This new Greece bailout proposal will crash the economy once again

The Greek saga has shown quite a few twists and turns over the past few days alone although we have continually been told that a deal is “close”. So now as the hype builds we find that we must as I pointed out yesterday be “closer than close” with apologies to Rosie Gaines. However the new proposals from the Syriza government look likely to be a wanton act of economic destruction and even worse one because its effects are easily predictable as they repeat mistakes made in the ongoing Greek economic tragedy.

What are the proposals?

In essence we are discussing Greece moving towards the austerity demanded by its creditors who used to be called the troika ( European Commission, ECB and IMF) until that name became so discredited. To do so it has chosen to increase taxes as by far the major part of the proposal with only relatively minor cuts in expenditure. So it will suck demand out of the economy and crash it one more time? I will return to this in more detail later but we are in the zone of this famous quote from Karl Marx.

History repeats itself, first as tragedy, second as farce.

According to the Financial Times the Greek proposal is shown below.

the Greek government estimates its new measures would yield €2.7bn in savings and revenue increases this year, or about 1.5 per cent of gross domestic product, and €5.2bn next year, or nearly 2.9 per cent.

The Tax Increases

The easiest milch-cow at a time like this is to raise the expenditure tax VAT or Value Added Tax. From Kathimerini.

The government proposed three value-added tax rates: a low one of 6 percent for medicines, books and theater tickets, a medium one of 13 percent for food (mostly fresh), electrical energy, hotel accommodation and food service, and a high one of 23 percent for all other products and services. That is seen raising 1.36 billion of extra revenues per annum.

Even that is not enough so there are proposals which are likely to be added to this list.

so the government is also considering bringing the VAT on food service up to 23 percent, and abolishing the special status granted to Aegean islands (with a 30 percent discount on VAT rates).

As you can see tourists in particular will not welcome such moves. Ironically the European Central Bank will as they will boost the inflation rate which it aims to return to 2% per annum and Greece is one of the laggards in this – as in so many economic areas – with a  consumer inflation rate of -1.4% in May. As so often these days what pleases a central bank makes the ordinary worker and consumer poorer.

In addition there will be higher on-going taxes on businesses as well as an attempt at a shorter-term rise.

There is also a proposal for a hike in corporate tax from 26 to 29 percent, concerning the nearly 15,000 companies with pretax earnings of at least 100,000 per year, set to fetch 410 million euros.

Over 1,500 enterprises will have to pay an extraordinary levy of 12 percent on their 2014 profits, in two installments, one this year and one in 2016. The measure should fetch 1.35 billion euros per year, and will now concern firms that earned at least half a billion euros,

These days corporate taxation is quite a contentious issue and what I mean by this is the ability of individual governments to apply it in a world in which many larger businesses consider themselves to be footloose and fancy free in geographical terms. In the UK analysis of this issue concentrated on Google,Amazon and Starbucks but they were far from alone. Of course in the Euro area itself there is Ireland competing for multinational “tax business” with a corporation tax rate of 12.5%. Thus there are obvious dangers in raising corporate tax rates.

The individual Greek might be hopeful that the plans above are enough but sadly even more is required.

The bulk of those savings would be a 3.9 per cent increase in contributions to the Greek government’s main pension scheme, which is projected to raise €800m by next year on its own. A new early retirement plan – which will gradually raise the retirement age to 67 by 2025 and eliminate incentives for early retirement after January 2016 – would account for another €300m in savings next year.

So in effect taxes on income are higher via social security contribution increases and the pension regime itself gets a trim. Both will have a contractionary impact on the economy.

The IMF admitted that this type of policy was a mistake

Back in 2013 an IMF Working Paper told us this.

We find that forecasters significantly underestimated the increase in unemployment and the decline in private consumption and investment associated with fiscal consolidation.

The attempt at using a third-party style of writing did not hide the fact that the IMF meant itself by “forecasters” and policies it had supported by “fiscal consolidation”.

