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30/09/2016

Greece adopts more austerity reforms ahead of key Eurogroup talks

Euro & Finance

Greece adopts more austerity reforms ahead of key Eurogroup talks

Alexis Tsipras

[European Council]

Greek lawmakers adopted a controversial package of pension cuts and tax hikes as eurozone finance ministers geared up for an emergency meeting today (9 May) to hammer out fresh reforms for Athens to stave off another eurozone crisis.

The ministers are expected to complete a long-stalled first review of Greece’s massive EU-IMF bailout and discuss new debt relief measures at the crunch meeting in Brussels, which follows mass public opposition to the newly adopted measures in the cash-strapped country.

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The talks have already suffered months of delays and Greece wants to wrap them up as quickly as possible so that it can unlock the next tranche of its €86-billion bailout – the third for the debt-laden country since 2010 – ahead of a huge European Central Bank payment due in July.

In its official agenda the ministers from the 19 countries that use the euro — the Eurogroup — said they would discuss the “progress achieved” by Greek and creditor officials in recent days on the reforms, “with a view to conclude them as soon as possible”.

It added that it would “also discuss possible debt relief measures aiming at ensuring that Greece’s gross financing needs remain at a sustainable level, with a view to reach a political agreement.”

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The meeting follows days of protests in Greece, where tens of thousands took to the streets to slam the unpopular reforms adopted Sunday (8 May).

The measures were passed thanks to the Syriza-led government’s slim majority in the 300-seat parliament, with the 153 MPs of the far-left Syriza and the Independent Greeks coalition voting in favour of the measures.

As expected all the opposition parties voted against the bill, which will reduce Greece’s highest pension payouts, merge several pension funds, increase contributions and raise taxes for those on medium and high incomes.

Here are key points of the reforms, approved with a majority by the Greek parliament.

Pensions

  • Introduces unified retirement rules and a national pension at €384, cuts supplementary pensions, plans to gradually phase out a top-up stipend for pensioners now on lower incomes and recalculate pensions. It also tightens rules on widower or legacy pensions and readjusts replacement rates to curb early retirement.
  • The target is to reduce pension spending by about two percentage points to around 15% of GDP by 2019.

Social Security

  • Sets social security contributions at 20% of employees’ net monthly income – with 13.3% burdening employers and 6.7% employees.
  • Reforms the social security contribution base from notional to actual incomes for the self-employed, including farmers and lawyers, forcing them to make a contribution to pension funds which is phased in over a five-year period to 20% of their income instead of a fixed monthly amount currently paid.

Taxes

  • Income Tax : Lowers the income tax-free threshold, or personal allowance, to an average of around €8,800 a year from around €9,500; makes income bands narrower, increases tax coefficients. Lowest tax band is now 22% on a gross income of €20,000 a year compared to 22% for €25,000 which existed previously.
  • The upper tax band, of 45%, is now imposed on gross incomes exceeding €40,000 as opposed to 42% on income above €42,000 under the previous arrangement.
  • Solidarity Levy : First introduced in 2012, rationale was to assist Greece’s army of unemployed. The levy on net incomes ranges from the lowest 2.2% on incomes from €12,000 to €20,000 a year, to 5.0% up to €30,000, and 6.5% up to €40,000. The highest band is 10% on incomes above €220,000.

By comparison, the highest band in that category was 8.0% before the new reform was pushed through, on earnings exceeding half a million euros.

  • Dividends Tax: Increases to 15% from 10%.

Clashes

In the run-up to the parliamentary debate, angry unions staged a general strike that paralysed public transport for a third straight day Sunday, while some 26,000 people took to the streets of Athens and Greece’s second city Thessaloniki in protest at the pensions and tax overhaul.

Brief clashes erupted outside the parliament in Athens ahead of the vote, with youths throwing Molotov cocktails and flares at riot police who responded with volleys of tear gas.

Numbers were, however, significantly down on February protests when 40,000 people marched in Athens alone.

“People are tired and disappointed by the leftist government in power… the rallies have not had the scale we had expected,” said Maria, a private sector employee in her fifties who claims to be owed €30,000 in back pay from her employer.

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Prime Minister Alexis Tsipras, who has said reform is needed to prevent the pension system collapsing in a few years, defended the changes in parliament earlier Sunday, which are part of the government’s pledge to achieve €5.4 billion in spending cuts by 2018.

“The system requires root-and-branch reform that previous governments have not dared to undertake,” he told lawmakers.

He also highlighted the fact that the Eurogroup meeting Monday will for the first time look at easing Greece’s crippling debt burden, one of the only concessions granted to Tsipras when he secured the bailout.

“Tomorrow is a very important day. After six years (of crisis), the Eurogroup will meet to discuss debt relief,” he said.

Ahead of the Brussels meeting, differences between the creditors themselves have emerged over extra reforms demanded by the IMF that could amount to another 3.6 billion in cuts by Greece.

IMF chief Christine Lagarde has warned that there were “significant gaps” in Greece’s reform offers, while European Commission head Jean-Claude Juncker said Athens had “basically achieved” the objective of the measures required by creditors.

Greek Finance Minister Euclid Tsakalotos has called on the eurozone to back the reforms, warning of a “failed state” if the Brussels talks run aground.

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