Written by
Yanis Varoufakis
Minister of
Finance in Greece
The only
antidote to propaganda and malicious ‘leaks’ is transparency. After so much
disinformation on my presentation at the Eurogroup of the Greek government’s
position, the only response is to post the precise words uttered within. Read
them and judge for yourselves whether the Greek government’s proposals
constitute a basis for agreement.
Colleagues,
Five months
ago, in my very first Eurogroup intervention, I put it to you that the New
Greek government faced a dual task:
We had to
earn a precious currency without depleting an important capital good.
The
precious currency we had to earn was a sense of trust, here, amongst our
European partners and within the institutions. To mint that precious currency
would necessitate a meaningful reform package and a credible fiscal
consolidation plan.
As for the
important capital we could not afford to deplete, that was the trust of the
Greek people who would have to swing behind any agreed reform program that will
end the Greek crisis. The prerequisite for that capital not to be depleted was,
and remains, one: tangible hope that the agreement we bring back with us to
Athens:
is the last to be hammered out under
conditions of crisis;
comprises a reform package which ends the
6-year-long uninterrupted recession;
does not hit the poor savagely like the
previous reforms did;
renders our debt sustainable thus creating
genuine prospects of Greece’s return to the money markets, ending our
undignified reliance on our partners to repay the loans we have received from
them.
Five months
have gone by, the end of the road is nigh, but this finely balancing act has
failed to materialise. Yes, at the Brussels Group we have come close. How
close? On the fiscal side the positions are truly close, especially for 2015.
For 2016 the remaining gap amounts to 0.5% of GDP. We have proposed parametric
measures of 2% versus the 2.5% that the institutions insist upon. This 0.5% gap
we propose to bridge over by administrative measures. It would be, I submit to
you, a major error to allow such a minuscule difference to cause massive damage
to the Eurozone’s integrity. Convergence had also been achieved on a wide range
of issues.
Nevertheless,
I will not deny that our proposals have not instilled in you the trust that you
need. And, at the same time, the institutions’ proposals that Mr Juncker
conveyed to PM Tsipras cannot engender the hope that our citizens need. Thus,
we have come close to an impasse.
At this,
the 11th hour, stage of the negotiations, before uncontrollable events take
over, we have a moral duty, let alone a political and an economic one, to
overcome this impasse. This is no time for recriminations and accusations.
European citizens will hold collectively responsible all those of us who failed
to strike a viable solution.
Even if
some, misguided by rumours that a Greek exit may not be so terrible or that it
may even benefit the rest of the Eurozone, are resigned to such an event, it is
an event that will unleash destructive powers no one can tame. Citizens from
all over Europe will target not the institutions but their elected finance
ministers, their Prime Ministers and Presidents. After all, they elected us to
promote Europe’s shared prosperity and to avoid pitfalls that may harm Europe.
Our
political mandate is to find an honourable, workable compromise. Is it so
difficult to do so? We do not think so. A few days ago Olivier Blanchard, the
IMF’s Chief Economist published a piece entitled ‘Greece: A Credible Deal Will
Require Difficult Decisions by All Sides.’ He is right, the three operative
words being ‘by all sides’. Dr Blanchard added that: “At the core of the
negotiations is a simple question. How much of an adjustment has to be made by
Greece, how much has to be made by its official creditors?”
That Greece
needs to adjust there is no doubt. The question, however, is not how much
adjustment Greece needs to make. It is, rather, what kind of adjustment. If by
‘adjustment’ we mean fiscal consolidation, wage and pension cuts, and tax rate
increases, it is clear we have done more of that than any other country in
peacetime.
The public sector’s structural, or
cyclically adjusted, fiscal deficit turned into a surplus on the back of a
‘world record beating’ 20% adjustment
Wages fell by 37%
Pensions were reduced by up to 48%
State employment diminished by 30%
Consumer spending was curtailed by 33%
Even the nation’s chronic current account
deficit dropped by 16%.
No one can
say that Greece has not adjusted to its new, post-2008, circumstances. But what
we can say is that gigantic adjustment, whether necessary or not, has produced
more problems than it solved:
Aggregate real GDP fell by 27% while
nominal GDP continued to fall quarter-in-quarter-out for 18 quarters non-stop
to this day
Unemployment skyrocketed to 27%
Undeclared labour reached 34%
Banks are labouring under non-performing
loans that exceed 40% in value
Public debt has exceeded 180% of GDP
Young well-qualified people are abandoning
Greece in droves
Poverty, hunger and energy deprivation have
registered increases usually associated with a state at war
Investment in productive capacity has
evaporated.