What was the size of the error then? The emphasis is mine.

We believe, however, that a reasonable case can be made that the multipliers used at the start of the crisis averaged about 0.5.

If we put this together, and use the range of coefficients reported in our tables, this suggests that actual multipliers were substantially above 1 early in the crisis.

The IMF deserves some credit for admitting its mistake as it makes a refreshing change from the way that misrepresentations and indeed lies are often repeated. However its analysis of the impact of a fiscal consolidation has a chilling implication for the austerity package which the Greek government has just proposed. The impact will be to reduce GDP by 1.5% to 2% this year and to reduce it by 3-4% next year! This will be along the lines suggested by Ms Britney Spears.

With a taste of a poison paradise
I’m addicted to you
Don’t you know that you’re toxic

As the Greek government turns to her first hit in terms of policies.

Hit me baby one more time

Didn’t Syriza reject austerity?

Things get more than a little awkward here as just after the Greek election in January we were told this. From the Guardian.

Syriza leader Alexis Tsipras said his party’s victory marked an end to the “viscious cycle of austerity”.

Indeed according to AP he went on.

The verdict of the Greek people ends, beyond any doubt, the vicious circle of austerity in our country,” Tsipras said. “The verdict of the Greek people, your verdict, annuls today in an indisputable fashion the bailout agreements of austerity and disaster. The verdict of the Greek people renders the troika a thing of the past for our common European framework.”

The only change as we peruse what went on yesterday is that the troika no longer calls itself the troika, but austerity and (economic) disaster seem to be on their way one more time.

Comment

When I see headlines proclaiming that the new deal offers hope for Greece I do wonder what universe the writers are living in! The cycle so far involves Greece implementing austerity followed by economic weakness and at times collapse which means that yet more austerity is required and then repeat. On that road the economy has shrunk by a quarter and real wages have fallen by a third. What is the solution? It is apparently to sing along with the Average White Band.

Let’s go round again
Maybe we’ll turn back the hands of time
Let’s go round again
One more time

What has been done to Greece is bad enough but to learn so little from it that you are willing to do it again seems insane under the Albert Einstein definition. Even worse is the fact that one of the ways that Greece entered its crisis was an inability to collect its taxes particularly on the wealthy and its equivalent of the oligarchs. Thus a solution essentially based on higher taxes has an obvious flaw.

It seems that US Treasury Secretary Tim Geither was correct that Euro leaders wanted to punish Greece and the current form of that seems to be making sure that it remains in its ongoing economic depression.

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53 thoughts on “This new Greece bailout proposal will crash the economy once again

    • and if that food is all home grown then less tax ( again)

      The VAT on food will hit tourism , even less reason to goto Greece, income drops , Debt ratio worse ….. Frankly this is really farce dressed up as salvation!

      hey Greek peoples ! leave the monster before it kills you all!

      Dont mention Iceland!

      Forbin

      • What’s wrong with Iceland? Of course we’ll need to leave the Eurozone(at least), enough is enough already.

  1. I don’t think that punishment is the goal.
    The goal is adhering to neo-liberal redistribution of wealth upwards (austerity), with opportunist corporatism thrown in for bad measure. (Forced privatisations ensure the best prices for international vultures)

  2. Hi Shaun,

    Another excellent analysis.

    I read that the Greek Government were given last week, by a Swiss whistleblower, a list of 2,000 Greek tax evaders with Swiss bank accounts and the Government weren’t interested in taking action. With an attitude like that, it makes you wonder how many people in the current Government and their associates were on the list?

    At the end of the day, we all know the solution, but it is not acceptable to 80% of the Greek people, the Greek Government and 100% of Brussels. If the majority of the Greek population want more hardship, who are we to stop them?

    Syriza election promises lasted about as long as most Government’s and political parties these days. They are all forgotten as the last ballot paper drops into the ballot box, which makes rather a mockery of modern democracy.

