The Greek site ToVima reports that the European Commission has put forward a new proposal to try to force the release of funds to Greece. This proposal has not been approved by the IMF or ECB and requires use of an ECB facility, the ESFS. While the report is only a summary, it also appears to call for a limited set of reforms, and thus is consistent with the notion of having Greece adopt a partial list of reforms in return for getting a partial disbursement.
While this would seem to be a positive development, recall that an effort of the EC to intercede in the negotiations, the famed Moscovici memo of February, has been negotiated with Greece but was not taken up by the Troika as a basis for negotiations. The problem in general in that the EC does not have funding power and is thus trying to get other parties to commit to funding Greece. The report notes that it does not expect the IMF to participate. Indeed, the proposal says it is an effort to cut the Gordian knot among the parties. In practice, this memo seeks to cut out the IMF and to pressure the ECB into cooperating, as in providing funding. But it also requires Greece to cross some of its long-established red lines.
There are several issues that look to have the potential to be stumbling blocs. First is the requirement that an agreement be reached by June to unlock €5 billion euros. Part of the comes via requiring the ECB to “unlock” the €1.9 billion in the SMP program, which Greece has repeatedly asked the ECB to provide then and the ECB has refused to release. Second is that it requires Greece to agree to structural reforms similar to those proposed by the OECD. The memo specifically mentions labor market reforms, which is one of Greece’s red lines. If Greece were to accept this memo, it amounts to capitulation. But it appears to offer Greece a concession on the labor reforms issue, in that it says that Greece will:
You Reviewed the issue of collective bargaining agreements in the light of the report of the ILO on “best practices” in labor relations of the European Union, the need to increase the competitiveness of the Greek economy and addressing the enormous problem of unemployment.
I’ll update in light of English language reports on this issue, since this is very unclear in this version. Greece did pump for using ILO best practices. This section appears to try to find a middle ground, with Greece adopting some labor market “reforms” as in increased labor competitiveness (ie, labor crushing) measures, but giving Greece the ILO measure to make the other measures politically and practically more palatable.
The memo notes that it does not expect the IMF to participate. The IMF has in fact signaled that it is not willing to continue to funding Greece unless the Eurogroup creditors write down their existing debt. Moreover, the IMF’s involvement has been unpopular with some European leaders. The IMF was brought into the earlier fundings due to the need for another pocket to tap, and some European officials, particularly European Commission chief Jean-Claude Juncker, have made it clear they would prefer for European institutions to control Europe’s destiny and the IMF should no longer participate. In theory, that’s all well and good, but in reality, the EC does not have a checkbook of its own, so the question remains who will stump up to replace the IMF.
It also sets forth fiscal targets that are draconian:
-2015 Primary surplus of 0.75% of GDP
-2016 Primary surplus of 2% of GDP
-2017 Primary surplus of 3.5% of GDP
-2018 Primary surplus of 3.5% of GDP.
3.5% is an insane level and .75% looks unattainable for 2015 without Greece engaging in extreme austerity given the current state of the economy.
Here are the other main provisions from ToVima via Google Translate:
In the first list out the measures for meeting the budgetary gap and to achieve primary surpluses by the end of 2016. The measures are:
-the reform of the VAT to be applied after the summer (most likely by October 1) and provides for a uniform rate of 18% for cash transactions and 15% for card transactions and maintaining the low rate of 6.5%.
-Increase The extraordinary tax on annual incomes above 30,000 euros to pre-reduction levels
-Maintains The ENFIA as the most efficient (in terms of collectibility) tax
-There Will apply the zero deficit in the subsidiary clause, but will be reviewed as part of the dialogue to be launched in autumn for the sustainability of the pension system
-You Reviewed the issue of collective bargaining agreements in the light of the report of the ILO on “best practices” in labor relations of the European Union, the need to increase the competitiveness of the Greek economy and addressing the enormous problem of unemployment.
The general secretariat of public revenues -Anexartitopoieitai and institutional guaranteed the independent role
-Create The fiscal council, also as an independent authority.
-Lamvanontai Measures to address the humanitarian crisis – and in the context of the package Juncker – safety net created for the “underprivileged.”
