Notes on the Greek negotiations

July 2, 2015

Sony,

I enjoyed your piece on the negotiations with Greece. Thanks for sharing your insights. I have a few comments and questions in response:

I’m curious about the extent to which you think the policies being required of Greece in recent negotiations will define future policies required of other countries in the EZ and greater EU?

This in the context of the push European officials at the ECB and EC are making for tighter integration and control of monetary, fiscal, structural and financial regulatory policies they say will be needed if a single currency is to be maintained. This was outlined in the recent five president’s report. Do you think this has been an important factor accounting for the prolonged intransigence of Germany and other creditors in the negotiations?

In looking over the IMF’s red-lined draft leaked on June 24 which precipitated the breakdown in negotiations, my impression is that this document reveals the IMF in quite a negative light. It shows the IMF to be as overly prescriptive as critics frequently charge, and worse, unwilling to work with the Greek government to design progressive measures to shift the brunt of adjustment away from those with low and middle incomes. For example, the Greeks proposed raising their corporate tax rate to 29 percent, but the IMF insists on 28 percent. This seems needlessly quibbling given that corporate tax rates in Germany and Italy are 29.65 and 31.4 percent respectively.

You’ve praised the IMF in the past for advocating with EZ creditors in favor of debt write downs (and for what as of today appears to be rescheduling). But looking at this document, the role the IMF has played regarding fiscal policy seems unconstructive. And it raises questions about whether the IMF as a matter of policy is pushing for reduced corporate tax rates in other countries (at the behest of the G-20?).

I am also wondering if you might be able to shed any light on Barry Eichengreen’s statement that the IMF rejected Greek proposals to further cut military spending to offset a delay in pension reductions. The FT did some reporting on this in January, noting that the IMF has rules precluding it from making defense cuts a part of program conditionality. But as we all know by now, IMF rules can be flexible and subject to exceptions, so this doesn’t seem to me to be a compelling reason for rejecting Greece’s proposal.

This took me by unpleasant surprise as most mainstream economists consider military spending as unproductive, and are not particularly inclined to protect it. Do you have any further insights into the way the IMF handled this in Greece, and how the IMF has pursued this policy in other borrower countries?

Cheers,

C.B. Bird