    All reminds me a bit of 100 years ago and WWI, one more push and we will achieve victory! Sorry to disappoint the Greeks but with the projected drop in your GDP, your debts are going to be that much closer to 200%. But they needn’t worry about that, as we all know that they can never be paid back and won’t be.

    I reckon the best way to make money on this Greek tragedy is to start a book on how long it will be after the last tranche of bailout money before the Greeks are back in Brussels pleading for more money?

    The battered old can might have been kicked down the road a bit, but the problem remains the same, Greece is bankrupt and it can’t escape within the constraints of the Euro straightjacket.

    We are heading towards the end of the current economic cycle, which makes you wonder if there is a small recession in 2016/17, how the Eurozone and especially the weaker members will cope?

    • Hi Rods and thank you.

      Is this new list an addition to the Lagarde List which did the rounds 2/3 years ago? It sounds rather familiar although of course there always were rumours of others being involved.

      I take your point about the first world war but sadly this saga has outlasted it already and there is plenty more to come.

      I too fear the next recession, who is in any shape if it comes anytime soon?

      • Hi Shaun,

        I misread the tweet, missing the date!

        Thomas C. Theiner ‏@noclador Jun 18
        In 2010 #IMF head #Lagarde gave #Greece a list with 2,000 tax dodgers with accounts in #Switzerland. Greek reaction so far: nothing.
        #Grexit

        You are correct it was a few years ago.

  3. My parents were over in Crete a few weeks ago. Everyone they bought from in cash went some way to conveniently “forget” to give them a receipt. The collection of this higher VAT is going to be a problem. Tax avoidance is such a part of the culture and this needs to change whether they default or not.

    • Why should the common Greeks not tax evade when even the new government signs new laws giving “full and eternal tax-exempt status” to ship-owners (seriously), while at the same time the Greek PM gives interviews left and right about “making the wealthy pay” and “destroying corruption and the cronies”?

      How would you justify to a Greek store owner about to have his business shuttered that “he needs to be tax responsible”, while he sees even the current government giving away tax-exempt status to the “big money”? What would your argument be, that he needs to be a… patriot despite the big money’s letting the ship owners and ship builders evade taxes legally? Why should all the small-mid guys fall on their swords… patriotically, while the big ones pay next to nothing?

  4. Shaun, I very much doubt that the latest proposals will be acceptable to the Greek government even if the Troika give it their blessing. Many ministers in Tsipras’s coalition of the left are unwilling to support these measures.

    With regards to yesterday’s subject, the one factor that is helping Portugal ( and Spain) is the return to growth of the UK. Portuguese friends reckon that the country would be in a much worse state but for the free spending Brits who have returned in force.

    • Hi Pavlaki

      It was pointed out a while back to me that Spain and Ireland tend to follow the UK economic cycle and I agree that there is likely to be an impact on Portugal. With the supersoaraway (with apologies to the Sun newspaper) Pound £ of these times pushing above 1.40 versus the Euro again then hoteliers,restaurants et al can expect a good holiday season from the Brits.

      Imagine if we had joined the Euro! The problems in Ireland and Spain with their housing markets would have looked like a tea-party…

  5. Depressing. Rephrasing my comment to a Guardian piece, I wonder if Greece might better address its own failings (beginning with tax avoidance) on its own, outside the Eurozone, in the privacy of the drachma. Fail, and then sort it out without more dooming recipes from the troika.

    • Hi John Mcvey and welcome to my corner of the web.

      I have argued for that since the early days of the crisis. I still recall the Euro establishment claiming that such a move would collapse the economy! Surely they should be put in the stocks and have some rotten tomatoes thrown at them for that. That is before you get to their part in actually collapsing the Greek economy.

