Tsipras' Proposal: Who is he kidding?

I was impressed by Tsipras' political maneuver in the bail out negotiations, that I was surprised and shocked by his U-turn. Reading through his proposal, I'm more than disappointed to find nothing new. In other words, the proposal is almost the same as was demanded by the Troika. To make things worse, the parliament jumped in with him, today.

Greece's proposal for EU bail-out aims at attaining a fiscal surplus of 3.5% of GDP by 2018. An ambitious target, nonetheless achievable. However, I strongly doubt if the proposal put forth could ever achieve it. It fails to recognize the driver behind the fundamental problem that led Greece to this debacle in the first place. I'm confident that the creditors are wise, but wants Greece to swallow its one poison, so that they can make bucks of the market.

To start with the proposed VAT reform, Greece aims at taxing restaurants and catering services at 23%. This would mean that franchise outlets like McDonald's and KFC could lose it attraction, pushing the unemployment rate higher, which would only reduce government income. Further, operating business would tend to highly under-report their income, leading to loss of revenue. The proposal, elsewhere, mentions of strengthening the enforcement agencies by criminalizing tax evasion. Won't that increase the overhead cost for tax collection?

The VAT reforms put forth by Greece also aims at reducing tax for theaters whose tax would now stand at 6%. I wonder, why is this preferential treatment to the theaters. First of all, in a tough economy, not many would have enough disposable income to enjoy the comforts of theaters. Second, it would encourage youngsters to look forward to theaters as sustainable sources of employment, which is not the case as one could observe from all over the world.

Another thing in the VAT reforms that I couldn't quite understand is, why the basic food should cost more than the pharmaceuticals? Basic food, along with energy and water, is to be taxed at 13% while pharmaceuticals are to be taxed at 6%. So, is Tsipras encouraging Greece to an unhealthy lifestyle? Or is he favouring the pharmas? This is akin to asking Greece to fall sick as it is cheaper to have medicines than to have food. Would sick population contribute to economy?

Further, the proposal put forth aims at tightening the definition of farmers to bring more people in the tax ambit. However, I think this proposal is made to target either small farmers or large farmers. Who is going to be targeted, we have to wait until Tsipras "defines" who is a farmer? Further reforms to Fiscal structural measures, aims at increasing corporate tax to 28% from 26%. I'm not sure, if Tsipras and his finance minister are in their own perceived state of Greece superiority. While, most of the population is unemployed, the hike in corporate tax would only increase in flight of capital and jobs. Further, those corporations who remain to operate in Greece would not be able to compete globally, again leading to loss of jobs and government revenue. I would like to draw attention to the Laffer Curve on taxation. This study is highly controversial and in some cases disproved. However, I think in the case of Greece, it may hold good as it may encourage foreign investments and corporations to operate from Greece.

The put-forth proposal proposes to provide disincentives for early retirement. However, I think it is infringing upon one's personal rights. Smart youngsters, would most likely take undeclared works and stash the money in some foreign accounts to cash during retirement. Of course, the proposal aims at identifying undeclared works. But how is Tsipras going to make that work? The law enforcement agencies as well as those who undertake those jobs are going to benefit from such works. The former through bribes and the later through additional untaxed income. I think Tsipras and his finance ministers are in the era of "barter system". Now the youth can take jobs from anywhere and earn from anywhere, store their revenue as bitcoins and cash them when they require. How is Tsipras going to address this issue? Ban Internet? Or create an agency to investigate and enforce compliance? Where is he going to pay the overhead cost of setting up the infrastructure from? From more debt?

The proposal also aims to hire more managers to make the system efficient. Even the Tories in Canada do the same. At least they have a hidden agenda, their meaning for efficiency is shutting down services and cutting federal jobs. So, does Tsipras have the same in his mind? If so, unlike Canada, Greece unemployment will rise leading to social and economic backlash. Is he prepared to deal with that? More importantly, does he have enough money (required to pay severance, unemployment benefits, etc.) to deal with that?

The proposal aims at adjusting zonal property taxes, preventing fuel smuggling, etc., but fails to provide any incentives to encourage declaration of true income, increase employment, attractive industries, attract foreign investments and lacks a sustainable path to compete in global market. At the most the proposed measures would aggravate Greece's debt and unemployment crisis. Grexit may have been a better alternative.

It seems Tsipras out maneuvered not only the EU but also successfully fooled the Greece electorate. 

Austerity aids who?

...Governments run by people who are either rich or supported by rich, have only the best interest of the rich in their minds...

