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Nothing will change for the better in Greece without debt relief

Wednesday, April 20, 2016  |   |  Tags: ,

Greece is back in the news as it undergoes a review meant to unlock another tranche of bailout funds. The deal reached last July provides for a discussion of debt relief after that review: “[The deal] is absolutely clear: It says that after the successful conclusion of the first review, the discussion on the debt will begin without terms and preconditions,” Prime Minister Alexis Tsipras recently said.

The IMF — which has been calling for debt relief for a while — is insisting that such debt relief by coupled by even more reforms (that is, austerity). The IMF and Eurozone ministers want to see greater cuts to Greece’s pension system (which represents some 17.7% of GDP), increases in taxes and improved tax collection, and other measures before considering debt relief.

The tone in many corners of the debate it that Greece has somehow intentionally dragged its feet in trying to get back on track. IMF chief Christine Lagarde said this month that “Greece cannot just continuously tag along and expect that things will be sorted out. The Greek leaders will need to take more ownership of re-establishing their country.”

Some analysts — like Stephanie Walter at The Washington Post — claim that Greek leaders “were unwilling to make internal adjustments, such as widespread austerity measures, and especially significant structural reforms…the Greek government is trying to implement only the bare minimum required to get continued financial support from outside and, it hopes, some debt relief. At the same time, Greece’s lack of decisive action and willingness to push painful decisions down the road leave its economy still in disarray and its debt problems mostly unresolved.”

To read such analysis is to believe that Greece simply tagged along, swimming in foreign funds while refusing to pass painful measures. Nothing could be further from the truth.

There seems to be a true disconnect between the reality on the ground and what Eurozone analysts and leader perceive to be true. Absolutely, more structural reforms are needed to bring Greece’s bumbling bureaucratic system up to modern standards. Anyone has consumed or produced goods or services in Greece can attest to the fact that there is far too much red tape to complete what should be the simplest of tasks. Still, it is absolutely incorrect to state that Greece hasn’t implemented “widespread austerity measures” and has only done the “bare minimum.”

Last year, Victor Luckerson at TIME extrapolated what Greece’s implemented austerity measures would look like in America:

  • Greece’s minimum monthly wage was cut by 22% in 2012, from 751 euros to 586 euros. A similar cut in the U.S. would drop the hourly minimum wage from $7.25 to $5.66.

  • In 2009 and 2010 Greece implemented a variety of cuts to salaries for public sector workers that worked out to an average pay cut of about 15%. In the U.S. that would decrease the average government employee’s pay from $51,340 per year to $43,639, using 2012 figures.

  • Pension cuts have been an especially controversial pain point in Greece, and the combined cuts have lead to a 40% decrease in pension funding since 2009, according to the Associated Press. A similar drop in Social Security payouts in the U.S. would mean the average senior citizen’s monthly would mean a drop in Social Security payouts from $1,294 per month on average to $776 per month.

  • Greece’s national health budget has been slashed by about 40% since 2008, according to the New York Times. Using U.S. health spending figures from 2013, that would drop federal, state and local government spending on health care from $1.25 trillion ($3,980 per person) to $725 billion ($2,388 per person).

This year, the 2016 budget provides for “the privatization of €50n of Greek assets to help pay back its debts, slashing pensions, and the handing over of a veto power on domestic laws to Brussels…€5.7bn of public spending cuts, with €1.8bn coming from pensions, and €500m from defense.”

Eurozone leaders and the IMF want more pension cuts, higher VAT rates, increasing the levy on mobile phone bills and cable TV, and more cutting of defense spending, among other demands. As Frances Coppola writing as Forbes has pointed out, even on pensions, such reform will be “hard to swallow”:

As always, the devil is in the detail: the provision for a minimum pension of 345 Euros from 15 years of contributions, rising to 384 Euros from 20 years, sounds reasonable until you discover that the “poverty line” in Greece is over 600 Euros. 45% of Greek pensioners already live below the poverty line: these reforms will make matters worse.

Prime Minister Tsipras has criticized Europe’s insistence on lowering budget deficits, saying: “We must all understand that, next to balanced budgets, we must also have growth … We need to be more realistic, and show more solidarity too.”

Greece isn’t intentionally not meeting targets. It’s not refusing to make the hard decisions. It’s trying to implement the terms of the deal it agreed to to the best of its abilities. It’s a country facing both an unprecedented economic crisis and a historic refugee, migrant and humanitarian crisis. It’s an overburdened country, not just in terms of the debt it carries on its back but in terms of the burden it is shouldering in Europe’s migration crisis.

As for the IMF and eurozone leaders, they are simply refusing to acknowledge this reality and to negotiate some method of debt relief. But their refusal to consider debt relief outside the context of another wave of massive austerity dooms Greece to live in this Sisyphean cycle. Eventually, something has to give.

Recently,  Vice President Biden, in a call with Prime Minister Tsipras, “underscored the need for Europe to follow through on its commitment to put Greece’s debt on a sustainable path through debt relief.” Greece cannot cut its way out of this crisis. The IMF and European leaders need to give Greece the breathing room it needs to save itself — and the eurozone as a whole.

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