So, the
first part of Dr Blanchard’s question “how much of an adjustment has to be made
by Greece?” needs to be answered: Greece needs a great deal of adjustment. But
not of the same kind that we have had in the past. We need more reforms not
more cutbacks. For instance,
We need to adjust to a new culture of
paying taxes, not to higher VAT rates that strengthen the incentive to cheat
and drive law-abiding citizens into greater poverty
We need to make the pension system
sustainable by eradicating unpaid labour, minimising early retirements,
eliminating pension fund fraud, boosting employment – not by eradicating the
solidarity tranche from the lowest of the low of pensions, as the institutions
have demanded, thus pushing the poorest of the poor into greater poverty and
conjuring up massive popular hostility against another set of so called reforms
In our
proposals to the institutions we have offered:
An extensive (but optimised) privatisation
agenda spanning the period 2015-2025
The creation of a fully independent Tax and
Customs Authority (under the aegis and supervision of Parliament)
A Fiscal Council that oversees the state
budget
A short-term program for limiting
foreclosures and managing non-performing loans
Judicial and civil procedure code reforms
Liberalising several product markets and
services (with protections for middle class values and professions that are
part and parcel of society’s fabric)
Elimination of many nuisance charges
Public administration reforms (introducing
proper staff evaluation systems, reducing non-wage costs, modernising and unifying
public sector payrolls).
In addition
to these reforms the Greek Authorities have engaged the Organisation of
Economic Cooperation and Development (OECD) to help Athens design, implement
and monitor a second series of reforms. Yesterday I met with the OECD’s
Secretary General Mr Angel Gurria and his team to announce this joint reform
agenda, complete with a specific roadmap:
A major Anti-corruption Drive and relevant
institutions to support it – especially in the area of procurement
Liberalising the construction sector,
including the market and standards of construction materials
Wholesale trade liberalisation
Media – electronic and press code of
practice
One-Stop Business Centres that eradicate
the bureaucratic impediments to doing business in Greece
Pension System Reform – where the emphasis
is on a proper, long-term, actuarial study, the phasing out of early
retirements, the reduction in the operating costs of the pensions funds,
pension fund consolidation – rather than mere pension cuts.
Yes,
colleagues, Greeks need to adjust further. We desperately need deep reforms.
But, I urge you to take seriously under consideration this important difference
between:
reforms that attack parasitic, rent-seeking
behaviour or inefficiencies, and
parametric changes that jack up tax rates
and reduce benefits to the weakest.
We need a
lot more of the real reforms and a lot less of the parametric type.
Much has
been said and written about our ‘backtracking’ on labour market reform and our
determination to re-introduce protection for waged workers through collective
bargaining agreements. Is this some left-wing fixation of ours that jeopardises
efficiency? No, colleagues, it is not. Take for example the plight of young
workers in several chain stores who get fired as they approach their 24th
birthday so that the employer hires younger workers in their place to avoid
paying them the normal minimum wage which is lower for employees under the age
of 24. Or take the case of employees who are hired part time for 300 euros a
month, made to work full time and threatened with dismissal if they complain.
Without collective bargaining, these abuses abound with ill effects on
competition (as decent employers compete at a disadvantage with unscrupulous
ones) but also with ill effects on pension funds and public revenues. Does
anyone seriously think that the introduction of well-thought out collective
bargaining, in collaboration with the ILO and the OECD, constitutes ‘reform
reversal’, an example of ‘backtracking’?
Turning
briefly to pensions again, much has been made of the fact that pensions account
for more than they did in the past; as much as 16% of GDP. But consider this:
Pensions have shrunk by 40% and the number of pensioners is stable. So, expenditure
on pensions has fallen, not risen. That 16% of GDP is due not to spending more
on pensions but, instead, to the dramatic drop in GDP which brought with it a
similarly dramatic reduction in contributions due to the fall in employment and
the rise of undeclared labour.
Our alleged
backtracking on ‘pension reforms’ is that we have suspended the further
reduction in pensions that have already lost 40% of their value when the prices
of the goods and services that pensioners need, e.g. pharmaceuticals, have
hardly moved. Consider this relatively unknown fact: Around 1 million families
survive today on the meagre pension of a grandfather or a grandmother as the
rest of the family members are unemployed in a country where only 9% of the
unemployed receive any unemployment benefit. Cutting that one, solitary pension
is tantamount to turning a family into the streets.
This is why
we keep telling the institutions that, yes, we need pension reform but, no, you
cannot just lob off 1% of GDP from pensions without causing massive, fresh
misery and a fresh recessionary round as this 1.8 billion multiplied by a large
fiscal multiplier (up to 1.5) is withdrawn from the circular flow of income. If
large pensions still existed, whose curtailment would make a fiscal difference,
we would do it. But the distribution of pensions is so compressed that savings
of such a magnitude would have to eat into the pensions of the poorest. It is
for this reason, I suppose, that the institutions are asking us to eliminate
the solidarity pensions supplement to the poorest of the poor. And it is for
this reason that we counter-propose proper reforms: a drastic reduction, almost
elimination, of early retirements, consolidation of pension funds and
interventions in the labour market that reduce undeclared labour.
Structural
reforms promote growth potential. But mere cutbacks in an economy like Greece’s
promote recession. Greece must adjust by introducing genuine reforms. But at
the same time, going back to Dr Blanchard’s answer, the institutions need to
adjust their definition of growth-enhancing reforms – to acknowledge that
parametric cuts and tax hikes are not reforms and that, at least in the case of
Greece, they have undermined growth.
