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.