The agreement proposal that was presented to Prime Minister Alexis Tsipras by the President of the European Commission Jean-Claude Juncker includes a number of “difficult” measures, such as the introduction of two VAT rates and simultaneous abolition of exemptions and discounts currently in place.
Specifically, European sources argue that the VAT reform is key, at it believed that it will increase revenue on a permanent basis. According to this plan, there would be two rates; a low 11% and a higher 23%. The low rate would apply to medicine, books and food, while all other products and services will incur a 23% tax.
Furthermore, the creditors demand cuts worth 1.8 billion euros (1% of the Greek GDP) from the pension system. This could be achieved by reducing expenses for pensions as early as July, which may save 0.25% to 0.50% of the GDP this year and 1% the next. It has not yet been determined if this will mean pension cuts, which Athens has ruled out.
The creditors have also revised the primary surplus targets for Greece, with a 1% GDP goal for 2015, 2% in 2016, 3% in 2017 and 3.5% in 2018. Although these revised targets are significantly less than previously (3% in 2015 and 4.5% in 2016), they are still higher than what Athens had initially expected.
The plan does not appear to include any redundancies from the public sector, while the creditors also seem to have backed down on the deregulation of collective dismissals. However, the plan presented to Greece requires that the government commits to not abolishing any of the recent legislation regarding the job market.
Finally, the Financial Times revealed that the creditor plan does not make any reference to any debt relief. The IMF seems to doubt the Greek government’s ability to achieve these ambitious fiscal targets and is pressuring the European side to agree upon a restructure of the debt. The European Commission however disagrees with the IMF and as such, there is no such provision in the draft agreement.
