Greek opposition sets demands as EU/IMF verdict nears | ReutersGreece's conservative opposition demanded tax cuts on Monday as the price for a consensus deal with the Socialist government on imposing yet more austerity, a major condition for getting further aid from the EU and IMF.
Conservative leader Antonis Samaras called for a flat 15 percent corporate tax and rejected government plans for hiking taxes to tackle Greece's budget deficit and please fiscal inspectors mulling the next, key tranche of a 110 billion euro bailout.
This latest situation provides an example that labor unions are not always the only foes of fiscal consolidation in the midst of debt crises. Such crises, precisely because difficult terms are required to stabilize finances, require broad and often painful sacrifice. In the midst of the sacrifice, populists often sense an opportunity to exploit a country's situation for political gain.
Were Greece not to meet the terms required to receive additional funding, the country would fall into default. Slashing tax revenue would only exacerbate the country's funding gap and make default even more likely. Such a default, could trigger a systemic banking crisis, wiping out the savings of many depositors. Such an outcome would not be a unique occurrence.
At present, it is unclear that the Greek populists fully understand the gravity of the situation, though they might. What may be more clear is that they find the opportunity to pursue political advantage too tempting to pass up, even if it means cutting off Greece from further IMF/EU assistance and taking a chance on default.
The assistance provides Greece with liquidity to avoid a liquidity crisis. Greece, itself, needs to address its solvency issues. To date, it has missed deficit reduction targets (by around 1% of GDP) and perhaps others, as well. The big risk has been whether the Greek government can sustain an austerity program in the face of strong popular opposition (very difficult in democratic states). That a populist party has now taken up the anti-austerity banner in pursuit of political advantage reflects the hazards of that course.
It is possible that the Greek government might accept an EU or EU/IMF finance board that would have broad authority over Greek fiscal decisions e.g., it could veto revenue slashing measures proposed by the populists were they to gain power. However, the big problem with such an arrangement is that there would be no guarantees that a successor government, if it were elected, would accept or adhere to the Board's decision making. Hence, even if such a mechanism were adopted, there would be limits to its credibility. That's why the EU/IMF are seeking broad consensus among Greece's political parties.
Ultimately, more fiscally responsible parties within Greece will need to build popular support for the measures required to address Greece's finances. At the same time, they will need to find a way to marginalize populists that wish to exploit the crisis for political gain, making abundantly clear to Greece's people that such populists offer "false solutions" and a readiness to trigger a default that would wipe out the savings of potentially a significant number of Greeks.