, and for coverage of the €27 billion of bonds held by the ECB, including the €6.7 billion due in July and August. Tsipras will present the new proposal to German Chancellor Merkel and French President Hollande at a Wednesday meeting. Greece’s goal is to come to a comprehensive agreement and avoid further negotiations that would continue to hold the Greek government hostage. ~~~~~ Dear readers, Greece, its creditors and the EU will have to make some sort of deal, perhaps in time for the next Eurogroup meeting on 18 June. Tsipras will probably accept some pension reforms, because they are better than capital controls. Creditors will accept some flexibility around primary surplus targets, even though they indicate the possibility of debt sustainability. Both sides will compromise on VAT reform, excluding electricity, and privatisations of electricity utilities. This is the only way to keep Greece in the Eurozone and the other Eurozone countries quiet and in line. The time for indecisive EU politics as usual is over -- it is time to stop posturing and do the deal.