Tuesday, 2 February 2010

Greek Tragedy II - and the tax dimension

Michael Burke: In today's Financial Times, two economists from the Breugel think-tank in Brussels argue that the best course for Greece is to call in the IMF.

The Greek economy and financial markets are bearing the brunt of concerted pressure in the Euro Area, and there are fears that a collapse there could lead to renewed speculative pressure on a number of countries including Ireland.

The possibility of an IMF intervention ought to be shameful for the architects of Europe's fiscal and monetary arrangements, since the Euro was touted as an instrument that would protect the economies of Europe from speculative pressures. 'European Solidarity' has proved a mirage. Worse, leading EU institutions have played their part in Greece's difficulties. As the authors of the FT piece note,

"One reason why things have sharply worsened is that the ECB has said that by the end of 2010 it will tighten quality requirements for bonds pledged as collateral – which risks excluding Greek bonds from repurchase agreement operations. This, and Greece’s inability so far to present a credible fiscal plan, explains the alarm in financial markets."

This unilateral move by the ECB seems wholly misplaced. If the ECB is concerned about the deterioration of asset quality in a tiny part of its portfolio, it should make its own determination about which assets can be pledged. Outsourcing this to the largely discredited ratings agencies seems like a wholly unwarranted measure, designed to increase the pressures on a Greek government which has inherited a crisis not of its own making.

Nor is the Commission blameless, having been apparently hoodwinked over a number of years by the previous Greek governmet about the size of the deficits (and debt!) in a manner that would make a primary schoolteacher blush.

The new government has bemoaned the endemic corruption in Greek society, includig government bodies, and its effect on reducing tax revenues. Perhaps the Commission could provide greater assistance as tax collectors than as macroeconomic advisers, or even auditors. In the period 1997-2006, Greek tax revenues as a proportion of GDP were 5.5% below the Euro Area average. Even in 2008, they were 4% below the average. Closing in on the average level would make a major dent in the deficit and, once the economy recovers, the debt stock too.

This low taxation is a common feature of those Euro Area countries currently in the cross hairs of the financial markets. In 2008, Spain's tax revenues were 37% of GDP, 7.8% below the Euro Area average. By contrast, in Germany they were 43.7% and in France they were 49.3%.

Of course, in 2008, Ireland's tax revenue GDP ratio was the lowest of all in the Euro Area, at 34.9%, and fully 10% below the average (Table 36). Closing in on the Euro Area average would see Ireland's deficit melt away to nothing.


Anonymous said...

@Michael Burke
At least Greece has a new government that can tell the truth to the people. Our current government can do no such thing. The only thing they can do is PR Spin, at which they excel. Are you getting the feeling that we are witnessing another PR stunt in the making? Lenihan and now Cowen have both declared that they are not for turning on the salary cuts of the senior civil servants. FF TDs have been getting it in the neck from angry low paid public servants, to an extent that seems to have shocked them, about this hypocrisy. Lenihan is THE media darling and it won’t make much difference to Cowen’s standing anyway.
I think there is a very high likelihood this decision will be reversed at the FF party meeting tonight. FF TDs need a victory and the government doesn’t need the rod it created for its own back. Even if the decision isn’t reversed, I would say that the unions and our discredited government will almost inevitably come to an agreement. That would be a tremendous pity.

It is time all parts of our society stood up and demanded that those who caused our economic and financial disaster leave office.

Oliver Vandt

Anonymous said...

@Michael Burke
The trade unions should indicate that they are willing to be flexible in negotiations with a future government. It is high time though that society as a whole joined together to force the current government from office. Striving to reach a pay deal - however patriotic the motivation given the state of the country - with this utterly discredited government is counter-productive. Our utterly discredited government ARE the country's biggest problem.

Oliver Vandt

Michael Burke said...


The most patriotic thing the unions could do is to resist all attempts at pay cuts, job losses and cuts to social welfare, using all the powers available to them.

The economy is sinking under the weight of collapsing final demand, which government policy has greatly exacerbated. Saving jobs, pay and welfare is, therefore, quite literally a task of economic salvation of the entire nation.

Rory O'Farrell said...

@ Oliver Vandt

Wage bargaining is like a game of poker. Indicating a willingness to be flexible is like tilting your hand.

Jack O'Connor is often quoted for what he said on that Frontline programme. However given the concessions the unions made in the last negotiations they have shown themselves to be flexible. A balance has to be made between winning the PR battle and winning the poker game. I suppose the question is which is more important.

I would like if the unions took the position of not protesting for pay, but for a general election. I think they would get a lot of support, and they could then negotiate pay with the next government.

Anonymous said...

@Rory O'Farrell
"I would like if the unions took the position of not protesting for pay, but for a general election. I think they would get a lot of support, and they could then negotiate pay with the next government."
I completely agree. The government are utterly discredited. Everyone in public life should follow the lead of the electorate who indicated their total lack of confidence in June 2009. The unions shouldn't negotiate on pay with a government that have no popular mandate. They should be leading a POLITICAL campaign with the opposition to have an immediate general election.