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OPINION

Greece: Agreement is Essential

Greece: Agreement is Essential

The economic programme of Syriza

The economic programme of Syriza is based on an anti-austerity agenda. The underlying logic is that after a painful 5-year austerity programme imposed in Greece, the country’s society and economy cannot withstand further austerity and a different economic recipe needs to be applied. The Syriza administration maintains the belief that wages and pensions should not be further reduced as this will undermine the disposable income of Greek citizens and, in turn, harm the economy itself. It places greater emphasis on Government income (as well as reducing tax evasion and tax avoidance) than on expenditure, meaning that the wealth of individuals and enterprises (especially hidden and undeclared income) should be more heavily taxed. 

Furthermore, the spirit of the government is not to penalise late debt payments to the government by Greek citizens and SMEs which have been hurt by the recession, but to provide incentives for them to tackle their debts over a longer period of time in order to help them get back on track.

 

Negotiations with Greece’s international partners
    
It is widely perceived that there has been an improvement in the climate of negotiations and a common understanding in many areas of reform has been reached. Nevertheless, regarding the potential for agreement between the Greek administration and its international creditors, there have been mixed signals conveyed to the people of Greece and international investors. On one hand, the Greek administration is optimistic that a potential deal with its creditors is likely to be reached very soon while, on the other hand, the latter insist that there are still many issues to be resolved before any agreement can be reached and are urging the Greek administration to work harder towards the presentation of a coherent and detailed programme of reforms and show determination to implement the majority of Jean-Claude Juncker’s proposals.

The solution and the way to implement the agreement still vary between the Brussels group and Greece. The fact is that everyone wants an agreement to be reached soon. Although the Brussels Group requires all the measures (including the structural reforms) to be consolidated before it will provide the necessary funding in instalments, while Greece requires the implementation of measures in segments, and the consolidation of the necessary funding from its lenders. Additionally, the Greek administration is demanding an immediate decision concerning the restructuring of the country’s public debt.


    
The Greek banking system and expectations
    
According to the latest available data from the Bank of Greece, domestic deposits declined by €12 billion in January 2015, although this decline decelerated thereafter by €7.6 billion in February 2015 and €2.0 billion in March 2015 (Mar. 2015: € 140.1 billion; Feb. 2015: € 142.2 billion; Jan. 2015: € 149.8 billion). Moreover, the level of decline accelerated during April 2015 and may amount to approximately €7 billion, while withdrawals in May amount to approximately €2.5 billion, reducing the amount of domestic deposits to the levels of approximately €130 billion. Unconfirmed reports suggest that in the first half of June, domestic deposits further declined to the levels of €127 billion. Obviously, the outflow of deposits during the last months is directly influenced by the uncertainty on a potential deal with the international creditors.

On the other hand, the ECB has raised the threshold of Emergency Liquidity Assistance (ELA) from €69.0 billion on 5 March 2015 to €83 billion on 10 June 2015. In general, ECB increases ELA funding by a limited amount in order to preserve the banks’ immediate liquidity needs, but cannot compensate for the total outflow of deposits. 

 

Reforms implemented by Syriza and its future plans

The full programme of Syriza has not yet been unveiled for two reasons: Firstly, Syriza has only been in power for about four months and this is too short a time to implement its scheduled reform agenda. Secondly, the current Greek Government is still engaged in lengthy negotiations, and some of the reforms proposed by its creditors go completely against Syriza’s reform agenda. As long as a deal is still pending, it is very difficult to implement reforms as this would constitute unilateral action. Still, Syriza has already initiated reforms in education (although different from those approved by the previous coalition government), while its future plans include reforms to the tax system. Privatisation, and changes to the insurance and labour sectors will depend on a successful outcome of the latest negotiations with the Troika.

Personally, I believe that by the end of June, Greece will have come to an agreement with its international creditors which will require each side to alleviate their demands. This will allow Greece to remain in the eurozone and will keep the eurozone unified.

 

Nikolaos Georgikopoulos is a Visiting Research Professor at New York University Stern School of Business & Senior Research Fellow in Financial Economics at the Centre of Planning and Economic Research, Athens

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