Germany Gives Greece a Short Leash
Contrary to all that's been said about Germany's uncompromising stand on helping Greece, Berlin showed today that it's willing to give the far-left government of Alexis Tsipras a chance. All he needed to do was clearly state that he wouldn't make any economic moves before consulting his country's creditors. Even if the rest of Tsipras's plans remain rather vague, Germany seems prepared to offer an endorsement -- while continuing to watch over his shoulder.
In accordance with a provisional deal between Greece and the Eurogroup last Friday, Athens was supposed to detail its policy proposals to secure a four-month extension of the country's current bailout. Finance Minister Yanis Varoufakis put them in an e-mail that landed in the mailbox of Eurogroup President Jeroen Dijsselbloem at 11:15 pm last night, 45 minutes before the deadline.
Here's a word cloud representing the words most frequently used in the document:
Words like "promote," "streamline," "strengthen," "improve," "transparency" and other similarly insipid political buzzwords are prominently featured, but not as prominently as "tax" and "public." That's a reflection of the Syriza government's plans to rely on a powerful public sector and more stringent taxation.
Parts of Varoufakis's letter loosely follow guidelines set out by Greece's European creditors. In their April 2014 review of Greece's economic progress, they called, for example, for measures to fix Greece's problems collecting value-added tax: the government managed only to collect about 40 percent of potential revenue from VAT -- down from 53 percent in 2008 -- costing the country about 10 billion euros ($11.3 billion) annually. So the proposal from Athens promises to "improve collection and fight evasion, making full use of electronic means and other technological innovations" and to "rationalize" VAT "in relation to rates that will be streamlined in a manner that maximizes actual revenues without a negative impact on social justice, and with a view to limiting exemptions while eliminating unreasonable discounts." It's not a specific plan but an acknowledgment of a problem that the creditors have mentioned before. There's nothing in that careful wording to which the Eurogroup could object.
Varoufakis's letter also seeks to dispel the suspicion -- common among European finance ministers who followed Syriza's election campaign -- that the Tsipras government wouldn't be a responsible spender. It says Greece will try to meet their election promises of higher pensions by streamlining -- that word again! -- pension and benefit systems and cutting the government's non-salary and non-pension expenditures, which "account for an astounding 56 percent of total public expenditure." But for now, these are just promises without substance. The creditors have been demanding specific tough measures -- such as expenditure ceilings for ministries and balanced budget targets for local governments -- that are absent from the Varoufakis proposal.
Still, two of Tsipras's election promises that were particularly worrisome for the creditors -- a minimum wage increase and a halt to privatization -- have been softened in the memo.
Greece now promises not to roll back any completed privatizations, see through the already announced requests for bids and only then start considering further sell-offs on a case-by-case basis. It's not exactly in line with the ambitious privatization goals set by the current bailout program, but then in April, 2014, the European Commission's review of Greece's performance had already declared the previous goals infeasible. Varoufakis's argument that asset prices are too depressed to even meet the new 2015 target of 4.7 billion euros is reasonable enough, and there's no reason why the creditors shouldn't compromise on that requirement.
As for the minimum wage, the letter mentions the ambition to "streamline" -- yes, I know -- "and over time raise minimum wages in a manner that safeguards competitiveness and employment prospects." For all practical purposes, that means this goal has been shelved for now, given the Greek government's promise to consult with European and international institutions when evaluating those safeguards.
The letter as it was sent to Dijsselbloem is a victory for German Finance Minister Wolfgang Schaeuble. He wanted Greece to seek an extension of the current bailout with all the strings attached -- policy goals, supervision from international institutions, a commitment to fiscal responsibility -- rather than the "bridging loan" Greece initially wanted, and that's exactly what he got. The Varoufakis letter is a promise to behave more or less as previous Greek governments did, constantly keeping the creditors informed and making it clear they intended to safeguard the German money -- 80 billion euros of it -- invested in their country's economic survival. The rebels of Athens have surrendered after only a month, and talks on specific policies and conditions will continue as they had before.
When an unruly child begs forgiveness, you can expect his wording to be vague to protect his self-respect. It's wrong to demand more at that point -- time to be generous and give the kid a pat on the head. That's why Tsipras's plan deserved Europe's approval today, despite its vagueness. After all, he still needs to square all this with his voters and he needed to granted a certain amount of flexibility to do so.
As I write this, the Greek memo has still not received final approval, but it looks highly likely, given that the European Commission has endorsed the document. The German daily Handelsblatt reported today that Schaeuble had already asked the Bundestag to support the Greek proposals even before seeing them. His approval was, of course, conditional on the Eurogroup's support, but the cautious finance minister wouldn't have reached out to the German parliament if he hadn't considered it a done deal.
The rules of the game are set for the next few months: Germany will let the Greek government have a go, but it will be watching closely. If Tsipras can keep Greeks happy while under such close scrutiny, he will have proven his political skill.
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