Mind the (Greek) gap

Athens and the Commission differ less on numerical targets than on the political implications of achieving them.

The gulf between Greece and its creditors doesn’t look significant from a pure financial viewpoint — a couple billion euros, less than 1 percent of GDP, a half-percentage point spread on the budget surplus.

It’s the political pain associated with closing those numerical gaps that makes the situation so intractable.

Two major questions further complicate the prospects of a compromise: Will Athens get some form of debt relief once its second bailout program expires June 30? And can it convince the other eurozone governments that it will deliver on the economic reforms if a deal is struck?

As the Eurogroup of finance ministers meet Thursday for a key summit, here is a rundown of what we know about what Greece and its creditors — represented by the European Commission, the European Central Bank and the International Monetary Fund — agree and disagree on so far:

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Fiscal targets

The Commission and Greece have agreed to a 1 percent primary budget surplus (i.e. before interest payments) for 2015. That looks like a significant concession by the creditors, compared to the previous three percent target agreed to by Greece’s previous center-right government.

But it mostly takes into account a reality: after Greece headed back to recession under the Syriza government, its budget is back in the red.

A 1 percent primary surplus this year would be an achievement in itself. More importantly, the Commission is also offering to push back the deadline for reaching a planned 3.5 percent budget surplus by two years, to 2018.

There’s still a gap, however, on what the primary budget surplus should be for 2016 Athens is proposing 2 percent, the creditors institutions demand 2.5 percent.

Pension reform

The institutions are seeking savings of €1.8 billion per year from pension reform, almost 1 percent of GDP. Athen’s proposals are limited to some phasing out of early retirement, and amount to just €71 million, or 0.04 percent of GDP.

That is the biggest problem. Tsipras has made pension reform one of his “red lines,” pointing out that any further reduction in pensions would pauperize Greeks already battered by five years of crisis. He asks Greece’s creditors to “adhere to realism.”

The Commission denies that it is demanding cuts in individual pensions. That is a “gross misrepresentation of facts,” according to spokeswoman Annika Breidthardt. She points out that Greece’s pensions are a big part of the state budget, based on one of the most expensive retirement schemes in Europe. It is an integral part of the solution of the country’s fiscal problems.

Olivier Blanchard, the IMF’s chief economist, outlined some of the Fund’s views in a blog post.

“Pensions and wages account for about 75 percent of [Greek] primary spending; the other 25 percent have already been cut to the bone. Pension expenditures account for over 16 percent of GDP, and transfers from the budget to the pension system are close to 10 percent of GDP. We believe a reduction of pension expenditures of 1 percent of GDP (out of 16 percent) is needed, and that it can be done while protecting the poorest pensioners.”

The Greek government argues that the pension numbers look worse than they really are because Greece’s GDP had fallen by a quarter since the crisis started, meaning that fixed costs like pensions make up a growing share of the budget.

Athens prefers to reach its primary surplus targets by other means.

According to Greek newspaper Kathimerini, the government suggests increasing the corporate income tax rate; taxing video lottery terminals; and cutting defense spending. All of that is supposed to add up to €1.6 billion this year and €2.3 billion in 2016. The problem is there isn’t much trust in the government’s numbers or its ability to raise those taxes, so a simpler scheme of pension coupled with VAT reforms seems safer to creditors.

VAT reform

The institutions are calling for a simplification of Greece’s VAT system, which has split rates that apply to different goods and different regions. They want a standard rate of 23 percent.

Athens is resisting, wanting medicines to pay a lower 6.5 percent rate and for most other goods to be taxed at 11 percent. Again, the Greek government is trying to shield voters from further pain.

Yanis Varoufakis, the Greek finance minister, argues that a higher rate will lead to even higher VAT fraud, hurting revenue collection.

Greece’s creditors also want to end the VAT exemption in the islands, which Athens is loathe to do, arguing that it might hit tourism.

Labor market overhaul

The institutions — the new name given to the former “troika” of the Commission, IMF and ECB — want major reforms of the labor market, and worry about the Syriza government’s plans to roll back the achievements of the previous government.

“Wages should grow in line with productivity and competitiveness needs of the economy,” Breidthardt said.

The Greek government is in favor of cutting red tape, but is sticking with its plan to reinstate collective bargaining rights for labor unions scrapped by their center-right predecessors.

What happens now?

The impasse will not be broken Thursday at the Eurogroup meeting in Luxembourg.

Varoufakis told Germany’s Bild he had no intention of presenting a new reform list to his fellow ministers: “The Eurogroup is not the right place to present proposals which haven’t been discussed and negotiated on a lower level before.”

That leaves little time to find an agreement that would release the last batch of €7.2 billion in bailout aid by the end of the month.