Break over, work on re­view can re­sume

Fis­cal gap, la­bor re­forms and post-2018 mea­sures are likely to prove most dif­fi­cult to re­solve in next weeks

Kathimerini English - - Focus - BY NICK MALKOUTZIS

ANAL­Y­SIS Many pupils around Greece will be feel­ing de­flated to­day as they head back to school and re­newed obli­ga­tions af­ter a care­free two-week break. It will be of lit­tle con­so­la­tion to them that many Greek gov­ern­ment of­fi­cials are likely to share the same sense of dis­ap­point­ment and trep­i­da­tion as they re­sume dis­cus­sions with the coun­try’s cred­i­tors.

The un­re­solved is­sues in the sec­ond bailout re­view sit right in the mid­dle of the ne­go­ti­at­ing ta­ble like a piece of un­fin­ished home­work. The longer they have gone without be­ing tack­led de­ci­sively, the more dif­fi­cult they have be­come to solve.

The three key mat­ters that Greece and the in­sti­tu­tions will have to ad­dress in the days ahead are la­bor re­form, the fis­cal gap for 2018 and the mea­sures that may be re­quired af­ter 2018.

There are other is­sues that will have to be re­solved in the com­ing days, such as out-of-court set­tle­ments for debts to banks and the state, steps to re­duce the Pub­lic Power Cor­po­ra­tion’s share of the en­ergy mar­ket, and main­tain­ing a sat­is­fac­tory pace in the pri­va­ti­za­tion process, es­pe­cially af­ter the re­cent col­lapse of the bid to sell gas trans­mis­sion sys­tem op­er­a­tor DESFA to Azer­bai­jan’s So­car.

How­ever, it is the for­mer group of three is­sues that will dom­i­nate dis­cus­sions in the com­ing days as Athens fo­cuses its ef­fort on con­clud­ing the re­view by Fe­bru­ary. They are the most po­lit­i­cally sen­si­tive stick­ing points and will, there­fore, re­quire the strong­est will for com­pro­mise.

Of the three, the fis­cal gap for 2018 seems the most straight­for- ward to solve. Athens has to find up to 450 mil­lion eu­ros in sav­ings or ex­tra rev­enues to reach a pro­jected pri­mary sur­plus that will sat­isfy the In­ter­na­tional Mone­tary Fund as well as Greece’s Euro­pean lenders.

The gap has partly been cre­ated by the rolling out of the guar­an­teed min­i­mum in­come (GMI) scheme, whose an­nual cost is es­ti­mated at close to 0.5 per­cent of gross do­mes­tic prod­uct (around 800 mil­lion eu­ros). While some within the euro­zone might be will­ing to ac­cept less ro­bust mea­sures to bridge the gap, the IMF wants Athens to adopt what it sees as re­li­able and ef­fec­tive mea­sures.

These may come from a re­cent World Bank re­port on Greece’s wel­fare sys­tem. The World Bank sets out a num­ber of changes the Greek gov­ern­ment can make to re- duce the sys­tem’s cost by around 0.5 per­cent of GDP per year and help it de­liver more ef­fec­tively for those who need it most. Although this sounds like a no-brainer, it would in­volve dif­fi­cult po­lit­i­cal de­ci­sions for the coali­tion, such as scrap­ping around 300 mil­lion eu­ros worth of tax cred­its.

In terms of la­bor re­form, Greece and some of its lenders seem to be ap­proach­ing the is­sue from op­po­site ends of the spec­trum. Athens be­lieves that it has to strengthen la­bor laws af­ter the dereg­u­la­tion of the last few years, while on the cred­i­tors’ side (at the IMF in par­tic­u­lar) there is a con­vic­tion that it is too early for the lib­er­al­iza­tion to be re­versed.

Greece is be­ing pressed to scrap re­stric­tions on col­lec­tive dis­missals, which cur­rently re­quire the ap­proval of the La­bor Min­istry, and can­not ex­ceed 5 per­cent of the work force each month. The gov­ern­ment is con­cerned that this might cre­ate a free-for-all in the la­bor mar­ket. In­stead, it would like to re­store col­lec­tive bar­gain­ing rights and al­low unions and em­ploy­ers to set the min­i­mum wage.

