What's Greek for cross your fingers?
A few days ago head of the IMF Christine Lagarde bemoaned the fact that there weren’t enough adults in the room when it came to discussing proposals for a prospective Greek debt deal.
Judging by the latest proposals put forward by the Greek government to EU creditors which have been lauded as a step forward in the latest round of negotiations between the various parties it would appear that the adults are still absent, despite the euphoric market reaction seen in the last 24 hours to the latest proposals.
That’s even before you look at how the Greece government can sell the proposals to the Greek parliament, which is by no means certain.
Since the beginning of the year the Greek economy has been in contraction as investment and tax revenues have dried up.
This has resulted in the unemployment rate moving back above 25% with youth unemployment still well north of 50%. This rise has been driven by the closure of thousands of small and medium sized businesses as consumers have reined back on spending decisions to focus on the day to day necessities.
Given these facts it beggars belief therefore that either the Greek government or the creditors for that matter can believe that raising VAT, and employment taxes will somehow close a fiscal gap of about €2bn give or take.
The special tax of 12% on companies with a turnover of €500m is bad enough, but to also introduce a surcharge on social security contributions on the employer and employee is hardly likely to encourage companies to grow and take on new people.
The hiking of VAT in food service from 13% to 23% is also not likely to go down well either given previous examples that VAT hikes in the UK and Japan. If anything it could well see further job losses and company closures.
Even a basic knowledge of economics should tell you that raising taxes when demand is shrinking is like squeezing the juice out of an already juiced lemon.
It seems that a lot of these measures are therefore based on some very forward optimistic forward looking assumptions, which in the real world are unlikely to be met.
Ultimately the big question is whether this prospective deal marks a big step forward in respect of the Greek debt crisis and at first glance the answer really has to be no, given that the bigger question remains about Greece’s debt sustainability remains unresolved.
For all the talk about the fact that Greece has 48 hours to reach a deal the fact remains that these components seem more designed to keep the Greek creditors happy than at fixing the inherent structural issues of the Greek economy.
This suggests that the best we can hope for in the coming days is for a program extension and some form of fudge, and that assumes this deal even gets past the Greek and German parliaments.
What’s Greek for cross your fingers?
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