What is the background to the Greek referendum?

Whatever the result, this vote is likely to be seen as a defining moment for Greece and its future relationship with Europe

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The Greek referendum asks:

“The Greek people are asked with their vote whether to accept the outline of the agreement submitted by the European Commission, the ECB and the IMF on the Eurogroup of 25th June 2015 and consisting of two documents, which form the basis upon the referendum question will be asked: the first document is titled “Reforms for the completion of the Current Program and Beyond” and the second document is titled “Preliminary debt sustainability analysis”.

Whichever citizen rejects the institutions’ proposal votes NO.

Whichever citizen accepts the institutions’ proposal votes YES”

How did Greece arrive at this point?

At the end of January, the SYRIZA coalition took 36.3% of the national vote in Greece’s legislative election making it the country’s largest party. That alone was no small feat for a party that only formed in 2004 and took only 5% of the vote in 2007.

The party ran on an anti-austerity platform promising to renegotiate Greece’s €240 billion bailout deal with its creditors and to halt further cuts in public spending.

In his victory address SYRIZA leader Alexis Tsipras said:

“The sovereign Greek people today have given a clear, strong, indisputable mandate. Greece has turned a page. Greece is leaving behind the destructive austerity, fear and authoritarianism. It is leaving behind five years of humiliation and pain.”

In order to deliver on those promises while remaining within the single currency — something that around 85% of the Greek public supported — Tsipras would have to convince the IMF, the European Commission and the European Central Bank that their mutual interests would be best served by reducing Greece’s debt burden.

The creditors had already undertaken the largest debt restructuring in the history of sovereign defaults in 2012 that saw around €100 billion wiped off Greece’s total debts of around €350 billion.

At the same time, while Greece has undergone one of the largest structural adjustments — with it public deficit down from a level above 15% of GDP in 2009 to around 4% at the end of 2013 — the programme has suffered from implementation problems throughout.

This helped lower the institutions’ confidence in the ability and/or willingness of the government in Athens to see through more challenging reforms such as increasing the retirement age, removing special VAT rates for particular economic sectors and liberalising the labour market even before SYRIZA came into government.

The primary problem that Greece faces is that the debt burden it carries (currently 175% of GDP) is highly unlikely to be sustainable. Indeed an IMF document leaked to the UK’s Guardian newspaper suggested that even by 2030 the country’s debt is likely to stand at 118% of GDP, well above the 110% that the Fund would consider a sustainable level.

That suggests that there is room for some form of debt relief alongside an already agreed relaxation of the target if a 4.5% primary surplus by 2018 that the institutions currently require of Greece. In the words of IMF chief economist:

“On the one hand, the Greek government has to offer truly credible measures to reach the lower target budget surplus, and it has to show its commitment to the more limited set of reforms…On the other hand, the European creditors would have to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability. We believe that, under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates. Any further decrease in the primary surplus target, now or later, would probably require, however, haircuts.”

What are the two sides currently offering?

Jean-Claude Juncker, president of the European Commission, is encouraging Greek voters to see the referendum as a vote on the latest proposal that he released last weekend. The key parts of the document are:

• A reduction in the primary surplus target from 4.5% by 2018 to “1, 2, 3, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018”

• Pension reform including increasing the retirement age to 67, freezing guaranteed pension limits in nominal terms until 2021 and phasing out the “solidarity” grant to pensioners by end-December 2019.

• Introduce a 23% standard VAT rate, streamline exemptions and eliminate VAT discounts in order to raise a further 1% of GDP in tax revenues.

• Raise corporate income tax from 26% to 28%.

• Approve and complete the privatisation of national assets held by the Hellenic Republic Asset Development Plan, including regional airports and the ports of Pireaus, Thessaloniki and Hellinikon.

Crucially, Juncker has also hinted that debt relief talks could be part of the discussion for the next bailout, which would begin in October.

However, many of the Commission’s demands, such as pension cuts and further privatisations, have been strongly resisted by the SYRIZA-led government since negotiations began in January. In response Tspiras sent another counter-proposal in which he said he would accept the terms offered by the institutions subject to the following caveats:

In the letter to European leaders Tsipras requested:

• To maintain VAT tax breaks for the Greek islands.

• Phase out the preferential tax treatment of farmers by end-2017.

• Hold back any immediate cuts to the “solidarity grant” for the top 20% of beneficiaries.

• Labour market reforms to be addressed in Autumn 2015.

Critics say Tsipras is pushing all of the tough choices on pensions, tax and labour market reforms out until the expiry of the current bailout (at which time he would have the opportunity to restart negotiations once again and potentially backtrack on the commitments).

At any rate, German Chancellor Angela Merkel has ruled out any further negotiations with the government in Athens until after Sunday’s referendum.

Eurozone politicians have been keen to stress that although there is no formal process to force a member of the European single currency out, a vote against the institutions’ terms would be viewed dimly by Greece’s fellow member states and could mean the end to bailout discussions. However, Tsipras has said that a No vote would still allow the country to continue negotiations but send a strong message to his eurozone partners that Greece is not willing to pay the price of austerity any longer.

Already Greek banks have instituted capital controls, meaning that Greek citizens have a limit of €60 a day that they are able to withdraw from their bank accounts, after following billions of euros being pulled out of deposit accounts. The ECB has since frozen its cap on emergency liquidity support effectively restricting the banks’ access to their lender-of-last-resort.

A No vote could mean that the limits could last well beyond this week.

Whatever the result, this vote is likely to be seen as a defining moment for Greece and its future relationship with Europe.

This article was first published in the WEF Agenda Blog on July 2, 2015.

Tomas Hirst is editorial director and co-founder of Pieria magazine and was previously commissioning editor, digital content at the World Economic Forum. His work has been featured in The Times, the Guardian, Prospect Magazine, the Financial Times and Quartz. He writes on politics, macroeconomics and markets.

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