      I did contact Mr. Varoufakis via Twitter on his appointment and offered to be Governor of the Bank of Greece if they were going to default and leave the Euro

  6. What can one say, except to repeat the words of Suggs and the nutty boys…

    Madness, madness, they call it madness
    Madness, madness, they call it madness
    I’m about to explain
    A-That someone is losing their brain
    Hey, madness, madness, I call it gladness, yee-ha-ha-ha

    Propaganda ministers
    Propaganda ministers
    I’ve a-got a heavy due
    I’m gonna walk all over you
    ‘Cause

    Madness, madness, they call it madness
    Well if this is madness
    Then I know I’m filled with gladness
    It’s gonna be rougher
    It’s gonna be tougher, pa-da-da, pa-da-da
    But I won’t be the one who’s gonna suffer
    Oh no, I won’t be the one who’s gonna suffer
    You are gonna be the one, a-you…

  7. That said, surely this outline agreement is politically unacceptable to Syriza as it stands, and even with a great big dollop of debt forgiveness surely has little chance of getting through the Greek parliament?

    • Hi Andy Z

      It is an odd beast I agree for a government which got elected on an anti-austerity platform. As to debt forgiveness this is an area which the Euro establishment and the ECB especially have dodged and evaded for some time. Remember that ECB accounting dictum that all sovereign bonds in the Euro area are assumed to be repaid at par?

  8. Hi Shaun,
    It’s hard to see how this can be presented as a victory for Syriza. Last night Robert Peston, who’s often faced criticism for being gloomy in the past, said on the 10 o’clock news, something along the lines of the new proposals might, just might, represent the start of a change in Greece’s fortunes. Like you, I don’t see what you can realistically build of the back of this. I predict we won’t be discussing the amazing change in fortunes of Greece as a result of this negotiation in six months time!

    • Hi Zummerzetman

      It is not clear to me that the economic analysis of either Stephanie Flanders or Robert Peston has ever really got much of a grip on the Greek situation. Perhaps their time at the Financial Times when it was a cheerleader for UK Euro entry still influences them.

      Tonight the BBC News led with “a glimmer of hope for Greece” Really?

  9. hello shaun

    if they can’t collect taxes whilst in the EU then I doubt being out of the eurozone will help …

    Forbin

    PS: shhhhhhh! Iceland !! Shhhhh!

  10. What a farce, with everybody in denial of reality. Tax evasion is endemic and everyone wants to take more from the Greek state than they contribute. Nobody is prepared to pay the taxes necessary to cover the costs of infrastructure, policing, health and retirement before 60.

    The denial and lies are endemic within the troika too. My theory is that the troika are complicit in the criminal transfer of debts from private banks to public institutions. They don’t won’t to admit failure or worse still make an admission of guilt – so the Greek tragedy lumbers on.

    Yet again, I’m in favour of a Greek referendum on whether to default. It’s a fairly simple, but unpleasant choice, either default & suffer a short, harsh devaluation recession which allows recovery or just continue the pain of the last 5 years for an indefinite period. Either way, life is going to become tougher for those who depend on state funds.

    • Well, since revenues raised will leave the country, rather than go to the Greek exchequer to help the Greek people, I would encourage all Greeks to evade as much tax as they possibly can.

      • Whatever, but remember that the hospitals can’t work without the money coming from taxes, benefits & pensions can’t get paid without the tax money. Be careful what you wish for, you might get it.

        • Since when, in any country you can think of, was govt. spending dependant upon revenues gained?
          It would be no bad thing if the squeeze on govt. revenues made the “primary surpluses,” which the Greek Govt. has signed up to, impossible to achieve.
          An impossibility which is likely to happen anyway, given the tax and spending measures demanded

          This is like running downhill to outpace a snowball; not only is the snowball going to catch Greece eventually, but it’s increasing in size as it rolls.

        • Bulgaria, idiot Stanishev aside, runs proper finances. I take your point that all are running deficits – but it’s a lemming death rush. Observing the consequences of Bulgaria’s 1997 default -> I’d suggest the lesson from history is simple “Balanced budgets and living within your country’s means are far less painful than a currency disintegration, therefore the downside of the risks of a 5%+ deficit is many more painful than balancing the books”

          I hope it doesn’t get as bad as 1997 – but I won’t be surprised if much of the west has a dramatic drop in living standards and benefits due to excess borrowing.

