18 May 2015

Greece: Europe’s last-ditch effort to keep it in euro?

After a weekend of leak and counter-leak, in which we learned Greece cannot make critical payments to its lenders due from 5 June, today has seen another dramatic development: the leak to the newspaper To Vima of the European Commission’s proposal to break the logjam.


(Greek Prime Minister and Syriza leader Alexis Tspiras and European Commission President Jean-Claude Juncker)

According to To Vima, the EU commission boss has offered Greece a deal that delays the harshest austerity for two years, and releases €5bn of bailout money to help fill the gaps in the Greek budget.

To get the money Greece has to:

Run a primary surplus of 0.75 per cent of GDP – much lower than the previous demands from the ECB and IMF. And a surplus of 2 per cent of GDP in 2016.

This rises to 3.5 per cent for both of the next years, but would have to be seen as notional – as committing to anything in 2018 barely matters when you are three weeks from default.

Greece has to raise VAT to 18 per cent – with 15 per cent for card transactions. This cleverly forces tax evaders into the formal economy by setting a relatively low rate.

Greece gets its way on labour market reform, which will be done using “ILO best practice”. But it has to keep an unpopular property tax called ENFIA and it has to reduce pension entitlements for public sector workers.

The obvious sticking point is the IMF. As I reported on Saturday, the IMF – one of Greece’s major creditors – has rules that prevent the sign-off of a “quick and dirty” settlement, such as the one  Jean-Claude Juncker is offering. The debt has to be judged sustainable – yet the Juncker proposal puts off a long-term deal until October.

Greek government insiders were already worried that the IMF was going to walk away – asking the EU to take over the next bailout of Greece. The Juncker document acknowledges this problem and hints that the Greek debt will have to be taken over solely under the EFSF fund.

Now to a snap analysis of this leak. If the details are confirmed – and I have not seen the document – this is a last ditch attempt by the EC to keep Greece in the euro. It is – on some points only – generous to Greece and leaves a lot to “creative ambiguity” in the future.

It may still be too austere for Syriza’s left to accept – meaning Alexis Tsipras’ government could not get it through parliament, and that there may have to be new elections.

At the weekend I spoke to a number of senior Syriza members and MPs and the mood seemed to be hardening towards resisting any attempt to sell what they would see as a capitulation. Beyond the usual left wingers, people I’ve found rigidly loyal to the party’s line were saying “if we surrender I am leaving”.

But the leaked offer at the same time is way more generous than any proposal previously considered by the ECB and the German Finance Minister, Wolfgang Schauble.

If the Germans veto it, then it leaves Alexis Tsipras with nothing palatable to sell his own voters.

A German veto would, if it came to a euro exit referendum, probably play well for those advocating a “controlled exit”. Greeks would no longer be seen as walking away from the euro, since the commission had offered them a compromise – but from a Europe where the commission has no power, and only the voters of Germany get their way.

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