In my previous post, I had argued that austerity would only lead to further austerity as it shrinks the economy. Keynesian Theory of economics is a classical theory that every student of economics would come across. Then, why are the EU nations and IMF administering the hard-pill of austerity on Greece. Why UK administers austerity when it has only increased poverty? Why is Canada administering austerity, when it claims to be well-off in the media? Why is US administering austerity? Some one should be benefitted by it, right? Who gets benefitted by austerity and who loses?

Runners first

During the European Debt Crisis in the later part of 2008, many European countries assumed the indebtedness of their banks to prevent them from failing. This left many of the European countries in debt to the extent they were not able to pay their debts without assistance from third parties such as EFSF (European Financial Stability Facility), ECB (European Central Bank) and IMF (International Monetary fund). Since many of these organizations require austerity as a part of their bail-out programs, countries are forced to impose austerity measures. 

For example, Ireland imposed austerity measures when it assumed the debts of its private sector banks and had to be assisted by the EU and IMF. While Ireland eventually recovered and ended its austerity in the 2015 budget, the impact of austerity was substantial. Property values collapsed making people pay mortgage more than what their property worth.  The economy shrunk resulting in widespread employment which rose from 4.2% in 2007 to 14.6% in 2012. Ireland also saw huge emigration with around 34500 people leaving Ireland between 2009 and 2010. However, the impact of these measures were felt most by those who could not bear it. 

Similarly, austerity measures imposed by UK due to its bank bail-outs were also affecting the poorest population who could hardly bear the impacts. As of 2014, close to a quarter of the UK population are in poverty. Unemployment rate rose from around 5.7% in 2007 to over 8% in 2012. However, since 2012 unemployment rate has shown gradual decrease. However the austerity was again found to affect the poorest of population. 

Though here two countries are taken as an example, we could make a point that the poorest of poor are those who'd be affected the most, the losers to austerity. This is also because the poor are the biggest consumer of public services, which takes the major hit due to spending cuts. If people tend to commit suicide  then austerity is effectively eliminating poor instead of poverty. 

Winners next

Naturally, those who hold and control government debts gains the most. When the governments bailed the banks, the investors benefitted from the austerity as their assets grew while the poor suffered as it is their jobs and earnings which was taken to pay for bailing out the banks. Naturally, investors and the wealthy were the big winners. 

Further, when the governments cuts its services and shrinks its work force, the private sectors see a increase in the supply of labor. Most of these labor could be acquired at low cost, particularly for short-term. Temporary workers are neither paid on par with the permanent workers nor have the benefits of the latter, in many countries. Further, their employees could be forced to put on more hours at work with the threat of lay-off. In other words, austerity helps big corporations and the wealthy to exploit the labor of the poor. 

Naturally, the rich-poor divide has grown sharply since 2007 with many billionaires seeing large increase in their wealth. 

Conclusion

Clearly, Austerity aids the rich, corporations and the investors...

There are many studies hailing the rich and the reason for the growth of their wealth as due to their wise investments. However, these studies/articles carefully "forget" to mention that poor and middle class don't have enough disposable income to invest, in the first place. Further, while the rich may have their investment knowledge transferred from their parents or bought, the poor and middle class are left in the dark. 

Further, I believe the system itself is designed to aid the investors. While I cannot say for every country, I could about India and Canada. In India, the rich has the money to buy the Govt. officials and vital information to make informed decisions on their investment, though illegal. In Canada, the start-up visa program, I believe, was designed with the interest of the investors (venture-capitalists) in mind. For example, it wouldn't include crowd-sourcing opportunities to raise capital. The system provides little opportunities for immigrant researchers for entrepreneurial pursuits though, those pursuits could create more jobs for Canadians... Rich again has an opportunity to get a investor visa or buy a business...

This makes me wonder, if the Governments real intentions are to help its people or only a section of its population. I'm afraid, the Governments run by people who are either rich or supported by rich, have only the best interest of the rich in their minds. However, what I don't understand is why people don't realize this and why they are falling prey to politicians' lies...

Grexit: World may suffer with Greece

Currently, the world is going nuts over the Greek dilemma. The surprising move by the President of Greece, Mr. Alexis Tsipras to call for a referendum on EU bailout conditions, have stumped many of the EU's leaders that they have started to openly vilify Mr. Alexis Tsipras. While the world would know Greece's decision by the start of next week, in the mean time Mr. Tsipras has closed the banks and stock-exchange to prevent financial collapse. 

