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10 July 2015

Financial Times: Greece’s new economic reform proposal

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On substance, the new “prior actions” come very close to creditors’ last “prior actions” proposal, which Greek voters overwhelmingly rejected in a referendum. None of the documents mentions debt relief.

The package sent to creditors on 9th July included three documents: first is a letter from Alexis Tsipras, the Greek prime minister; second it a more detailed letter from Euclid Tsakalotos, the new finance minister; and the third is what’s called the “prior actions” – a 13-page plan of reform measures that must be completed prior to winning bailout aid.

A few things that stand out. First, none of the documents mentions debt relief. Instead, what is interesting about both the Tsipras and Tsakalotos letters is their explicit mention of wanting to remain in the EU’s common currency. 

On substance, the new “prior actions” come very close to creditors’ last “prior actions” proposal, which Greek voters overwhelmingly rejected in a referendum at the weekend. It maintains a primary budget surplus target (revenues minus expenses when debt interest payments are not included) of 3.5 per cent by 2018, though it remains a bit more vague about how fast it will get to that level. The previous progression – 1 per cent this year, 2 per cent next and 3 per cent in 2017 – remains in the proposal, but tellingly in parentheses.

On the two areas that proved most divisive before negotiations were cut off two weeks ago, overhauling the value-added tax system and pension reform, there is also a lot of convergence.

In the VAT system, Athens vows – as the creditors demanded – to find new revenues amounting to 1 per cent of gross domestic product (about €1.8bn) every year. It also concedes to a creditor demand to allow processed foods to be taxed at the standard 23 per cent rate.

The Greek proposal also incorporates one of the creditors last concessions – moving hotels to a lower 13 per cent VAT bracket – but it appears to hold out on one thing that could prove problematic: a separate, lower-rate system for Greek islands.

Creditors have demanded a single system for the whole country, arguing that a separate rate for the islands – which Athens has insisted on because many are remote and expensive to supply – requires a completely separate administrative system, raising expenses needlessly.

The new Greek proposal agrees to “eliminate discounts on the islands”, and offers to start with the bigger islands that are popular tourist attractions. But it also says the discounts will not be ended “for the most remote ones”, which may defeat the purpose of a single nationwide system.

On pension reforms, there are still a handful of gaps. The 2012 pension reform legislation will not be implemented until October 2015 under the Greek plan, whereas the creditors wanted it done immediately.

But on the big things – implementing measures to raise the effective retirement age to 67 by 2022 and phasing out a “solidarity grant” to poorer pensioners by December 2019 – Athens appears to have conceded.

Full article on Financial Times (subscription required)

Letter from Alexis Tsipras

Letter from Euclid Tsakalotos

Prior actions

© Financial Times

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