Generational Dynamics World View

[John J. Xenakis]

*** 15-Dec-16 World View -- Greece financial crisis threatened after Tsipras announces new spending program

This morning's key headlines from GenerationalDynamics.com

• Greece financial crisis threatened after Tsipras announces new spending program
  
• IMF says that Greece's budget must be 'more growth-friendly'
  

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**** Greece financial crisis threatened after Tsipras announces new spending program
****


Alexis Tsipras in Athens on November 28 (Reuters)

A new disagreement between Greece and Greece's three creditor
institutions -- the International Monetary Fund (IMF), the European
Commission (EC), the European Central Bank (ECB), formerly known as
the "troika" -- is threatening to catapult Greece into a major new
financial crisis by Christmas.

This has been going on for years, and as we've written many times in
the past, there is no solution to Greece's financial crisis. It's not
that no one has been clever enough to figure out a solution. It's
that no solution exists. Greece's government accumulated an enormous
amount of debt in the 2000s decade by repeatedly lying about its
income and expenses, and ever since the day of reckoning, it's been
clear that Greece will never be able to repay its debts.

If Greece declares bankruptcy, leaves the euro currency, and returns
to its original drachma currency, it will be a financial disaster for
the Greek people. And so, the three institutions have been kicking
the can down the road by repeatedly providing money, and by requiring
Greece to make various cuts in government programs, in order to give
the appearance of forcing some discipline on the government, even
though they know it will make little difference. Officials in Greece
make arguments that boil down to the following: We all know that
Greece is going to go deeper and deeper into debt anyway, so we might
as well just keep spending more money on social programs.

On December 5, the three institutions reached an agreement to a
bailout loan with enough more money to allow Greece to meet its next
debt repayment and avoid having to declare bankruptcy. At the same
time, they insisted that Greece's government adopt more reforms, thus
playing their part in the game. But Greece's prime minister Alexis
Tsipras didn't play the game. He announced that instead of reforms,
he would grant a pre-Christmas bonus to poor pensioners. In addition,
he will keep in place a discount in valued-added tax, to eastern
Aegean islands whose tourist industries have suffered because of the
crisis of refugees crossing from Turkey to Greece. He had previously
promised to scrap that discount as one of his commitments in return
for the latest bailout. Apparently he believes that he can get away
with this because of Greece's central role in the refugee crisis.

This sudden announcement has caused the December 5 agreement to fall
apart. The Eurogroup of eurozone finance ministers issued a statement
saying that Tsipras's announcement appeared "to not be in line with
our agreements." The bailout loan has been put on hold, and the
institutions will now put into place a full investigation of Greece's
fiscal plans, before it will be reinstated. Kathimerini and Bloomberg

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**** IMF says that Greece's budget must be 'more growth-friendly'
****


Left: Greece's tax collections have fallen sharply; right: More than 50% of Greece's household are exempt from paying any income tax at all (IMF)

The International Monetary Fund (IMF) is being blamed by many people
for demanding more austerity from Greece and threatening Greek people
with starvation.

The IMF is responding that it's not demanding any additional austerity
at all, but instead is asking that the public sector be restructured
to make it "more growth-friendly." The IMF makes the following
points:

• Over 50% of Greek households are exempted from paying any
  income tax at all (versus 8% average for the rest of the
  eurozone).
  
• As a result, less than half the households must pay extremely high
  tax rates, which makes it very difficult to raise taxes any
  further.
  
• Greece's social payments are so high that little is left for
  investment in Greece itself. As a result, decaying infrastructure is
  hampering growth and the delivery of basic public services such as
  transportation and health care is being compromised.
  
• A better solution, according to the IMF, would be to spread the
  tax burden to more people, so that tax rates can be lowered. Lower
  tax rates would be friendly to growth.
  
• Greece does not have the kind of unemployment compensation and
  other well-targeted social benefits that are commonplace elsewhere in
  Europe and that are critical for broad social support in a modern
  market-oriented economy.
  
• As a result, Greece has outdated laws restricting layoffs. Rather
  than provide unemployment benefits for laid off workers, the
  government restricts the ability of firms to lay the off, which
  inhibits growth. Allowing layoffs and providing unemployment benefits
  would be growth-friendly.
  
• Greece has no basic welfare benefits, which means that poor people
  cannot get welfare.
  
• But Greece has unreasonably high pensions, paid to the elderly.
  The result is an implicit transfer of money from the most vulnerable
  members of the working age population to older Greeks.

The IMF recommends that the authorities should further reduce current
pensions while increasing spending on a modern and well-targeted
welfare system to protect those that are most in need. More should be
spent on other essential public services and key public investments
too. IMF and IMF (PDF) and Newsweek

Related Articles

• Workers riot as Greece braces for new austerity measures (09-May-2016)
  
  
• IMF balks at new European bailout plan for Greece (26-May-2016)
  
  
• Alexis Tsipras' far-left Syriza party wins historic election in Greece (26-Jan-2015)
  
  
• Number of migrants reaching Greece surges since Turkey's attempted coup (18-Aug-2016)
  
  
• Increasingly desperate European Union threatens Greece over refugee crisis (13-Feb-2016)
  
  
• With Dubai threatening default, Greece enters the spotlight (30-Nov-2009)
  

KEYS: Generational Dynamics, Greece, Alexis Tsipras,
International Monetary Fund, IMF, European Commission (EC),
European Central Bank (ECB), Turkey, Eurozone

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John J. Xenakis
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