As Greece activates its 45 billion-euro (US$60.2 million) rescue package with the IMF and EU, it is becoming clear that a new, far more comprehensive approach is needed. Two problems need to be addressed: The credibility of Greece’s fiscal stabilization program and how to cover the country’s medium-term financing gap.
The magnitude of the fiscal adjustment effort being demanded of Greece is now well known. The deficit has to be reduced by at least 10 percentage points of GDP (from around 13 percent to less than 3 percent). The key problem, which has not been addressed so far, is that a fiscal adjustment on this scale requires the government to take two steps that can be implemented only with wide social approval: A cut in wages and a cut in social expenditure. Both steps are now as unpopular there as they are unavoidable.
The country’s competitiveness problems are well known. Unit labor costs have increased by 10 percent to 20 percent more than in Germany. Assuming that Greece wishes to stay within the eurozone, an “internal devaluation,” ie, a significant cut in nominal wages, is inevitable. The government can (and has) cut wages in the public sector, but this is not sufficient. A large cut in private-sector wages also is urgently needed to stimulate exports (which currently amount to less than 20 percent of GDP, even if one counts both goods and services) to create at least one source of growth.
Greece thus needs a “National Competitiveness Pact” in which government, opposition, employers and workers agree on a set of measures that cut unit labor costs by at least 10 percent. Three levers could be used to reach this goal: Adjustment in nominal wages, extension of working time and a reduction in social security contributions (compensated for by an increase in value-added tax). The mix of measures should be left to Greece to decide, but a cut in unit labor costs of this size is an essential first step for a successful adjustment and should be a pre-condition for IMF/EU support. Deep cuts in social expenditure are also unavoidable in order to achieve sustainable public finances. The growing fiscal deficits in Greece over the last decade were essentially the result of a massive increase in the size of state social benefits, from 20 percent to close to 30 percent of GDP, without any significant increase in tax revenues.
Contrary to popular perception, the public-sector wage bill is only of marginal importance. The government has already forced through most of the necessary adjustments in this area. Indeed, cuts in public sector wages can yield at most 1 percent to 2 percent of GDP in fiscal consolidation. Given that social expenditure amounts to close to 60 percent of total public spending, a successful fiscal adjustment will ultimately require that it be cut significantly. The alternative, an increase in tax revenues by almost 50 percent in the span of a few years, simply is not feasible.
Profound reform of the welfare state and building a modern tax administration system requires time. However, financial markets are in no mood to give Greece time, which brings us to the second major problem facing the country.
In order to gain the breathing space necessary for the reform process to be effective, Athens could just announce a simple rescheduling: The due date of all existing public debt is extended by five years at an unchanged interest rate. In that case, the Greek government would face no redemptions for the next five years and would have to refinance about 30 billion euros per year from 2015 onwards, which should be manageable by then. Official financing needs would then be much more limited and the IMF/EU package of around 45 billion euros should be sufficient to cover most of the progressively lower deficits over this grace period.
Without such a rescheduling, it is unlikely Athens will be able to roll over the 30 billion or so euros maturing annually for the next few years. Over time, the eurozone countries would inevitably have to refinance most of Greece’s public debt. This is a recipe for continuing political problems, as the Greeks would always consider the interest rate too high, while Germany would consider it too low (at least relative to market rates). Moreover, once the eurozone had started refinancing Greece without any contribution from private creditors, it would be politically impossible to stop. The type of rescheduling proposed here would signal the Greek government’s readiness to service its debt in full and thus might be accepted without too much disruption in financial markets. Of course, markets would view any rescheduling without a credible adjustment program merely as a prelude to a real default later on, thus leading to an even higher risk premium.
However, even the best adjustment program cannot be financed without some contribution by private creditors, ie, some form of rescheduling. The only way out for Greece is thus to combine both elements: Rescheduling its debt plus national agreements on wages and social expenditure. The current approach — focusing only on the financing needs and fiscal adjustment for this year and leaving all the hard choices for later — will not work.
Daniel Gros is director of the Centre for European Policy Studies.
COPYRIGHT: PROJECT SYNDICATE
China has not been a top-tier issue for much of the second Trump administration. Instead, Trump has focused considerable energy on Ukraine, Israel, Iran, and defending America’s borders. At home, Trump has been busy passing an overhaul to America’s tax system, deporting unlawful immigrants, and targeting his political enemies. More recently, he has been consumed by the fallout of a political scandal involving his past relationship with a disgraced sex offender. When the administration has focused on China, there has not been a consistent throughline in its approach or its public statements. This lack of overarching narrative likely reflects a combination
US President Donald Trump’s alleged request that Taiwanese President William Lai (賴清德) not stop in New York while traveling to three of Taiwan’s diplomatic allies, after his administration also rescheduled a visit to Washington by the minister of national defense, sets an unwise precedent and risks locking the US into a trajectory of either direct conflict with the People’s Republic of China (PRC) or capitulation to it over Taiwan. Taiwanese authorities have said that no plans to request a stopover in the US had been submitted to Washington, but Trump shared a direct call with Chinese President Xi Jinping (習近平)
Heavy rains over the past week have overwhelmed southern and central Taiwan, with flooding, landslides, road closures, damage to property and the evacuations of thousands of people. Schools and offices were closed in some areas due to the deluge throughout the week. The heavy downpours brought by the southwest monsoon are a second blow to a region still recovering from last month’s Typhoon Danas. Strong winds and significant rain from the storm inflicted more than NT$2.6 billion (US$86.6 million) in agricultural losses, and damaged more than 23,000 roofs and a record high of nearly 2,500 utility poles, causing power outages. As
The greatest pressure Taiwan has faced in negotiations stems from its continuously growing trade surplus with the US. Taiwan’s trade surplus with the US reached an unprecedented high last year, surging by 54.6 percent from the previous year and placing it among the top six countries with which the US has a trade deficit. The figures became Washington’s primary reason for adopting its firm stance and demanding substantial concessions from Taipei, which put Taiwan at somewhat of a disadvantage at the negotiating table. Taiwan’s most crucial bargaining chip is undoubtedly its key position in the global semiconductor supply chain, which led
RSS