Obeying Europe Has Been Disastrous, Greece Says, Demanding A Better Deal

06/21/2015 08:56 pm ET | Updated Jun 21, 2015

To hear some tell it, Greece is acting like a petulant child unwilling to take its medicine.

But Greece says it has good reasons for holding out on key demands from its international creditors. The terms of the bailout it received from the International Monetary Fund, the European Central Bank and Eurozone countries were imposed on Greece and none of the accompanying predictions of recovery have yet come true.

In 2009, as the Great Recession deepened in Europe, Greece revealed that after years of official deception, its finances were worse than believed and it could no longer pay its debts. Worried about the future of the euro, Eurozone governments, along with the European Central Bank (ECB) and International Monetary Fund (IMF), provided emergency bailout loans to Greece's government. In exchange for two rounds of bailouts in 2010 and 2012 totaling 240 billion euros, Greece's international creditors have insisted on massive spending cuts, tax increases and other reforms.

As a result, Greece has implemented one of the most drastic fiscal adjustments in modern history. According to the IMF, when adjusting for Greece's sluggish economic performance, Greece now has the largest budget surplus before interest payments of any country in the Eurozone. Spending, in particular, has declined precipitously, with the government employing 30 percent fewer people than it did in 2009. At the same time, according to an analysis by Greek news site Macropolis, only 11 percent of the bailout funds have gone toward government services; the rest has been designated for payments to Greece's creditors.

But the austerity measures have devastated Greece's economy. Greece's GDP has declined 27 percent since 2008; recovering slower from the 2008 crisis than the United States from the Great Depression, or Germany after World War II. Currently, one out of every three Greeks lives at or below the poverty line. The adult unemployment rate is over 25 percent, and for Greeks under 25 it is 50 percent. Since 2009, Greek wages have declined 37 percent. The economic crisis has also seen a rise in drug abuse, and accompanying growth in the number of HIV infections.

Ahead of a meeting of Eurozone leaders on Monday, there were reports that the two sides were closer than ever to a 6-month bailout extension that could ultimately include debt relief for Greece. Regardless of the contours of the final agreement, it is important to understand why Greece was so insistent on debt relief and other concessions in the first place.

Below is a primer on the arguments made by Greece and a broad array of sympathetic economists, and a look at how they stack up against the facts. For background on the bailout deal that Greece is trying to renegotiate head over here, and to learn what could happen if Greece defaults on its debts, head over here.

Which of the creditors' demands is Greece still refusing to agree to?

Officially, Greece has accepted its creditors' proposed primary budget surplus targets: a 1 percent surplus in 2015 and 2 percent in 2016. But as of late Sunday, Greece has not agreed to the measures its creditors want it to implement to achieve those targets. Specifically, Greece will accept pension cuts and an increase in the value-added tax (VAT), a tax on consumption. Each of the measures is worth 1 percent of GDP in annual savings.

Greece also wants a cancellation of a significant portion of the debts it owes Eurozone nations.

As a counter-proposal, Greece has offered a mix of other spending cuts, tax increases and administrative reforms that it believes will be less harmful to its economy and population. To prevent profligate behavior in future years, the Greek government has proposed a "fiscal brake" mechanism wherein automatic cuts would take effect if the country did not hit its future targets.

Defense spending is one area that Greece has proven willing to cut. Greece formally proposed 200 million euros in defense spending cuts. Yiannis Bournous, an official in the ruling Syriza party, subsequently told reporters that it would be a "pleasure" for Syriza to cut it even more.

But Greece's creditors rejected defense cuts out of hand, according to James Galbraith, an economist at the University of Texas at Austin, who is advising Greece's negotiators in Athens. Galbraith said that a key point of disagreement is the Greek government's pursuit of savings through administrative reforms, rather than direct cuts.

"The problem from a budget standpoint with administrative reforms is that they take time," Galbraith said. "The institutions are mainly interested in policy changes with ostensibly large budget savings in the very first year or so."

Administrative measures that could produce major savings, Galbraith said, include ending the abuse of the early retirement system, reducing military manpower requirements, and streamlining the "onerous and abusive" business licensing and permitting process. On the tax side, he said, Greece could adopt a point-of-sale registration system for the VAT tax, which Croatia has used to reduce tax evasion.

During the recent adjustment period, Greece has shown its willingness to streamline bureaucracy. In the World Bank's "ease of doing business" rankings, Greece has gone from being ranked 109th in the world in 2010 to 61st in 2015.

The creditors have said that they remain open to other spending cuts and tax increases than the ones they have proposed but that the savings they produce must be genuine. Apparently, they do not believe Greece's current offers meet that standard.

Galbraith admits that Greece's proposals would not achieve the creditors' primary budget surplus targets, but called those targets "strongly contractionary and therefore not a good idea in any event."

