Marko Djurica / Reuters

Greek debt disaster bodes ill for daily life

Analysis: Impending fiscal deal with European creditors could cause greater social crisis

“There are red lines in the sand that will not be crossed,” Greek Prime Minister Alexis Tsipras said just weeks ago as he began the long negotiations process with creditors.

Some of these lines included no more pension cuts or value-added tax (VAT) increases, and a debt restructuring deal that incorporates renewed economic assistance from Europe. Tsipras has been working to complete the previous government’s austerity commitments, without any guarantee of a meaningful debt reprieve in the future.

Yet on Monday, he crossed his own previous red lines and offered a round of fresh austerity measures worth 7.9 billion euros ($8.9 billion) — the largest to date — which in turn prompted mass protests at home.

Crafted by the Greeks, an agreement seemed close at hand, but was nevertheless rejected by the International Monetary Fund and Greece's euro partners at the European Commission and European Central Bank. The fiscal tightening that is currently being discussed is on the order of 2 to 3 percent of gross domestic product (GDP), comparable to that at the peak of the crisis in 2010.

If the creditors' amendments are accepted, here is what the new arrangement will mean for the Greek people, especially those hardest-hit:

Tax revenue increases

Tsipras offered 0.74 percent of GDP in sales tax revenue. The creditors had asked for 1 percent. The prime minister included a wide range of tax increases, including a VAT hike to 11 percent on basic foodstuffs, energy and water. But the creditors wanted 13 percent.

The International Monetary Fund (IMF) apparently rejected tax increases that fall on the wealthiest segments of society, as well as those on gambling and lottery revenue, derived from a highly monopolized private market. The troika of negotiators also has not accepted a one-off corporate tax increase of 12 percent on profits over 0.5 million ($560,000) to meet 2015 fiscal targets. Meanwhile, for its part, the IMF argues that Greek promises of improved tax collection are in vain. At the same time, creditors are insisting on eliminating the lower tax rates and deductions for farmers and poor island residents.

The agricultural and tourism sectors in Greece are mostly small family and cooperative arrangements. They employ a third of the population and, notably, nearly 40 percent of the agricultural population is 64 years and older. Essentially, the IMF is lobbying for shifting the tax burden away from corporations and wealthy individuals to the poorest and most vulnerable members of society.

Recall that the first round of austerity measures increased Greece’s debt-to-GDP ratio from 100 percent to almost 180 percent — a profound failure of reforms, which the Troika, comprised of the European Commission, the European Central Bank (ECB), and the IMF, has yet to acknowledge. They also produced a collapse in all social indicators, spurring an epidemic of suicides, mental illness, acute poverty among children and the elderly, and depression-level unemployment rates. And yet the creditors are asking for more.

Tough pension cuts

Greece, it is often argued, contributes more to pensions as a share of GDP than any other European nation. Yet, no other nation has experienced the 25 percent collapse in GDP that Greece shouldered from earlier structural reforms. This decline is equivalent to wiping out the largest three state economies in the U.S. (California, Texas and New York) — the engines of its economic growth — in a very short span of time.

Creditors are asking for another 1 percent of GDP in cuts to pensions and a freeze in nominal pension contributions until 2021 — no matter that 50 percent of pensions in Greece already provide income below the poverty line. Also on the chopping block is the solidarity grant (EKAS) — a means-tested supplemental pension benefit for the poorest and most vulnerable pensioners.

In these difficult economic conditions, the pension system in Greece can be best thought of as an unemployment insurance and social protection scheme. With the explosion in unemployment in Greece and the elimination of virtually all welfare assistance, the pension system has remained the only lifeline which many unemployed individuals have.

While it is true that the retirement age in Greece is too low, and increasing it to 67 is a point of consensus, such an upward adjustment must not only be gradual, but also replaced by a safety net for those who are no longer eligible for retirement and have no unemployment protection.

Budget surplus plan

All of these “red lines in the sand” are being crossed in the name of achieving the budget targets recommended by Europe.

Greece has agreed to pursue additional fiscal tightening to produce an annual primary surplus (calculated before factoring in debt payments) equivalent to 1 percent, 2 percent, 3 percent and 3.5 percent over the next four years, after running 0.4 percent in 2014, while the creditors seek an unprecedented 4.5 percent in 2015. These figures exclude interest payments and spending on propping the banking system.

But the overall budget has been shrinking rapidly. What seems to elude the creditors is a simple and irrefutable accounting fact. For any given economy, one sector’s surplus is equal to another sector’s deficit. And in the case of Greece, if the government budget deficit continues to fall drastically or even move into surplus, that should mean that the non-public sector surplus (the net savings of Greek households and firms) will also fall rapidly.

Simply put, the cruel irony of the IMF recommendations is that, the private sector will not be able to rebuild its nest egg. Or, worse, it must accumulate more debt, as the Greek government tightens its belt even further in the pursuit of long-term surpluses.

People to pay the price

For the Greek population, and the most vulnerable and hardest hit segments, the proposal on the table means a lot more economic pain. The troika-imposed solution has been exclusively focused on reducing incomes.

And the only hope of arresting the social consequences of these reforms is for the debt restructuring talks to deliver much needed pro-growth economic assistance from Europe, including infrastructure rebuilding and funding for a job protection program that is currently being devised by the Greek Ministry of Labor.

Without such assistance, euro reforms will continue to have drastic social consequences. They have already produced an unprecedented crisis in Greece, and this round promises to deliver more of the same. What is at stake is not just the fate of one nation, but that of any semblance of a democratic decision-making process in Europe that delivers shared prosperity.

While ancient Greece was undoubtedly the cradle of Western civilization, will modern Greece become its tomb?

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