Article by Mirada Xafa*
Coming out of a ten-year debt and memorandum crisis, Greece has had the misfortune to be faced with a pandemic that is causing great damage to the economy. Restrictive measures for rallies lead to the temporary closure of thousands of businesses, with tourism and transport sectors being hit hard. The government’s austerity measures (tax and contribution suspension, financial aid, payroll subsidies, government guarantees) are aimed at preventing the bankruptcy of healthy businesses and job losses.
So far, it has raised funds from cash and capital markets. But the government’s reserves are “burning” rapidly, so the country is exploring alternative sources of EU funding so that the economy can recover once the restrictions are lifted.
It already estimates it will borrow € 1.5 billion from the EU’s SURE program. to support employment and loans of 2.5 billion from the NBG to Greek companies. It has not ruled out a loan of up to 4 billion euros without (or slightly) hedging from the ESM. In the second phase, it may be able to raise funds from the Rehabilitation Fund when the terms and conditions have been agreed at European level.
The temporary lifting of the EU’s fiscal rules to give each member state more room to move in the face of the crisis does not negate the need to maintain debt sustainability in the medium term, in order to avoid a new memorandum thereafter. Especially in indebted Greece, the additional financial needs should be met with the least possible recourse to borrowing. It is also necessary to reconsider the fiscal space by reducing the target for primary surplus, so as not to undermine the rapid reduction of debt / GDP ratio after its peak this year close to 200% of GDP.
In addition to meeting emergencies, fiscal space must be found to significantly reduce the taxation that the government has announced as an integral part of the rapid growth it expects. With fiscal margins narrowing desperately, the possibility of cutting government spending should be explored. The damage the economy has suffered due to a pandemic requires new priorities, a new timeline, a new plan.
Strengthening the recovery and moving to a new, extroverted production model requires deep cuts, which will release valuable resources that are currently stagnant.
In its latest report, the IMF noted that we spent an average of 2.6 billion euros a year in the seven years 2012-18 to cover the losses of state-owned enterprises that have no hope of returning to profitability with current data (PPC, LARCO, ELTA , EAB, defense industries, transport). Eliminating these costs presupposes a thorough restructuring with staff reduction. The worst-case scenario would be the additional borrowing in the corona era to be used to maintain loss-making state-owned enterprises instead of rearranging the country’s productive sector.
With GDP shrinking by 8-10% this year, and the recovery of time not enough to return to 2019 levels, we will have to reconsider spending on pensions. In 2019, we spent 16% of GDP on pensions, more than any other EU country, with a disproportionately large share of State and DEKO pensioners under the age of 67. This rate will skyrocket this year and next, undermining growth, intergenerational solidarity and the viability of insurance.
Therefore, the possibility of cutting the “personal dispute” that was to be implemented from 1/1/2019 but was abolished by SYRIZA as soon as the third memorandum expired should be reconsidered. Maintaining it disproportionately affects young retirees and workers, who are required to pay high contributions to receive meager pensions, while protecting “old” retirees who have retired relatively young, with pensions far exceeding their contributions. The new insurance bill passed in February missed the opportunity to restore some balance between generations.
In terms of revenue, the reduction in contributions and the progressiveness of the tax scale is urgent, which makes it unprofitable to attract highly specialized executives who will be needed in high value-added industries with export orientation.
By reducing the minimum income tax rate from 22% to 9% and the maximum by just 1 point to 44%, and maintaining the additional burden of solidarity tax (up to 10%), the government increased the system’s progressivity instead of reducing it. It should at least reconsider expanding the tax base by reducing the tax-free allowance, which today leaves the majority of taxpayers untouched.
Finally, with tourism falling short of the anti-coronavirus vaccine, the industry, which has shrunk over the past twenty years, needs to be strengthened. As Stefanos Manos points out in “Kathimerini” (19/4), according to a report by the Energy Institute of Southeast Europe, Greece has the most expensive electricity in Europe. At the beginning of April, wholesale prices for electricity were set at around € 20 / MWh for most Western European countries, € 26 / MWh for the former Eastern European and € 34 / MWh for Greece! Vigorous industrial enterprises in metallurgy (Manesis) and textiles (Varvaresos, Epilektos, Nafpaktos) suspend their operation, unable to cope with the competition. The government should aim to increase competition in the wholesale electricity market to lower prices.
Until that goal is achieved, the government could impose a negative tax on industrial electricity consumption so that the price is directly equal to that paid by German industries, as suggested by Stefanos Manos.