The Greek Parliament is now just a rubber stamp. A German led Euro area has dictated to the Greek government. A comprehensive remodelling of Greek administration and justice is demanded, alongside major policy changes, a new wave of large cuts in public spending and tax rises. The lengthy list of requirements from the EFSF, the nominal creditor of Greece, is to be implemented in a hurry, with some of the programme a prerequisite for sitting down to try to reach agreement on new loans. Behind the EFSF lies some angry creditor states.
Some have rushed to presume that this is all now a done deal, that Greece will receive Euro 86 billion of new money, and peace can return to the Euro area and German-Greek relations. It is difficult to form such a conclusion if you read the full text of the “agreement”. The amount of money to be lent remains in question. There appears to be no reliable estimate of how much extra the Greek state will need to borrow, as it is likely tax revenues have fallen as a result of the latest crisis. There is no informed assessment of how much new capital and how many write offs the Greek commercial banks will need. The ECB is to study the Greek banks over the summer and assess the damage. There is marked reluctance by the Greek administration to find assets worth Euro 50 billion that can be sold for that much money.
The creditors are aware of this forced vagueness and match it with language demanding that Greece does conform to tight controls on its budget. They say “The Euro summit takes note of the possible programme financing needs of between Euro 82 billion and Euro 86 billion, as assessed by the Institutions. It invites the Institutions to explore possibilities to reduce the financing envelope, through an alternative fiscal path or higher privatisation proceeds.” If you took this to its logical conclusion there would have to be more spending cuts, more tax rises and more privatisation sales, at a time when most sensible commentators call in question the abilities of Greece to meet the targets needed to limit the new money to Euro 86 billion.
The Summit did ask the Greek government and the negotiators of the loans to “take into account the strongly deteriorated (sic) economic and fiscal position of the country during the last year”. Again this is a requirement on Greece to cut more and raise more tax at exactly the time that the economy’s output is probably falling badly thanks to the banking crisis. The EU likes ripping out the fiscal stabilisers during a recession, the opposite of policy followed in countries like the USA and UK with their own currencies where public borrowing is allowed to increase in a downturn.
The wide ranging reforms are to be assisted by EU technocrats and supervised by EU Monitors. The Greek Parliament has to legislate for Sunday trading, sales periods, pharmacy ownership, milk and bakery reform and to open “macro critical closed professions”. They are to undertake a “major overhaul of procedures and arrangements for the civil justice system”. This is on top of the much discussed higher VAT, pensions cuts and creating a properly independent Statistics authority.
Most crucial of all is the pledge of the Greeks to accept “introducing quasi automatic spending cuts in case of deviations from ambitious primary surplus targets…subject to prior approval of the Institutions”.
It is extraordinary that they had to accept this when the most likely reason for failing to hit budget targets will be a further collapse of revenues from poor economic performance.
It is a tragedy. I do not see that either side have been sensible or done well. A provocative Greek government with no feasible plan for growth has collided with a vengeful EU with no credible plan for growth. Between them they have badly damaged the banking system that is needed to finance the recovery. I wrote without seeing the books they would need Euro 100 billion to get by, when the official figure was Euro 53 billion. The official figure is now up to Euro 86 billion, though reluctantly. I still fear that when they tot up the damage to output, tax receipts , banking capital and loan losses by commercial banks it will be Euro 100 billion and still no permanent fix. Meanwhile the challenge is now on the Euro area protectors of Greece to show how their policy can work if they do go ahead with this damaging programme and these large loans.