A third, irrational, bailout of Greece (EN)

As the talks in European countries and Greece are finalizing a third bailout of 85bn Euros, my reader's eye was caught by the following confession of our former finance minister, Yannis Varoufakis:

"There is something called the Hellenic Financial Stability Facility, which is an offshoot of the European Financial Stability Facility [EFSF]. This is a fund that contained initially €50 billion – by the time I took over it was €11 billion – for the purpose of recapitalising the Greek banks.
[...]
I discovered at some point that the law that constituted the EFSF allowed me one power, and that was to determine the salary of these people. I realised that the salaries of these functionaries were monstrous by Greek standards. In a country with so much hunger and where the minimum wage has fallen to €520 a month, these people were making something like €18,000 a month.
So I decided, since I had the power, I would exercise that power. I used a really simple rule. Pensions and salaries have fallen by an average of 40% since the beginning of the crisis. I issued a ministerial decree by which I reduced the salaries of these functionaries by 40%. Still a huge salary, still a huge salary. You know what happened? I got a letter from the Troika, saying that my decision has been overruled as it was insufficiently explained."

Source: https://www.themonthly.com.au/issue/2015/august/1438351200/christos-tsiolkas/greek-tragedy

This confession of Yannis Varoufakis strengthened my opinion that I stated in my book "The Greek Tragedy", that "these people were not capable of saving our country".

Today the Greek parliament will vote on 57 new measures for the economy, most of them leading to a further contraction of the economy.

Here are some of the most obvious examples:

- Increase of the tax percentage of low incomes (below 12000 Euros per year) from 11% to 15%

My opinion: Increasing the taxation of the poor hurts the economy more than it helps. Taxation is a way to transfer money from the rich to the poor and taxing the poor is misusing one of the main tools of stability in capitalism. Especially when these taxes are used for bank rescues, the tax money flows from the poor people to the already wealthy international funds. This is a clear path to an increase in poverty in the future and of course social unrest. In any case poverty does not affect the rich classes, but the middle and lower class, which are a majority and therefore can cause political instability.

- Gradual cancellation of the preferential tax treatment of shipping companies

My opinion: Shipping, tourism and agriculture are the main business sectors that are left in Greece. They are the only ones that can trigger the much needed GDP growth. Increases in corporate taxation can lead businesses to flee abroad in our today's world open economic area. Especially shipping companies can be based anywhere since the boats are based on the sea and not on the land of a specific country. This is why Greece has a special tax treatment of shipping companies, in order to have them taxed in Greece instead of losing their entire tax income to another country.

- Increase of taxation in heating oil (about 0,35 Euros per liter)

My opinion: Heating oil is essential for the winter months in Greece. Taxation of oil is already high and most of the oil price consists out of taxes. A past increase of the price of heating oil has proved ineffective: People stopped buying it and instead were burning wood in fireplaces and ovens to warm up their houses. Since cheap wood ovens do not have proper filtering this practice caused massive pollution in Athens in 2013. In addition the total tax income of heating oil on that year fell by 400 million Euros, despite the higher tax percentages. This measure was a failure and it will be no different now.

It is very notable that most of those 57 new measures target to increase the income of the government. Very few target to reduce the expenses such as the following measure:

- Decrease in annual military spending by 100 million Euros

My opinion: This is nonsense. 100 million Euros is too low of an amount to be mentioned. The current military spending is 3.300 million Euros.

Just as it is revealed in the article I quote above, the target of troika all these years has been to increase revenue but not to cut spending. This practice, as I outline in my book, is leading to a shrinkage of the economy, which is not what is needed for the debt to be repaid. A growth of the economy is needed so that the debt can be made more viable as a percentage of the GDP. Since the measures have started in 2010, the debt to GDP ratio has risen from 112,9% in 2009 to 177,1% in 2015, not because of an increase in debt itself, but mainly because of a decrease in the GDP amount. Had the GDP remained the same as in 2009, then the debt/GDP ratio would be about 131% of the GDP instead of the current 177,1%.

It is clear that the measures needed for the debt to be repaid should target an increase of GDP and not an increase of revenues. It has been proven by the results of the financial policy of the last years in Greece that an increase of revenues through higher taxation damages GDP growth. Thus the revenue increase can only be short-lived, since tax revenues depend on the GDP.

The third bailout measures -to be voted this week- again target a short-lived increase of revenues. GDP is again predicted to fall. The European governments are asked to give further loans from their own budgets in the black hole of the Greek debt. This will not only hurt Greece but the entire European region. Those funds will be entirely lost in a non-viable debt. Even the IMF is not willing to back this action, since it states that the measures planned will not lead to an increased viability of the Greek debt.

My proposal is clear: If Europe wants to help Greece and itself, it should not give those funds, definitely not on condition of austerity measures. The hole is getting bigger and Europe will fall in it. A default of one country now is a lot more manageable for Europe as the same default after 10 years. Political stability cannot be guaranteed in a country with more than 25% unemployment. The same counts for Spain.

In my book "The Greek Tragedy" I propose measures to get Greece out of the crisis and the the GDP growing again. Those measures are some among hundreds of different possibilities that target GDP growth.

Modest GDP growth, sustainable unemployment rates and low inflation is the only way for any country to succeed in today's capitalism. It is no different for Greece.