by Frances Coppola
Published at Forbes – April 18, 2016
Meanwhile, the IMF is standing on the sidelines throwing grenades. The Fund was always skeptical about the deal reached last summer, and its view has not changed. It says that deeper cuts to the Greek government budget are needed, particularly to pensions. And it believes that Greece needs debt relief. With its call for deeper cuts AND debt relief, the Fund has managed to make itself unpopular with both sides. Deep cuts to pensions are anathema to the Greece government, while the European creditors refuse even to discuss debt relief.
But the IMF has an ace to play. If it believes that debt is unsustainable, it will refuse to lend. And that is unacceptable to Germany, which has always insisted that the IMF must be involved in the Greek program. The European authorities and the IMF are playing for high stakes: the price is the future of Greece, and possibly of the Eurozone itself. Who will win?
So far, it appears that the European authorities are in the ascendant. The measures proposed in the latest draft MOU are those of the European Commission, not the IMF. Though it seems that excluding the IMF is not on the agenda (my emphasis):
The Government commits to consult and agree with the European Commission, the European Central Bank and the International Monetary Fund on all actions relevant for the achievement of the objectives of the Memorandum of Understanding before these are finalized and legally adopted.
Presumably, if the IMF leaves the program, this paragraph would need to be appropriately amended. Though if the IMF leaves the program, either the European creditors will have to lend more or Greece will need substantial debt relief. This is a battle that Germany can’t win. All it can do is kick the can by refusing to discuss debt relief until Greece has done enough “reforms”. At the present rate of progress, that could be forever.
The draft MOU is structured as four “pillars”. Unsurprisingly, top of the list comes fiscal sustainability:
Restoring fiscal sustainability (section 2): Greece will target a medium-term primary surplus of 3.5 percent of GDP to be achieved through a combination of upfront parametric fiscal reforms, including to its VAT, income tax and pension systems, supported by an ambitious programme to strengthen tax compliance and public financial management, and fight tax evasion, while ensuring adequate protection of vulnerable groups. To enhance the credibility of its fiscal policies, and support the achievement of targets, an ambitious package of parametric measures is adopted in combination with non-parametric measures. The authorities will create an autonomous revenue administration to secure effective collection.
For “parametric fiscal reforms” read “spending cuts and tax rises”. The cuts are deep, and the tax rises substantial – unsurprisingly, since although Greece achieved a small primary surplus in 2015, it is now back in recession. Growing its way to a 3.5% primary surplus would take more years than the creditors will tolerate.