        • In the 1950’s 30% of Sovereign Nations defaulted as a result of the the 1930’s depression and WWII. I suspect we are heading for the same again, although if the increasingly likely WWIII happens, much will then depend upon whether it is finally resolved conventional or by nuclear means.

    • A default would merely intensify the pain now and it would continue to infinity. I think it will continue to infinity anyway but the pain will be “less” if they don’t default.

      The time for defaulting was 2010 as I argued at the time but circumstances have moved on.

      As long as Greece manages to hoodwink further funds from the authorities it can continue with it’s informal tax evasion policies and use the external fund payments from the authorities to finance benefits etc – this can run and run until the authorities tire of chasing their tails which history dictates will take a long long time.

      • Greece is negotiating on the final tranche of the current bail out of Euro 7.4Bn but owes Euro 7.4Bn to the IMF and EU over the next 3 months. The bailout won’t be used to pay benefits and pensions but replace short-term debt from earlier bail outs. Does this fact change your diagnosis?

  11. “and a high one of 23 percent for all other products and services”
    These products include, dairy, frozen food, oil, sugar, and any other food but what you get at the green-grocery store/department. 90-95% of our money for food is burned on the food that will soar 10% in price, so each ~50€ weakly (for a family of 2) food bill at the super-market soars immediately to 55€ for the same quantity of food. That’s, by far, the most outrageous part, not the 1% cut in basic pensions and wages for our insurance.

    If you combine them all, of course, the picture gets much more dire than it already was. And all that “to stay in Europe”? F*ck that, f*ck the EU, f*ck the “we stay in Europe” movement that was organized by the top 10% of cronies and their dependents, who “rallied” with Rolex watches in their hands(seriously) and f*ck, above all, the Eurozone den of lions (or “λυκοφωλιά”, aka “den of wolves”, as we say here) and the Euro, not a currency intended for the good of the people, but a tool designed solely for the most massive redistribution of wealth from the many to the elite few in the history of mankind.

    • Yes, the elite will practice any distraction to avoid questions like

      In whose bank accounts are the borrowed billions ?
      How can you afford that mansion, that mercedes and that rolex on your declared taxable incomes ?
      Why are the kleptocrats immune from prosecution ?

    • Hi Nicholas and welcome to my corner of the web.

      UK readers will understand at least a part of this as the inflation of 2010/11 which was affected by a VAT rise pushed real wages lower especially for the poorer sections of society.

      One request please which is that whilst strong opinions are welcome on here please keep the language temperate.

  12. Hi Shaun,

    If Syriza were silly enough to take this lot to Greek Parliament and the Greek Parliament were silly enough to accept this, then, given that the Greek people voted for an end to Austerity I imagine a further election would be forced and we could be witnessing the beginnings of a long period of the extrication of Greece from the EZ by the Greek people.

    I chuckled to myself when I saw all th ereliance on increased taxes as part of the “plan” – I mean increased tax payments? In Greece of all counties! C’mon!!

  13. Thank you Shaun, for eloquently spilling the beans on this fiasco settlement. It is clearly an unworkable patch-up to keep the show on the road for a few months. The cycle time to failure will get shorter as the excesses continue to leverage. Without debt forgiveness any deal is doomed. These policies are an alarming prescription for failed economies and coudl set a precedent for EU-wide approach. We’ve often talked about harmonised banking and joint deposit responsibilty, forget all that, its too hard and bankers dont like it. Lets instead do harmonised taxes with a skim going to Brussels.

    All states to charge 23%, including eBooks and childrens food, especially baby milk, there will be no escaping it and we’ll force some great inflation numbers, at least initially anyway.

    This “deal” is like a Frankenstein experiment and the Greeks are on the operating table. The troika are commiting family homicide to one of our members and we are standing around gawping. Dont be surprised to see these policies in your local state.