Greece's bold move

In my previous post, I had argued that austerity is likely to lead a country into a vicious cycle. As austerity tends to reduce disposable income, people may tend to be frugal which could further aggravate the problem. Austerity is also likely to cause unsurmountable hardships to the citizens of the nation. Hence, I regard Mr. Tsipras move for a referendum bold and creative. Apparently, the move have stumped the EU leaders' expectation that Mr. Tsipras could be pressured to submission as is apparent by their open personal attacks on him. If anything, he might be on the right track.

Greece is not without precedent. Many countries have defaulted and have recovered from the financial crisis in the wake of such default to become strong economies. In case, on July 5th, Greece rejects EU's proposal it may its exit from EU. In such case, Greece is at liberty to issue its own currency. Though the currency might start on par with Euro, it would soon be devalued which may increase inflation sharply. However, such devaluation may also turn out to be a boon as it could boost exports there by setting Greece on its path to recovery. The period of intense economic hardships due to inflation would have severe effects on the lives of the people. However, I hardly doubt if the situation would be any different if Greece accepts EU's proposal.

However, Greece should guard itself against continuing to commit the mistakes that had led it into the crisis - corruption and tax evasion. If the tax is not friendly or is felt unjustified, it is likely to encourage corruption and tax evasion. With increasing tax evasion, the country is unlikely to increase its revenue, which is critical for its recovery from the debt-trap.

Greece Exist cost more to EU

I believe Greece's exist from EU is likely to affect the other nations in EU more than the Greece itself. Greece's exit would mean a fracture in the political union of Europe. It is likely that other countries like Ireland and Spain may follow suit plunging Europe into financial crisis, affecting markets and resulting in financial instability whose effects would be felt all over the world. Euro would lose its value plunging EU into high inflation.

A fractured EU would likely see EU's influence diminished in the World politics. Greece is already trying to woo Russia to invest. In such case, the NATO allies may not be particularly comfortable knowing the growing influence of Russia in their backyard. In addition, China is also buying off Greece's debts, which would likely increase China's influence in the region.

Greece's exit at this juncture would also be inopportune as UK is in the process of conducting a referendum to decide whether to continue with EU or not. In case of Greece's exit, the anti-EU parties' claims could find support, which may further weaken EU.

Hence, Greece's tragedy is likely a EU's tragedy and may likely to lead to many set-backs, economic and strategic. I'm sure the EU leaders are not oblivious to the reality but their dogged insistent ofn austerity makes anyone wonder the reason behind their insistence...

In any case, the world would know Greece's verdict by Sunday evening...

Austerity begets austerity?

Currently most of the western countries are embarking upon some form of austerity measures (reduction of debt-to-GDP ratio), to various extents. In some cases, these measures are forced by its neighbours and allies (Ex: Greece).  There are many info available on austerity measures. However, I tried to put my hypothesis in simple terms. My hypothesis is that austerity only leads to further austerity measures, until the country goes broke or some innovative steps are taken to break this vicious cycle, depicted in the figure below:

While being one amongst the many suffering because of these measures, what confounds me is that why none is asking the right questions:

• Explain how these measures would help us in the short and long term? (in layman terms but quantitatively not equivocally!)
• Countries have been deploying austerity measures since 2008.  Prove that it has worked!
• If some are being benefitted by these measures, who are they and why? Why not others? When would other be benefitted?
• Irrespective of many economic theories and empirical studies that would support anti-austerity, why are you deploying those measures? Why are the banks forcing such measures? How they reason it will benefit our economy?
• It is a simple business/economic knowledge that spends cuts are good only if they become investment. This principle is well known to almost all CEOs and CFOs. If so, show how the spending cuts have generated more income, in an attempt to reduce to the debt-to-GDP ratio.
• Who is responsible for the mess, in the first place?

I'm no economist but a "student" interested in the socio-economic-strategic affairs. I have tried to put, in simple terms, how austerity would only breeds further austerity until either the cycle or the country is broken. I would very much like to hear the counter arguments to this hypothesis! (Please leave your thoughts in the comments below...)

References:

http://en.wikipedia.org/wiki/Austerity#cite_note-Blyth-18

Blyth, Mark (2013). Austerity: The History of a Dangerous Idea. New York: Oxford University Press. ISBN 019982830X.

http://blogs.ft.com/martin-wolf-exchange/2012/04/27/the-impact-of-fiscal-austerity-in-the-eurozone/

http://economix.blogs.nytimes.com/2012/06/01/confusion-about-the-deficit/?_r=0

http://www.idsa.in/idsacomments/TheLightningfromGreeceStrikesGermany_kpfabian_300115.html