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Greece, the Eurozone and the 6th Installment

1 December 2011 | Philip Ammerman

The meeting of the Eurozone finance ministers yesterday agreed (according to Greek press reports) to release the 6th instalment of the first bail-out package. Worth EUR 8 billion, the instalment is desperately needed to pay government salaries and unpaid debts, as well as international bond and Treasury redemptions worth between 4-6 billion EUR in December.

The decision to release the 6th instalment is fundamentally a political one. Greece and the Troika have admitted that the country will not meet its fiscal targets in 2011. Despite the heroic statements made by European leaders in the past few months that no further funds would be released if real progress were not made, the Troika has caved in to the political and economic reality of the Greek as well as the broader problems affecting Europe.

Wolfgang Schauble, German Minister of Finance as quoted in The Telegraph (6 September 2011):

"The troika mission must be resumed and it must come to a positive conclusion, otherwise the next tranche for Greece will not be paid out," Mr Schäuble told a budget debate in the German parliament. "Those are the rules."

Peter Altmaier, Chief Whip, German Christian Democratic Union, as quoted in Kathimerini (6 September 2011):

“It was very clear that we expect Greece to meet its obligations, that there can’t be more aid without adequate behavior by Greece.”

Although some progress has been made, Greece has not implemented the full set of targets it was supposed to have implemented:


  • Closed professions haven’t been liberalised. Remarkably, despite all the damage done during the summer tourist season by the taxi strike, there is still no final law on taxi licensing

  • The government deficit has risen above the annual target, and will probably top 9% in 2011.

  • Many tax measures announced, such as the tax on real estate collected via the Public Power Corporation bills, cannot be implemented, and are either being rescinded or adjusted, resulting in lower tax revenue.

  • Privatisations have not taken place: the government will certainly not achieve its EUR 5 billion target in 2011.

  • The labour reserve, designed to reduce Greece's public sector by 30,000 workers, has still not been implemented.


The record of implementation in Greece over the past 4 months has been disastrous. This started with Minister of Finance Venizelos’ attempt to find a “political solution” to Greece’s lack of progress in late August 2011; this lead to the withdrawal of the Troika’s monitoring mission. Conflicting statements and priorities, such as the Finnish collateral deal, absorbed valuable time and energy. Eurozone delays on EFSF leveraging have led to a very dangerous situation at present. George Papandreou’s disastrous referendum decision led to further chaos, and his departure. Antony Samaras’ posturing over his letter supporting the second bail-out led to a further delay.

By now, it should be abundantly clear that classical macroeconomic austerity prescriptions do not work effectively in a dysfunctional, highly specific economy and society. Because that is what Greece is, and unless policy measures are taken which are rooted in reality, there will not be a successful end to this process.

If the Troika really wants to save Greece, it will need to prioritise [at least] three policy interventions:

a.     Establish an independent social safety network to help Greek citizens adjust to the impact of structural reforms. This should include measures to assure that pensions and minimum wages for lower-income residents are unaffected, or even increased, while providing for additional measures such as school lunches or other support. This should probably be managed within the existing infrastructure, but by an independent authority. As much procurement as possible should be implemented in Greece, by an independent budgeting, payment and audit mechanism.

b.    Accellerate business growth by independent management of community support framework and other funds. The Task Force for Greece is making some progress in this area, but it’s quite clear that the same political networks exist which are slowing down progress. The idea of setting up a business bank using EFSF guarantees and EIB capital should be accelerated and expanded.

c.     Require capital controls on international transfers from Greece, while at the same time implementing an immediate and exhaustive audit of all Greek-owned offshore bank deposits in Switzerland, Lichtenstein, Cyprus, Luxembourg, London, and other jurisdictions. This process should be taken out of the hands of the Ministry of Finance, which is moving far too slowly and is protecting vested interests. The European Central Bank, the OECD’s Financial Action Task Force, and the IMF can probably do this extremely quickly. The results should be published, and any further aid to Greece made conditional on a proper accounting and repatriation of this capital.

Any further aid should be subject to equally strict conditionality, with a measure of realism. As conflicting and contradictory as the past 4 months have been, it’s clear that without Troika brinksmanship, the Greek government would have tried to do even less than it finally did.

This is, however, not to argue that all reforms undertaken were successful. They are not. The reforms need to be prioritised. There is absolutely no gain to be had in liberalising professions such as taxis or pharmacies in the midst of a recession, when the root causes of the problem are far different from the solutions suggested by “liberalisation.” The benchmark for liberalisation should include consumer or operator benefit, within a normal operating framework. For instance, “liberalising” pharmacies when the social security funds still set prices for certain drugs, determine which drugs are on the approved list, and then delay reimbursement to pharmacies, will not bring much by way of benefit.

Furthermore, indiscriminate tax increases and austerity cuts across-the-board affect Greece’s pensioners, young and middle classes, and exacerbate the decline in consumption and GDP. The social fairness of these policies is in doubt, and may not be cost-effective. For instance, the total benefit from cutting pensions of private sector employees is estimated at between EUR 1.2-2.0 billion per year. Yet there are 140,000 large tax debtors who collectively owe EUR 37 billion to the state. Where should the government’s priority be?

Ultimately, receiving the 6th instalment will enable the government to address very short-term funding needs and possibly avoid a technical default. But it’s obligations in terms of unpaid bills are EUR 6.5 billion, and including social security funds and hospitals, may reach EUR 9 billion. Greece will confront nearly the same situation 1 month from now.

Philip Ammerman

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