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The International Monetary Fund warns Greece of frauds, public workers and closed professions

07 May 2013 / 18:05:33  GRReporter
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Greece has made some progress regarding the improvement of competitiveness and the reduction of the financial deficit stipulated in the loan agreement. According to a report of the International Monetary Fund, which was released today, the country should continue with the restructuring, especially in the area of ​​taxation, public administration and competition. As stressed in the report, the financial programme for the period 2013-2014 certainly proves the government’s determination to fulfil its commitments in the financial sector. Moreover, the government has advanced in the field of adjustment as well, which allows it to pursue appropriate policies in the coming period in order to achieve a turnaround in the development of the country. The report notes among other things that it is necessary to better balance the distribution of the burden of adjustment.

It is noted at the beginning of the report that Greece had faced extreme challenges in 2010 as regards both the financial deficit and the deficit in current transactions, facing massive increases in public spending and a lack of competitiveness in the period after the adoption of the euro.

The report stresses that when tackling such problems, each country belonging to a monetary union faces major development risks and that in the case of Greece, the decline was much larger than expected. The report also notes that there has been outstanding progress in terms of the financial adjustment and that the balance will have to be improved by 10% of GDP by the end of 2013 despite the decline in GDP by more than 20%. The report states that Greece has covered a significant part of the gap in competitiveness by radical reforms in the labour market. In particular, the gap in competitiveness as measured by cost of labour per unit of output has fallen by almost 2/3 compared with 2010 and the deficit of current transactions has decreased by about 10% of GDP. At the same time, the stability of the financial sector has been maintained despite the major losses associated with the debt restructuring and the significant increase in the number of non-performing loans. It emphasizes that on the one hand, these achievements have facilitated the unprecedented support for Greece from the international community including the 173 billion euro Greece has received to date from its European partners. This support has significantly reduced the need for adjustment, thus preventing more serious social problems and limiting the negative consequences in the rest of the euro zone.

The achievements to date are evidence of the strong determination on the part of Greece and its European partners to do what is necessary in order for the country to be able to return to its viable state within the euro zone. However, as noted, the insufficient structural changes demonstrate that the adjustment has been achieved mainly through deflation and the uneven distribution of the adjustment burdens, thus giving rise to three major problems.

There has been insignificant progress in tackling tax evasion in Greece. Rich and self-employed people do not pay their obligations, thus making the programme excessively dependent on spending cuts and tax increases that affect salaried workers and pensioners.

Reforms in the labour market have led to a significant reduction in nominal wages, which is insignificantly expressed in lower prices because of the failure to liberalize the closed professions and to open markets to competition. This is another reason why so far the burden of adjustment has largely fallen on salaried workers and pensioners.

Although the balance of the economy is associated with increased unemployment in the private sector, mainly among young people, the enormous public sector has remained intact because of the bias towards dismissals.

According to the report of the International Monetary Fund again, decisive structural changes are required in each of the aforementioned sectors in order to increase the supply and to achieve a more balanced distribution of the burdens.

As regards the fiscal adjustment, important challenges lie ahead. There room for the imposition of direct taxes and large cuts of exceptional costs is limited and the government has been forced to focus on socially unpopular cuts in wages and social insurance. The report stresses that the financial programme for the period 2013-2014 undoubtedly proves the determination of the government to meet its obligations in the financial sector.

Photo: naftemporiki.gr

It further states that Greece's European partners have agreed that the medium-term goal of reducing the financial deficit from 6.5% to 4.5% of GDP should be transferred to 2016. As noted, Greece will continue to need financial structural adjustment to achieve its medium-term financial goals and the main challenge before the government is to determine a method by which to achieve this goal without departing from the commitment to avoid excessive further spending cuts.

The report of the International Monetary Fund describes three main priorities:

1. Reform of the tax administration

2. Reform of the public administration.

3. Preservation and strengthening of the social protection network.

The report pays attention to the changes in banks. Incidentally, it also states that the role of the financial and credit sector is vital to the recovery of the country and that after the programme to recapitalize the banks, they should be able to support a gradual increase in lending - something that could happen if the deposits return to the Greek financial institutions. It is also noted that even the smallest contribution of Greek banks to the public debt will facilitate their more rapid return to the financial markets.

Tags: IMFAnnual reportTax evasionRecapitalizationStructural reforms
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