Colleagues
have remarked in the past, and may do so again, that our pensions are too high
compared to their older people and that it is unacceptable for the Greek
government to expect them to foot our pension bill. Let me be clear on this: We
are never going to ask you to subsidise our state, our wages, our pensions, our
public expenditure. The Greek state lives within its means. Over the past five
months we have even managed, despite zero market access and zero disbursements,
to repay our creditors. We intend to keep doing so.
I
understand that there are concerns that our government may slip into a primary
deficit again and that this is the reason the institutions are pressing us to
accept large VAT rises and large pension cuts. While it is our view that the
announcement of a viable agreement will suffice to boost economic activity
sufficiently to produce a healthy primary surplus, I understand perfectly well
that our creditors and partners may have cause to be sceptical to want
safeguards; an insurance policy against our government’s possible slide into profligacy.
This is what lies behind Dr Blanchard’s call for the Greek government to offer
“truly credible measures.” So here comes an idea. A “truly credible measure”.
Instead of
arguing over half a percentage point of measures (or on whether these tax measures
will have to all of the parametric type or not), how about a deeper, more
comprehensive, permanent reform? An automated hard deficit brake that is
legislated and monitored by the independent Fiscal Council we and the
institutions have already agreed upon. The Fiscal Council would monitor the
state budget’s execution on a weekly basis, issue warnings if a minimum primary
surplus target looks like being violated and, at some point, trigger automated
across the board, horizontal, reductions in all outlays in order to prevent the
slide below the pre-agreed threshold. That way a failsafe system is in place
that ensures the solvency of the Greek state while the Greek government retains
the policy space it needs in order to remain sovereign and able to govern
within a democratic context. Consider this to be a firm proposal that our
government will implement immediately after an agreement.
Given that
our government will never again need to borrow from your taxpayers or from the
taxpayers standing behind the IMF, there is no sense in a debate between
member-states that compete on whose pensioners are poorer, instigating a
race-to-the-bottom. Instead, the debate moves on to debt repayments. How large
should our primary surpluses be? Does anyone seriously believe that the growth
rate is independent of the primary target set? The IMF understands fully that
the two numbers are linked endogenously and that this is the reason why
Greece’s public debt must be looked at at once.
Our large
debt overhang should be thought of as a large unfunded tax liability. While it
is true that the EFSF and GLF slices of our debt are long-dated and the
interest rate is not large, the Greek state’s unfunded tax liability, our debt,
features a lumpy component that impedes investment and recovery today. I am
referring here to the 27 billion of SMP bonds still held by the ECB. This is a
short-dated unfunded liability that potential investors in Greece take a look
at it and turn back because they can see the funding gap this part of the debt
creates instantly and because they recognise that this lump of 27 billion on
the ECB books stop Greece from taking advantage of the ECB’s quantitative
easing at the very moment when this program is unfolding and is reaching its
maximum capacity to come to the aid of countries buffeted by deflation. It is a
cruel irony that the country most afflicted by deflation is the one that is
excluded from the ECB’s anti-deflation remedy. And it is excluded because of
this 27 billion lump.
Our
proposal on this front is simple, efficient and mutually beneficial. We propose
no new monies, not one fresh euro, for our state. Imagine the following
three-part agreement to be announced in the next few days:
Part 1:
Deep reforms, including the automated hard deficit brake that I mentioned.
Part 2: A
rationalisation of Greece’s debt repayment schedule along the following lines.
First, to effect an SMP BUY-BACK Greece acquires a new loan from the ESM, then
purchases the SMP bonds back from the ECB and retires them. To underpin this
loan, we agree that the deep reform agenda is the common conditionality for
successfully completing the current program and for securing the new ESM
arrangement that comes into operation immediately afterwards and runs
concurrently with the continuing IMF program until the end of March 2016.
Short-term funding relies on the outstanding disbursement from the current
program and medium to long term funding is completed by the return of the SMP
profits, coming up to 9 billion out of the 27 remaining billions, which go into
an escrow account to be used in order to meet Greece’s repayments to the IMF.
Part 3: An
investment program for kick-starting the Greek economy funded by the Juncker
Plan, the European Investment Bank – with which we are in talks already – the
EBRD and other partners who will be invited to participate also in conjunction
with our privatization program and the establishment of a development bank that
aims at developing, reforming and collateralizing public assets, including real
estate.
Does anyone
truly doubt that this three-part announcement would dramatically change the
mood, inspire Greeks to work hard on hope of a better future, invite investors
to a country whose asset prices have fallen so dramatically, and give
confidence to Europeans that Europe can, even at the 11th hour, do the right
thing?
Colleagues,
at this juncture it is dangerously easy to think that nothing can be done. Let
us not fall prey to this state of mind. We can forge a good agreement. Our
government is standing by, with ideas and with the determination to cultivate
the two forms of trust necessary to end the Greek drama: Your trust in us and
the trust of our people in Europe’s capacity to produce policies that work for,
and not against, them.
yanisvaroufakis.eu
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