    Paul C.

    • Agreed and the past evidence was that VAT rises underperformed in revenue terms. If we add in the experiences discussed above by bootsy I would suggest that we are very near to getting less not more revenue from VAT increases in Greece.

  14. Hi Shaun, Another great piece, thanks.
    It must be obvious to the Euro-powers-that-be that this latest “rescue” is no rescue at all and doomed to make things worse. I don’t believe the troika can’t see what they are asking of Greece. – Are there no limits to the cost of saving the Grand Project? Is no sacrifice too great? Its really quite scary – how long will this experiment last? With this sort of determination it could take half a century before the whole things joins the LMU on the scrapheap. Hopefully someone will see sense soon.

    • Hi Eric
      I think that the Eurocrats have kept talking the easy way out and now they feel trapped. As the debt owed by Greece has built up then a default gets ever more expensive for theEuro area. It means that they will keep kicking that poor battered can pretty much regardless of the implications cor the Greek economy.

  15. Pingback: This new Greece bailout proposal will crash the economy once again | Notayesmanseconomics’s Blog | Explore Investing

    • Yes Foxy, but unfortuately if the Greek bank owes a €1billion to a foreign bank then it becomes your problem again.

  16. I live in an area of Melbourne that has historically been an area of Greek immigrants with lots of ageing Greeks who immigrated in the 60s and 70s, and lots of Greek cafes and restaurants. The last two years especially has seen *lots* of younger (mid-twenties seemingly) Greek waiters and waitresses in many of these cafes. Just a long winded way of wondering what the emigration rates have been from Greece and what proportion of the young go-getters have already left.

    • Exactly Rdk. I do not see how Greece can ever recover, at least while remaining Greek. There are far too few young Greeks anyway and the best and brightest have better options available than supporting a comfortable retirement for all the oldies who, for whatever reason, did not produce enough little Greeks. Unfortunately, as goes Greece, so goes the Western world on present trends.

  17. Greece and it’s Disney approach to non-solutions

    There is so much wrong with the current views I read here, that it is not even close to funny (not the blogger, but the parts the blogger reports upon).
    ‘about 1.5 per cent of gross domestic product’, that is not even close to realistic. If Greece gets to grow its GDP, than it will only do so after it collapses. Anything above 0.3% is not feasable. After the reports, soon there after, they will start a cycle of bad news management, downgrading outlooks all over the field.
    VAT is only a gimmick for the Greeks, the Greek people will find ways around it. As Greece has not changed its laws we will see more and more money leaving Greece. There will be no ‘additional’ 1 billion, the question becomes will they even get close to 1 billion in tax collection (a slightly mean remark from my side)?
    The other part is “It seems that US Treasury Secretary Tim Geither was correct that Euro leaders wanted to punish Greece and the current form of that seems to be making sure that it remains in its ongoing economic depression”, not really, Greece is now being held accountable for the deals the previous governments struck, the fact that Syriza was sitting on its hands for 6 months has angered the other players, the fact that Syriza is now turning this into a referendum is even more discouraging, especially as they knew time had run out. When Greece goes, it will massively strain France and Italy, both with a debt into Trillions. the oterh nations will get hit hard too.
    If Syriza had been actually fighting for a decent solution, it would not have come to this. You cannot spend close to half a trillion and then go “payment? What payment?”, Greece ran itself into the ground whilst allowing billions upon billions to be moved out of Greece. Alexis Tsipras is about to learn how uncomfortable governmental involvency feels like. The worst thing is that if he is ‘saved’ to keep status quo, parties like UKIP and National Front will use this to enrage its local constituencies, both aiming to leave the Eurozone, the consequene to that disaster is many times more dangerous for America. These involved players know that for too long they are walking a super fine line. Presidente Hollande knows this, David cameron knows this, Both Tim Geither and Jack Law definitely know this and Mario Menti, Matteo Renzi fearfully knows this and Jean-Claude Juncker is desperate to find any third option at present.

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