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article imageOp-Ed: Greece's new proposals erase most previous 'red lines'

By Ken Hanly     Jun 24, 2015 in Politics
Brussels - Eurozone finance ministers gather in Brussels this evening to discuss new proposals that Greek officials hope will be sufficient to release the last 7.2 billion euros of the bailout funds remaining in the loan that expires the end of June.
If the reforms are approved and then are passed by the Greek and several other parliaments, Greece will be able to pay off the 1.6 billion euros it owes the International Monetary Fund( IMF) on June 30. The Greek government already had bundled four separate payments due this month into one due at the end of the month.
Optimism was high on Monday that a deal would soon be reached, optimism that sent stock markets higher. Now the optimism is waning as some creditors suggest a deal still has some hurdles to overcome. What is clear is that the new proposals have erased most of the red lines that Greece had drawn on the issues of pensions and taxation particularly the Value Added Tax (VAT).
The pension reforms in effect decrease pensions although since the reduction is not a direct cut, the Greek government could claim that their red line of pension cuts was not crossed. This would not be the first time that the Greek government has claimed a victory which was an actual defeat. At the very start of negotiations Greece had refused to deal with the Troika, of the European Commission, the European Central Bank(ECB) and the International Monetary Fund(IMF). Greece still has to deal with the three but they are now called "the institutions."
National healthcare contributions, a levy on pensions, will increase from an average 4 percent to 5 percent of pension income. On average this will mean a one per cent decrease in actual pensions received. Supplementary incomes are now hit by a levy for healthcare of 5 per cent of the pension, reducing actual cash received by 5 per cent. There will also be an increase in the social security contributions of those receiving supplementary pensions from 3 percent of the pension, to 3.5 percent. Those working towards retirement will see their contributions increase by 3.9 percent.
On the VAT issue the red lines seem to be crossed as well although at least there are some attempts to lessen the blow of an extension of the huge standard rate of 23 percent. The rate for energy, basic foods, catering and hotels will be reduced to 13 per cent. This will still be high for those on low incomes. Reduction for catering and hotels is intended in part to shield the tourist industry. The tax will be further reduced to 6 percent on medical supplies and books. The higher VAT rates will raise the equivalent of 0.74 per cent of GDP. This assumes though that consumption and tourism does not decline further.
The corporate tax is set to increase from 26 to 29 percent with an extra 12 percent on profits over half a billion euros. The problem with taxation in Greece is not just the rate but the lack of efficiency in collecting taxes. Raising rates will not increase revenue unless taxes are collected. Given the risks in investing in Greece at present the higher tax rates may further discourage investment as well. On one issue, Syriza and the Greek government should agree and that is a decrease in defence spending. The Greek proposals are for a cut of 200 million euros while the creditors want a cut of 400 euros. Surely a leftist government could agree to that!
There are other measures in the Greek proposals that will hurt the incomes of workers. A solidarity supplement that was imposed under previous bailout programs is to be increased. The supplement will start at 1 percent of income and increase to up to 3 percent depending on income. All in all there is very little left of the anti-austerity reforms promised by the main governing party Syriza during the recent election campaign. However, the creditors are asking for even further reforms. The aim of the creditors may be to serve Greek up as an object lesson as to what happens when a country challenges the power of the Troika as described in this zero hedge article.
Among the further reforms that creditors demand are a complete end to early retirement and an increase in the retirement age from 62 to 67 by 2022 rather than 2025 as in the government proposals. The creditors also want the increase in VAT to go to 23 percent rather than the present 13 percent in restaurants.This would hurt an already wounded tourist industry even more.
German finance ministry spokesperson Martin Jaeger said his impression was that negotiations for a deal still had a long way to go. The reaction within the ruling Syriza party to what is happening may be so sharp that prime minister Tsipras may be forced to call off negotiations altogether. By tomorrow, the road forward may be clearer, then again it may not.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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