Battle lines drawn over rival plans for Greece | Business| Economy and finance news from a German perspective | DW | 05.06.2015
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Battle lines drawn over rival plans for Greece

While Greece has rejected reform proposals by its creditors as "absurd" and "unrealistic," Brussels has called for a "financially sound" alternative plan. DW examines the proposals in the Greek debt clash.

After delaying the repayment of a loan to the International Monetary Fund (IMF), the leftist government in Athens on Friday hardened its stance toward its bailout lenders, with Prime Minister Alexis Tsipras calling their proposals "absurd" and "unrealistic."

In an uncompromising speech to parliament, Tsipras said a proposal by Athens made earlier this week was the only realistic basis for a deal and accused Europe of failing to understand that Greek lawmakers could not vote for more austerity.

"The proposals submitted by lenders are unrealistic," Tsipras said, adding the offer did not take into account common ground found between the two sides during months of negotiations. "The Greek government cannot consent to absurd proposals."

Still, Tsipras said he was confident that Greece is closer to a deal than ever, and the Greek proposal took needs of the creditors into account. "Time is not running out only for us; it is running out for everybody else as well," he said.

Tsipras, Juncker

Jean-Claude Juncker had a number of bitter pills to sell to Alexis Tsipras at their meeting in Brussels.

During a meeting in Brussels on Wednesday, EU Commission President Jean-Claude Juncker presented Greek Prime Minister Alexis Tsipras with a 9-point catalog of reforms (see below for the document) the cash-starved southern European country must implement to secure payment of its final bailout installment worth 7.2 billion euros ($7.9 billion).

However, Tsipras produced his own 49-page reform plan, calling on the country's creditors to show some "realism" and urging a deal that would let Greece escape from "economic asphyxiation."

Critical fiscal targets

A major point of contention between the two sides is the future size of the Greek budget, including the so-called primary surplus which the government must generate to remain solvent. The primary surplus is the difference between public revenue and spending, excluding the payments of interest on debt.

In their proposal, the creditors demand a surplus target of 1 percent of gross domestic product (GDP) for this year, 2 percent for 2016 and 3 percent for 2017. But with Greece's economy in free fall, hitting those targets would require an immediate budget saving of 3 billion euros and potentially more without a fast recovery.

Therefore, Athens is asking for a much lower 0.6 percent of GDP this year that would require no extra saving. The surplus would increase to 1.5 percent in 2016 and 2.5 percent in 2017, under the Tsipras proposal.

Sales tax hike

For the government to achieve its budget goals, Tsipras is counting on an increase in valued-added tax (VAT). But even on this front, there are disagreements with the creditors over the size of the tax hike and which sectors it would cover.

For instance, creditors demand two VAT rates - a general one of 23 percent and a lower one of 11 percent for food, medicines and hotels to boost Greece's vital tourist industry.

Athens, however, insists on a low 6-percent rate for medicine, books and theatre, and a medium rate of 11 percent for basic foods, energy, water, restaurants as well as hotels, magazines and newspapers.

Pensions 'red line'

One of the thorniest issues in negotiations is Greece's lavish pension system which is running a huge deficit and proving a massive drain on state finances. Creditors demand that Athens should cut spending on pensions by 0.5 percent of GDP, yielding up to 900 million euros in savings this year and 1.8 billion euros in 2016.

The measures envisaged by the lenders include closing the door to early retirement and chopping off a raft of special benefits, including an emergency pension boost for the poor.

But the Greek government's proposal delays the zero deficit target in the retirement system until 2017. In addition, Tsipras has ruled out any pension cuts to the needy, describing this as a "red line" he is not prepared to cross.

unemployed people

Labor market deregulation is intended to reduce mass unemployment in Greece after five years of economic depression

Labor market reforms

Similarly, the Tsipras government is determined to roll back labor market reforms - initiated by the previous government - which make it easier for employers to hire and fire. Moreover, it wants to gradually raise the country's minimum wage to the 2010-level by the end of 2016.

In the creditor's proposal, Athens is asked not to reverse the previous measures aimed at opening up the labor market.

Sustainable debt level

While the measures proposed by the bailout lenders include no reference to Greece's huge overall debt of at least 320 billion euros, Athens has called for the issue to be included in an aid-for-reform deal.

Athens considers the debt load, amounting to 180 percent of Greece's annual GDP, as unsustainable over the long run and wants its creditors to forgive at least parts of it. This, however, has been repeatedly rejected by those holding Greek debt.

uhe/sri (Reuters, dpa, AFP)

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