Safe as houses
It was Friday September 2nd, 2011 when the troika of Greece’s creditors left Athens after two weeks of negotiations that failed to bridge the gap between the Greek government and the representatives of the IMF, the European Central Bank and the European Commission.
Their last unscheduled departure was in June 2011 when Papandreou’s government went through a month of hell: it had failed in an attempt to form a coalition government with Antonis Samaras, thousands of protesters gathered almost daily on the streets outside the Parliament and Syntagma square was occupied by Greece’s indignados. The events peaked with the vote in Parliament on June 29th of the Medium Term Fiscal Program worth 28 billion euros in austerity measures, a day that neither the Greek state nor the police should be proud of because of the practices used against demonstrators.
Two months later and the projections of the newly agreed program were falling apart. The austerity measures that were implemented over the previous twelve months had now a proper grip on an economy that was sinking much faster than anyone anticipated or wanted to admit. The signs were gathering that GDP would drop by more than 5% compared to the 3.75% that was projected in June, making it impossible for Greece to meet the target of 7.5% of GDP deficit.
Although we now know, after the recent admission of the IMF that the wrong multiplier was applied to relate the impact of austerity on economic activity, back then the troika would not accept any slippage further than 7.7% of GDP due to the deeper recession, although reports were estimating it at well above 8% of GDP. Greece had to implement new measures to close the estimated gap of 1.8 to 2 billion euros and meet the target.
In the meantime, a second program for Greece was in the works after a decision on July 21st to conduct a Private Sector Initiative (PSI) and everyone involved in the program was in negotiations with the Institute of International Finance (IIF), which represented Greece’s private creditors. So, the mission had to conclude successfully not only for the disbursement of a loan tranche of 8 billion euros, which Greece needed to keep state operations going, as it did not cover any debt maturities, but a happy conclusion was also needed so a second bailout program could be agreed at an upcoming EU summit in the end of October.
Greece was completely absorbed by meeting the targets of a troika dogmatically using wrong assumptions. This led to the announcement after a cabinet meeting on September 11th in Thessaloniki, on a weekend that was marked again by protests outside the venue of an annual local exhibition after a calm summer, by the then Finance Minister Evangelos Venizelos of a new emergency levy on all properties connected to the power grid, which was to be collected through the electricity bills. The tax would only apply for 2011 and 2012 given the critical condition of the country’s finances, Venizelos said.
That decision terminally damaged the already battered government and played a significant part in Papandreou losing his job less than eight weeks later.
The use of the Public Power Corporation (PPC) to collect the property tax totally exposed the weaknesses of the public sector and the inability of the State to perform basic functions. Venizelos openly admitted at the time of the announcement that the measure was chosen because it could be implemented immediately as it does not depend on the tax collection mechanism.
Although Venizelos himself in June had rejected in a press conference the possibility of levying a tax via PPC, he chose to do so in order to meet the unbending demand of the troika and to ensure the successful collection over the next five months so the government would be able to book the revenue in 2011.
The measure was initially designed – something that later on was ruled out by courts – with taxpayers facing the threat of having their power cut off in the event of non compliance with the emergency tax. This led to the complete collapse of any bridges still left standing between the Papandreou government and Greek society. It was not only the fact that people who had already seen their disposable income heavily reduced by various other measures were saddled with another tax burden but the connection of the levy with a public good like electricity gave the measure a punitive nature, something that is reflected in the word that was used to describe it, haratsi, a tax that was imposed on every Greek over the age of twelve during the nearly 400 years of Ottoman occupation.
Just as they have done throughout this crisis, Greeks bit the bullet. From 600 million euros of revenues from property in 2010, the Greek government collected 1.2 billion euros in 2011 and 2.8 billion euros in 2012.
Greece’s finances remain under serious distress as a result of the policies that the troika has dictated over the last three years. Against all the latest findings and the mea culpa of the IMF regarding fiscal multipliers, the new Greek government is being forced to go “fast and hard” and implement a heavily frontloaded austerity package that is expected to push the economy further into depression as a contraction of more than 4% is expected this year. Revenues are estimated to drop by 5.6%, with proceeds from direct income tax expected to decline by 15.6%.
The process of collecting the haratsi through the electricity bills might be gone but the tax burden on the Greek society remains as it is earmarked to plug a hole in the revenues worth 1.7% of GDP in 2013. Greek households between 2010 and 2013 saw their incomes take a fivefold hit from property taxes, in a period during which 650,000 lost their jobs, 770,000 are unemployed for over one year and pretty much everyone else had their salaries or pensions cut on average by a quarter.
Judging by previous incidents, Stournaras has little room to re-negotiate a measure that was agreed upon only two months ago. What is different this time compared to the past, though, is the new evidence presented by the IMF’s chief economist Olivier Blanchard that austerity can do up to three times more damage on an economy than was initially thought.
Greece’s 2013 budget is designed with a fiscal multiplier close to one – as opposed to the 1.7 that the implementation of the program so far has shown – in the expectation of improvement of sentiment towards the country, the end of euro membership speculation and improved credit and liquidity conditions after the recapitalisation of the local banks.
Maintaining the same austerity course while adjusting the multiplier so one can have a proper assessment of the damage is one way of making use of Blanchard’s new evidence. The other is to adjust the policies so the damage is contained. In a recent IMF press conference Blanchard went as far as suggesting that fiscal consolidations should be adjusted to structural and not nominal targets so automatic stabilisers are allowed to kick in. According to IMF’s latest review of the Greek program, on a cyclically adjusted basis Greece has already achieved a phenomenal fiscal adjustment and in 2012 run a primary surplus.
The onus is on the Greek Prime Minister Antonis Samaras and the finance minister to protect the best interests of the country. Surely after three tumultuous years, the troika also wants to see the situation improve and some success stories begin to come out of Greece.