Find­ing a com­pro­mise on this is­sue is go­ing to be tricky. On the one hand it is clear that the in­sti­tu­tions do not want Greek la­bor leg­is­la­tion to be­come an ob­sta­cle to re­cov­ery, par­tic­u­larly at a time when a num­ber of cor­po­rate re­struc­tur­ings are ex­pected, but on the other Greece can­not em­ploy a frame­work that is far re­moved from the Euro­pean norms.

How­ever, it is likely the big­gest dis­pute that must be set­tled is what will hap­pen once the cur­rent Greek pro­gram ends in 2018. The IMF be­lieves that Athens will have to take an ex­tra 2 to 2.5 per­cent of GDP in mea­sures (around 4.5 bil­lion eu­ros) in or­der to main­tain a 3.5 per­cent pri­mary sur­plus from 2019 on­ward. It also wants these mea­sures to be leg­is­lated now as it will not have any way to tie this, or any sub­se­quent Greek gov­ern­ment, down when the pro­gram has ex­pired.

Fur­ther­more, the di­rec­tor of the Fund’s Euro­pean De­part­ment, Poul Thom­sen, set out in a re­cent blog post he co-au­thored the kind of mea­sures that the Wash­ing­ton­based or­ga­ni­za­tion be­lieves Greece should take. His two main sug­ges­tions are a re­duc­tion in the tax-free thresh­old for an­nual in­comes from 8,500 eu­ros to 5,000 eu­ros and for sub­stan­tial cuts to ex­ist­ing pen­sions.

All three of these de­mands are deeply prob­lem­atic for the SYRIZA-In­de­pen­dent Greeks coali­tion. The prospect of leg­is­lat­ing now another 2-2.5 per­cent­age points in new mea­sures, less than 12 months af­ter it passed 3 per­cent of GDP in fis­cal ac­tions is anath­ema to Prime Min­is­ter Alexis Tsipras’s ad­min­is­tra­tion. Equally, thoughts of fur­ther cuts to pen­sions, af­ter last year’s re­duc­tions and sev­eral oth­ers in pre­vi­ous years, risk alien­at­ing a large part of the Greek elec­torate.

It is no won­der, then, that Fi­nance Min­is­ter Eu­clid Tsakalo­tos has pro­posed a less painful com­pro­mise. Speak­ing to Kathimerini re­cently, he sug­gested that the ex­ten­sion of the au­to­matic fis­cal mech­a­nism, also known as “the cut­ter,” be­yond 2018 could be ac­cept­able to Athens. The cut­ter was agreed as part of the first re­view last year and en­sures that the Greek gov­ern­ment will be obliged to take cor­rec­tive ac­tion if it fails to meet each year’s fis­cal tar­get.

It is un­likely that the lenders would ac­cept a gen­eral com­mit­ment to make fis­cal ad­just­ments if the pri­mary sur­plus comes in be­low tar­get. The IMF is adamant that the ini­tia­tives need to be tar­geted and that the pen­sion sys­tem is the prime area for in­ter­ven­tion. This means that if the fis­cal brake does turn out to be a ba­sis for com­pro­mise, Tsipras and Tsakalo­tos will also likely have to ac­cept the de­tail­ing of the mea­sures that would be im­ple­mented if the bud­get is off track. The com­pro­mise on the lenders’ part would have to be that spe­cific mea­sures are not leg­is­lated now but their im­ple­men­ta­tion is made con­tin­gent upon Greece’s fis­cal per­for­mance af­ter 2018.

As all sides re­turn to the dis­cus­sions af­ter a brief but wel­come hia­tus over Christ­mas, ev­ery­one knows where the dif­fi­cul­ties lie and what com­pro­mises have to be made. Play­time is over – now comes the task of get­ting the work done.

Cred­i­tors do not want la­bor leg­is­la­tion to be­come an ob­sta­cle to re­cov­ery, par­tic­u­larly at a time when a num­ber of cor­po­rate re­struc­tur­ings are ex­pected.

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