Also in the text – in substance evaluation report and model of the new agreement – the European Commission notes that there is convergence of views on banks and red loans
Update: The link to the OECD report is here. I will attempt to embed it but I have been having difficulty from my current location. I had looked at this document briefly in February and back then set reader and expert in all matters construction-related bob on the building materials section. He gave a long list of reasons why it made no sense from an economic perspective and amounted to a prescription for looting the Greek industry. It is also not crisp on the issue of pensions. It does urge the lifting “third-party levies on materials or services, which are then used for parafiscal purposes, mainly to finance pension funds for special interest groups….It should be said that the quantification of consumer surplus, cost savings or increased expenditures/turnover obtained by the OECD study represents an estimate of the gross positive effects of removing the barriers to competition. In some cases, such as removing the fee on advertising, there will be a cost associated with implementing the recommendation, for instance a funding gap for the pension fund in question. However, in this particular case, owners of media houses and newspapers do not currently contribute
to the pensions of their employees. Some of the switching cost should therefore be borne by employers, rather than by the state.” Recall that Greece has an extremely fragmented pension system, with IIRC 133 separate pension funds. I’d welcome reader input, but from what I can tell on this quick pass, the OECD reform list appears to call for some form of pension reform, as in reduction, by require private employers to pick up more of the burden.
Second Update 2:10 PM. So much for relying on Greek sources, as readers have urged me to do more often (although ToVima is not friendly to the Greek government). This report comes from Reuters:
The European Commission denied on Monday a Greek newspaper report that its President Jean-Claude Juncker has made a new, compromise proposal to Greece in negotiations on more funding in exchange for reforms for the cash-strapped country.
Greek To Vima newspaper reported that the Commission, which together with the European Central Bank and the IMF is negotiating a deal with Athens on behalf of its creditors, offered to disburse new funds in exchange for fewer reforms and smaller primary surplus targets than demanded before.
“I can’t confirm media reports on @EU_Commission /Juncker proposal on GR. Not aware of such proposal. Working towards comprehensive deal,” Commission spokeswoman Annika Breidthardt said on Twitter.
This may mean the cat was let out of the bag early and has put the EC in an awkward position. The leak is too specific for To Vima to have fabricated it out of whole cloth. We’ll see if future updates shed light on what is afoot.
Third Update 2:20 PM: The Financial Times’ Peter Spiegel reports that the EC plan has not been well received by the actual proposed funders and reveals the existing fault lines:
The Commission’s spokeswoman responsible for economic issues, former Reuters correspondent Annika Briedthardt, has already distanced the Commission from the document, saying in a tweet that she’s not aware the proposal actually exists:
Can't confirm media reports on @EU_Commission /Juncker proposal on GR. Not aware of such proposal. Working towards comprehensive deal.
— Annika Breidthardt (@A_Breidthardt) May 18, 2015
Other commission officials are similarly playing down its importance. “We have many documents,” said one, only half-jokingly.
Although nobody is admitting the provenance of the document, what it appears to be is one in a series of proposals going back and forth between the Commission and Athens in an effort to find common ground, rather than a full-blown “Juncker Plan” to cut the Gordian Knot.
Still, even if it is not a fully-articulated Juncker proposal, what may be most interesting about the document is what it says about the current negotiation process. It is now no secret that the Commission views the IMF and Berlin as being unreasonably hard-line in the Greek talks and Commission officials, including Juncker himself, have been trying to bridge differences between Athens and hard-line elements for weeks.
It is also no secret that many others involved in the talks are none-too-pleased with the Commission’s freelancing. Jeroen Dijsselbloem, the Dutch finance minister who leads the negotiations on the part of his fellow eurozone ministers, has been quite open about his unhappiness that the Commission tried to intervene without his knowledge back in February, when everyone was desperately trying to convince Athens to seek an extension of the current €172bn bailout before it expired.
The new Juncker effort could touch off similar recriminations, because it appears that none of the other players knew what Juncker was up to. “We are thunderstruck,” said one official involved in the talks, who said the ECB and the IMF – who are theoretically on a co-equal standing with the Commission when it comes to talks with Greek authorities – were unaware such a proposal was being mooted.
Spiegel also describes how the EC tried to intercede in the Cyprus banking system collapse and lost to the IMF and Germans. He concludes: “The new Juncker document likely faces a similar fate.”