On Saturday, Greek Prime Minister Alexis Tsipras indicated he would be open to more concessions, but it is not clear what those are. On Sunday, the troika of creditors offered Greece a 6-month bailout extension that reportedly included debt relief. More will become clear at Monday's meeting of Eurozone leaders.

Why is Greece opposing pension cuts? Isn't Greece's pension system notoriously profligate?

Proponents of the pension cuts point out that Greece's pension spending as a percentage of GDP is the highest in Europe at 16 percent. But while that figure may make Greece's pension spending look high, it does not hold up to closer scrutiny.

First, it obscures the fact that Greek pensions are not generous. Greece has one of the oldest populations in Europe -- 1 in 5 Greeks is over age 65 -- so the money is spread out over a larger share of the population. A Wall Street Journal analysis of the official data reveals that in 2012, Greece's spending per person aged 65 or older was below the Eurozone average.

In addition, pension spending has remained high as a share of GDP because of how much Greek GDP has shrunk since 2009. The Journal's analysis of 2012 data -- when the economy was still larger than it is now -- shows that Greece's pension spending as a share of GDP trailed that of Italy and was not much higher than the Eurozone average.

The Greek government objects to further pension cuts because previous pension cuts have rendered the benefits modest at best. Greek pensions have been cut as much as 48 percent in previous budget agreements, according to The New York Times.

The average Greek pension is 833 euros a month, down from 1,350 euros in 2009. According to official government estimates, 45 percent of pensioners receive monthly benefits below the poverty line of 665 euros.

And while Greece's pension benefits are now much smaller, in recent years they have become even more vital to Greeks. At a time when Greece's official unemployment rate is over 25 percent, the pension system has taken on the roles of long-term unemployment insurance program and multi-generational safety net. Many pension applicants told the Times that they were applying for benefits against their will because they had lost their job and could not find a new one. And although definitive figures are not available, Tsipras and others say that an increasing number of non-retired people who lack sufficient income to live rely on the pension benefits of family members. Nearly half of all Greek households relied on pension benefits, according to a 2014 survey by a Greek small business association. By contrast, fewer than 10 percent of surveyed households reported receiving unemployment benefits.

All of that provides context for government concerns that pensions cuts would have a disproportionate impact on living standards. Greek Prime Minister Alexis Tsipras has claimed that the cuts will "only cause a further worsening of the already dramatic social situation."

Seriously though, don't they let haircutters retire at 50?

Not really -- anymore. Anecdotes about the inefficiency Greece's retirement system have become something of a punchline in Western media accounts of the Greek bailouts. And back in 2010, they were rooted in reality. At the time, the Greek government designated 580 kinds of jobs eligible for early retirement at age 50 for women and age 55 for men. Eligible professions famously included hairdressers, television and radio presenters and musicians.

Under pressure from its creditors, Greece has since moved to curtail early retirement and raised its full retirement age from 65 to 67. But the pension reforms grandfathered in people who were had already paid in to the system for a certain number of years.

Despite Syriza's opposition to the cuts currently being proposed, the party acknowledges that the country must continue to scale back early retirement and has made it part of its agenda. Prime Minister Tsipras has proposed slowly eliminating those early-retirement programs that remain. Greek Finance Minister Yanis Varoufakis wrote in an op-ed in the Irish Times Saturday that "elimination of scandalous early retirement practices" is one of many reforms that the country "desperately" needs.

Some are still skeptical of Syriza's professed commitment to pension reform. Manos Matsaganis, a professor at Athens University of Economics and Business, believes that the Syriza government has favored retirement perks for public sector workers at the expense of the broader population.

"Our government keeps going on about Greece's 'humanitarian crisis,' but their spending priorities show that in fact they care very little about the poor and the unemployed and a lot more about 50-year old public sector workers to whom they have promised lavish pensions at a ridiculously early age," Matsaganis told The Huffington Post.

Why does Greece want to restructure its debt?

Greece claims -- and many economists agree -- that it will never be able to repay the debt it currently owes the troika of creditors, and that continuing to try to do so is preventing it from recovering economically. Greece's total public debt is 320 billion euros -- an amount equal to 177 percent of the country's GDP. Nearly three-quarters of that debt is owed to members of the troika. Although Greece's debts to the Eurozone member nations only start coming due in 2020, its repayments to the European Central Bank (ECB) and the IMF are due much sooner. And the sheer size of Greece's total debt, economists and investors say, has scared away investment, further limiting its economic growth. The 27 billion euros in bonds that Greece owes the ECB is particularly burdensome, because it precludes Greece from participating in the ECB's quantitative easing program even though Greece is in greater need of monetary stimulus than any other Eurozone nation.

