Greece: Toward a Workable Program
IMF Blog, February 11, 2016
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Bibliographic details
- Authors: Poul M Thomsen
- Published: February 11, 2016
Overview
- Author: Poul M. Thomsen.
- Date: February 11, 2016.
- Context: After stabilizing the economy following last summer’s crisis, the government of Alexis Tsipras is discussing with European partners and the IMF a comprehensive multi-year program to secure a lasting recovery and make debt sustainable.
- Central IMF objective: Help Greece return to a path of sustainable growth that benefits the Greek people through a program of reforms plus debt relief that "adds up."
Debt relief and reform trade-offs
- Key principle: There is an inverse trade-off between the ambition of reforms and the strength of debt relief — a program with less ambitious reforms requires more debt relief, and vice versa.
- Mutual dependence: "No amount of pension reforms will make Greece’s debt sustainable without debt relief, and no amount of debt relief will make Greece’s pension system sustainable without pension reforms."
- Political reality: Greece and European partners will face politically difficult decisions; compromises must reflect political constraints within the euro zone.
Why focus on pension reforms
- Persistence of generosity: Despite reforms in 2010 and 2012, Greece’s pension system "remains unaffordably generous."
- Comparative indicators:
- Standard pensions in nominal Euro terms are "broadly similar in Greece and Germany," despite Germany being "twice as rich as Greece" by average wage.
- Greeks retire much earlier than Germans.
- Germany is much better at collecting social security contributions.
- Fiscal consequence: The Greek budget needs to transfer "some 10 percent of GDP" to cover the pension system shortfall, compared to a European average of "some 2½ percent."
- Sustainability conclusion: The present pension arrangement is "unsustainable."
Fiscal targets, required measures, and credibility
- Medium-term target: Greece’s ambitious medium-term target for the primary surplus is "3½ percent of GDP."
- Required adjustment: To reach that target, Greece will need measures "in the order of some 4-5 percent of GDP."
- Limits to alternatives:
- Scope to cut other spending or increase tax rates exists but is "very limited."
- Most other spending has "already been cut to the bone" to protect pensions and social payments.
- Failure to broaden the tax base and improve compliance precludes assuming large future tax collection gains.
- Growth assumptions: It is "not credible" to assume Greece can grow out of its debt problem rapidly by transitioning from the lowest to the highest productivity growth within the euro zone.
- Credibility emphasis: The IMF seeks a "credible plan" to reach the medium-term surplus target; over-optimistic assumptions risk reviving Grexit fears and stifling investment.
Social impacts and safety net considerations
- Social hardship: Pension reforms will be "socially challenging" given exceptional hardship over "the past six years."
- Reversals: Social pressures have already forced reversals of course under both the previous and the current government, leaving Greece "much further away from its medium-term goals than it was in mid-2014."
- Social role of pensions: Pensions have a broader social function in Greece, but using pensions for social protection "is not a durable solution."
- Recommendation: The IMF argues for "a modern social safety net that is sustainable over the medium term."
IMF stance and conditionality clarity
- Misperception addressed: The IMF did not make participation conditional on "socially draconian reforms" of pensions; rather, a program must "add up" quantitatively.
- Flexibility: The IMF is "willing to work with the combination of reforms and debt relief on which Greece and its European partners can agree," provided it adds up.
- Near-term support: The IMF does not want draconian fiscal adjustment in an already severely depressed economy and has argued for a fiscal path "more supportive of recovery in the near term and more realistic in the medium term."
- Overarching message: Difficult choices on reforms and debt relief are necessary to ensure that Greece’s efforts over the last six years are not wasted.
Poul M. Thomsen, February 11, 2016.
Content in this bundle
- Ελλάδα: Προς ένα Εφαρμόσιμο Πρόγραμμα - Από τον Πάουλ Μ. Τόμσεν