Tsipras Blinks, But Is It Too Late?

The Greek Government finally submitted an economic reform proposal last night, and Eurozone finance ministers will decide upon the fate of Greece tomorrow. The markets have welcomed the U-turn by the Tsipras  Government, but the outcome remains highly uncertain. Like a high-stakes game of chicken, Tsipras  has left it until the last second to swerve, and his proposal could be too little, too late.

Listening to the politicians of Northern Europe, I believe most of them want Greece to stay in the Eurozone. This is what Greece has been relying on (some would say taking advantage of), but in recent weeks patience has run dry. On top of the Greek’s failure to deliver on past promises, they have now broken off negotiations, insulted their European counterparts and played a dangerous game of brinkmanship. Despite all this, the creditor nations are willing to talk, but they want to see concrete proposals, and they want to see steps made towards real progress. The attitude of Northern European nations was summed up well in a passionate speech by Guy Verhofstadt (MEP and previous PM of Belgium). It’s well worth 7 minutes of your time to listen to this speech, which was directed to Tsipras  at the European Parliament on Wednesday. Here are some highlights:

“You are talking about reforms…but we never see concrete proposals of reforms” (to huge applause in the parliament)

“You have to downsize the public sector. I know…it’s difficult for a leftist, BUT IT HAS TO BE DONE”

Greece has been sleepwalking towards this point in the crisis. When you listen to their rhetoric, it’s clear that they failed to grasp the seriousness of the situation. They listen to Europe, because they need the money, but none of it makes sense to them. They view Europe as an extension of their own welfare state – a communal pot of money available to redistribute the aggregate wealth.

“This was a courageous choice by the Greek people…and this was not a decision of breaking off negotiations with Europe…it’s a return to the start of democracy and solidarity…going back to mutual respect and equality. It’s a crystal clear message”  Alex Tsipras  following the Greek Referendum

Huh? The real world is finally catching up to them – a world where you pay your creditors or you default and exit the Eurozone. When it comes down to it, the Greeks wants to remain in the Eurozone and Tsipras  recognizes this. This is why he was finally forced into submitting his proposal last night.

I read through the proposals this morning, and I was struck by how vague much of it remains. As many politicians have pointed out, much of it is lifted from what was previously agreed in recent weeks. There are a few additional (and welcome) commitments, but it feels like Greece have gone for something that will be “just enough”. This is a last minute gamble, and I suspect that Angela Merkel will be quite critical of it. She has already said that these proposals need to go further than what was previously agreed because the Greeks are now negotiating a 3rd bailout, not just the final tranch of the 2nd bailout. Here are some of the highlights:

Fiscal

The fiscal surplus targets are set at 3.5% by 2018, in line with the previous negotiation. While this is a welcome and ambitious target, it holds little credibility for the Eurozone finance ministers. Finance ministers will be disappointed in the lack of specifics and the fact that the Greeks did not make deeper cuts to military spending (The Greeks promised to cut military spending by $100m this year and $200m next year, but this falls short of the $400m proposed by the Eurozone)

Pension Reform

The pension reform is likely to generate the most goodwill from the Eurozone, since this was previously one of Syriza’s “red lines”. The phasing out of the “solidarity grant” for certain pensioners is a key compromise (that continues to be opposed by many left-wingers in the party)

Labor and Product Market Reform

This section contains proposals above and beyond what was previously agreed, including a proposal to restructure the “Collective Bargaining System” (European-style agreements between unions and employers), as well as streamlining license requirements. There are also long overdue proposals to open up a number of protected professions.

Tax

As previously agreed, VAT will be simplified to 3 separate rates (though still very complex compared to most countries). VAT on restaurants will be raised to 23% (a new concession), although the most remote islands will continue to benefit from a special regime.

Privatization

Very little detail provided on privatization, which is likely to prove disappointing. This is where Germany saw some some relatively easy gains being made in reducing the debt burden.

The meeting of Eurozone finance ministers will take place tomorrow, ahead of the Eurozone crisis summit due on Sunday. It’s important to remember that the Eurozone is not a homogenous beast – there will be elements arguing for acceptance of this deal on Saturday (in particular the French, who reportedly helped draft it), while others will be arguing it doesn’t go far enough and what’s different this time? Acceptance of these proposals will keep the Eurozone intact, but of course it will not resolve the underlying issue. By accepting the proposal, the Eurozone will loose credibility only to face the same negotiation 12 months down the line.

There is an outside chance that the Eurozone rejects this proposal outright and preparations begin for a Greek exit on Sunday. However, I believe the more likely outcome now is for the finance ministers to accept it. They may even pair it with a debt restructuring, while talking a tough game about additional conditions and close monitoring between tranches. As long as there is still hope for Greece to change its ways, the creditor nations desperately want to give them the benefit of the doubt. The markets would cheer this result on Monday morning, but we shouldn’t fool ourselves into thinking this will bring an end to talk of “Grexit”.

Disclosure: None.

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