Greece is proposing two main forms of debt relief. First, it is asking the Eurozone nations to issue it a new, long-term 27-billion euro loan with which it can buy back the bonds it owes the ECB. The ECB would return to Greece the 9 billion euros in profits that it earned on the 27-billion euro bonds, which Greece would then use to pay its debts to the IMF. And the move would have the advantage of making Greece eligible for the ECB's quantitative easing program.

Greece also wants to essentially cancel half of a particular 144-billion euro debt it owes the Eurozone nations. It would pay twice as high of an interest rate on one half of the debt, and have the Eurozone nations write off the rest.

How has the troika reacted to the plan?

Greece's second request is a non-starter with the Eurozone creditors. And until Sunday, they were refusing to entertain debt relief as part of the current bailout negotiations.

In any event, there are no guarantees that the ECB would extend its quantitative easing program to Greece even if it became eligible.

"The ECB appears to make up the rules as it goes along," said Peter Doyle, an economist and former senior manager at the IMF. "They could say they think that the deal the politicians have struck with Greece is not good enough."

A particular case that Doyle and other economists have been critical of was the ECB's February decision to end a waiver allowing a Greece to use its junk-rated sovereign debt as collateral for loans, thereby increasing its borrowing costs.

The ECB said at the time that the decision was based on a lack of confidence in Greece's completion of the fiscal adjustment program.

Of all of Greece's creditors, the IMF has been the most open to restructuring Greece's debts. Olivier Blanchard, the IMF's chief economist, wrote June 14 that Greece's Eurozone creditors would need to agree to "debt relief sufficient to maintain debt sustainability," which could be achieved by extending the repayment timelines of Greek debts and cutting interest rates further. Blanchard's comments were directed at the Eurozone, because as a matter of policy, the IMF itself does not forgive debts, but as the Greek government's plan illustrates, debt restructuring by other parties could play a role in enabling payment to the IMF.

But experts say that the IMF has not gone nearly far enough, remaining vague in its recommendations and timid about expressing them. It is unclear what role Blanchard's suggestions are playing in the actual negotiations between Greece and the troika or if any more concrete proposals have been drafted. A recent meeting of the IMF division responsible for the Eurozone did not mention debt relief at all in the concluding statement of its Thursday meeting. That same day, IMF Managing Director Christine Lagarde struck a much different tone than Blanchard, calling for "dialogue with adults in the room."

"Blanchard's statement is in a blog post, but it is nowhere in the official document of the Euro area IMF mission," Doyle said. "What are they doing? It is incompetence and a dereliction of duty."

Still, Nicolas Véron, a visiting scholar at the Peterson Institute for International Economics and a former advisor to the French government, believes that debt relief is the most promising area of compromise between Greece and the troika.

"I would not rule out the European creditors making more of a step toward debt relief in one way or another," Véron said. "At the end of the day it has to be part of the solution but it depends on the sequence. Can it happen at the same time as the bailout deal, as the Greeks would like to see, or would it happen later?"

What does this all mean for the future of the euro?

The creditors are concerned that if they concede too much to Greece, it could lead to a slippery slope of new negotiations with other Eurozone nations. Restructuring Greece's debt, in particular, "is opening a can of worms," Doyle, the former IMF senior manager, said. "Let's say you write down 50 percent of Greek debt, now at 175 percent of GDP. Italian public debt is at 130 percent. Germany is at 95 percent. Should it be written down as well?"

Doyle favors a comprehensive debt restructuring for all Eurozone nations. "You cannot solve Greece in isolation," he said. "You have to do it in a Euro-wide context."

A darker interpretation of the Eurozone creditors' approach is that in making an example of Greece, they are trying to warn voters across the continent that Eurozone institutions have veto power over a country's democratically elected officials.

Syriza party officials and other observers are convinced that Eurozone officials are trying to pressure the Greek public into electing a more accommodating Greek government. By forcing Syriza to return to the public that elected it with little to show for months of bargaining, the theory goes, the people will despair of electing leaders who seek more favorable bailout terms.

Such a move would not be unprecedented. Europe's leaders are believed to have leveraged debt negotiations to oust Italian Prime Minister Silvio Berlusconi in 2011. Former U.S. Treasury Secretary Timothy Geithner wrote in a memoir that European leaders solicited U.S. cooperation in a plan to withhold support for IMF loans to Italy in 2011 until Berlusconi.

"There is an attempt to induce regime change," said Daniela Gabor, a professor of international finance at the University of the West of England's Bristol Business School. "They do not want the Syriza government to have a chance to implement its agenda, because they are worried about Spain."

Spain, which has adopted an austerity regimen that rivals that of Greece and had similar results, is witnessing the rise of the left-populist Podemos party. In May, Podemos candidates won the mayoralties of Madrid and Barcelona, Spain's two largest cities. Those local wins could portend a victory for Podemos in general elections later this year.

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