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Keeping the patient on life support

Kitty Miv, Editor
20 July, 2015

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

So what was the point of all that then? I refer of course to the humiliating conclusion for Greece in its attempt to renegotiate its bailout terms. Almost unbelievably, after six months of deadlock and brinksmanship, Athens has seemingly managed to secure itself worse terms than those it originally protested against, and significantly worse ones than were on the table just a short while ago.

I keep reading and hearing in the media that Greeks will be subjected to harsh new tax rules as part of the agreement. It's certainly true that the screw will be turned ever tighter on tax evaders. However, the statement summarizing Greece's obligations, which was released after the Euro Summit on July 12, barely mentions the word "tax." In fact, taxation is referred to twice, and both references are vague in the extreme: streamlining the VAT system (presumably this means removing the VAT breaks bestowed on the Greek islands and reduced rates) and broadening the tax base to increase revenue. In any other country, the goose will be barely heard to hiss. In Greece, however, the hisses are being drowned out by the howls of anguish at the agreement's other terms. There's not the room to go into all the gruesome detail here, but, to summarize, the stipulations are the very antithesis of what a left-wing party like Syriza stands for, so it is hard to see how the current coalition will hold together. They include: removing labor rights; cutting pensions; and privatizations, to name a few. Indeed, the latter of these three is particularly contentious because it essentially entails the flogging off of state assets, with the proceeds flowing into a fund to pay Greece's creditors (i.e. mainly Germany). In fact, the origins of the privatization fund tell a story in itself. Initially it was proposed that the fund would not be located in Greece at all, but somewhere else (Germany, perhaps?), as if Greece were some kind of undisciplined trust fund brat who couldn't be relied upon not to blow the money. But that was a humiliation too far for Athens, and in a rare concession by Angela Merkel, the fund will now be established in Greece under the supervision of "relevant European Institutions." Nevertheless, it illustrates just how much control over its own destiny Greece appears to have ceded to foreign powers. If you're wondering why I keep mentioning Germany, it's because the country is Greece's largest EU creditor and Europe's largest economy, so it's calling most of the shots here. One economist has actually proposed that the German Government should just increase the solidarity tax – the mechanism currently funding development in eastern Germany – by 2.5 percent, transfer those revenues to Greece, and dispense with the tortuous procedure of negotiations and bailout loans. But that would be far too simple, wouldn't it. And it would be far too transparent for the German Government's liking – Germany's taxpayers would realize the extent to which they've been propping up Greece.

It might surprise you to know that Greece represents only 2 percent of the total GDP of the EU. To which you might respond "what's all the fuss about then?" But I'm giving this topic special treatment this week because it's about so much more than just Greece itself; its about how the EU now operates. The Oxford Dictionary definition of "negotiation" is to "try to reach an agreement or compromise through discussion." So this was really only half a negotiation: there were plenty of discussions, an agreement of sorts was reached, but there was certainly no hint of a compromise from the EU side. But back to my opening question: what was the point of taking such a hard, unsympathetic line against Greece? Certainly, to a degree, Greece's current pain is self-inflicted and is partly rooted in fiscal and economic mismanagement by successive governments. But I can't see what continuing to punish Greece for its past profligacy is going to achieve. This is now the third Greek bailout. Plainly, the first two haven't achieved anything except misery for a large swathe of Greece's population. Would you lend someone with a disastrous credit rating a bunch of money you know you're never likely to see again? Thought so. Moreover, how is the Greek economy ever going to grow in such a tight straitjacket when it doesn't hold the key to release itself? The answer to all these questions lay in the unsayable in the EU's corridors of power. As unsayable as it may be, let's imagine how the conversation might unfold. What about debt relief for Greece? "Ah," says Brussels, "but that sets a bad precedent you see. First Greece, then Portugal. Then perhaps Spain and Italy – France even?" So just cut Greece loose from the eurozone then! "Hmm," ponders Brussels. "Apart from the fact that nobody's quite sure how far the financial and economic ripple effect of the Grexit would spread, and of course there could be considerable short-term pain for Greece itself, there is another problem. The Grexit would signal that the European Project (i.e. ever closer monetary and political union) had failed. We need to keep the patient on life support, rather than let it die and reincarnate as an independent nation with its own currency. But you didn't hear me say this, right?"

The EU should be mindful of how such a hard-nosed attitude could cause collateral damage. Nationalist and anti-EU sentiment is already on the rise in Europe, and the way Greece has been treated could merely fuel the view that the EU is undemocratic and increasingly intolerant of points of view that don't match its own. I wonder what British voters have made of all this as they decide whether to change their relationship with Brussels, or file for divorce?

 

Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Execrations:

Greece tragic

Ciao

Kitty



About the Author


Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

 

 

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