Why Greece Can't Fulfill Bailout's Terms

The government will never collect enough taxes.

An arm and a leg.

Photographer: Sakis Mitrolidis/AFP/Getty Image

The debate about the third Greek bailout centers on its political divisiveness and the sustainability of the country's debt. More important, however, may be the country's ability to stay any kind of rational economic course, implement reforms and collect taxes. Judging by recent government revenue statistics, the chances of achieving those goals remain remote.

Political fireworks can be distracting: Prime Minister Alexis Tsipras's Syriza party is splitting in two and he is likely to face a vote of no confidence after the bailout deal is approved. Besides, if there's an election soon, a new government may try to renege on commitments to implement the tough program required by the bailout. Yet there is no viable alternative to proceeding with the measures Tsipras accepted. No Greek government would have the time, money or technical resources to return to the drachma rapidly (which voters don't want anyway).

It's exciting to watch German conservatives label Finance Minister Wolfgang Schaeuble an incorrigible optimist as he and Chancellor Angela Merkel lobby lawmakers to vote for the bailout. Merkel may need to rely on the votes of leftist parties for the deal to be approved Wednesday because her core voters, the moderate-right readers of the tabloid Bild, overwhelmingly favor rejection. The German parliament, however, will almost certainly approve the Greek deal, as will other European parliaments.

And the questions about debt sustainability and the willingness of the International Monetary Fund to take part in the bailout may not matter much: Greece's debt burden is manageable for the duration of the aid package, and Europe can afford for the IMF to stay out.

When they hammered out the deal, both the EU leaders and the Greeks realized that its ultimate success depended on Greece's ability to execute its provisions. "Success will require the sustained implementation of agreed policies over many years," the Aug. 11 memorandum of understanding said. "To this end, political commitment is needed, but so is the technical capacity of the Greek administration to deliver."

On the surface, the capacity is there. According to the latest budget numbers, Greece achieved a cumulative primary surplus of 3.5 billion euros ($3.8 billion) by the end of July, representing 2 percent of 2014 gross domestic product and surpassing the 2.99 billion euro target. This performance by the anti-austerity Syriza government suggests that achieving a medium-term primary surplus of 3.5 percent of GDP isn't impossible. This optimism, however, may be misplaced because the surplus wasn't achieved by increasing revenue, which is what the European Union is demanding.

In July, Greece's budget revenue was 3.2 billion euros, or 40 percent, below target. The Greek government says the shortfall is largely attributable to its decision to allow individual and corporate taxpayers to put off filing income and property tax declarations. That was also the reason it cited for failing to meet its target in May.

Another cause of the shortfall was the failure of the European Central Bank and EU countries' central banks to remit to Greece the profits from Greek government bonds they held, which they had agreed to do under the previous bailout in 2012. While Greece's fate hung in the balance, that money wasn't coming in. "While the latter was mostly due to deadlock in negotiations and could be easily reversed after an agreement is reached, the problem with revenues collection appears to be more structural and could persist," Silvia Merler of the Brussels think tank Bruegel wrote in a blog post Monday. 

Greece showed a better-than-expected primary surplus only because the government has been withholding payments to its suppliers and creditors. Expenditures in January through July were 27.7 billion euros, 4.5 billion euros less than the target. Part of the rescue package -- about 7 billion euros -- will be used to clear government arrears, but that's just one-time aid. So far, it appears the Greek government can only reach the surplus target at the expense of its suppliers.

Early in its tenure, the Tsipras government came up with improbable stratagems to improve tax collection, including asking students and tourists to snitch on businesses that dealt in cash. Such plans didn't work then and they won't work now: Ordinary people, faced with an increasing tax burden, are more likely to empathize with small business owners than with the government, which, under the bailout plan, will effectively be run by foreigners. Greeks' patriotism doesn't extend to giving up a higher share of their often insecure incomes. After the extreme pain of capital controls, tax evasion will be even more widespread.

If the Greek government, headed by Tsipras or anyone else, is unable to collect the tax revenue needed for the bailout program to succeed, the deal will collapse once creditors realize things are not going according to plan. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.