Scale of reform task facing Greece is monumental

Fri, May 18, 2012, 01:00

Between June 18th and 30th, the next Greek government (assuming there is one) faces a Herculean list of “must dos” if it wants to keep bailout money flowing

EVEN IF the Greek people return a pro-bailout government next month, their leaders face a daunting task to meet the country’s obligations to the EU-IMF troika.

An examination of the memorandum of understanding with its lenders shows Greece must execute more than 70 legal and political measures by the end of June to ensure the next round of official aid is released.

In spite of the political paralysis in Athens, euro zone sources are adamant that the money won’t be released if these policy conditions are not met.

Although history suggests some leeway may be granted, the fact that polling day is just a fortnight before the deadline speaks volumes about the pressures facing any coalition that wants to pursue the programme.

Under the first, unsuccessful, Greek bailout, agreed in May 2010, Greece received €73 billion in loans from euro zone countries, the EU Commission and the IMF.

The second bailout, if fully implemented, would deliver a further €164.5 billion by the end of 2014, with €144.7 billion on the European side and €19.8 billion from the IMF.

To keep the money flowing, Greece must execute a seismic reform of its public service, boost tax collection and cut spending. Even in the most advanced administrative system, such measures would take years to implement and would involve prolonged political debate. Yet the forlorn Greek state is the very opposite of advanced.

While Europe argues that the country will never be able to fund itself on the open market if the state is not reformed and the budget cut, the election last Sunday week saw Greeks baulk at the prospect.

After all, the rescue deal calls for more than €11 billion in tax measures and spending cutbacks. The plan assumes budget consolidation measures to be made in 2013 and 2014 can be identified within 13 days of the next election.

That this follows a litany of cutbacks and tax hikes under the first bailout underscores the challenge, doubly so given the bruising the pro-bailout parties suffered in the first election.

The truth is that the conditions to be met next month are monumental – and the measures required are as deep as they are varied. For example, laws must be passed to enable citizens of EU member states and a handful of other European countries to open a petrol station in Greece.

Legal and administrative reform are at the heart of the reform initiative, yet this is an area fraught with complexity and nuance. While work is already under way on this front, the power vacuum points to an absence of political direction from the very top.

The bailout plan demands the enactment of intricate legislation by next month to reform the Greek tax system, the aim being to intensify the clampdown on evasion.

This involves simplifying the personal and corporate income tax systems, eliminating several exemptions and preferential regimes, simplifying the VAT and property tax structure and introducing more uniform treatment for capital income.

Greece must also establish a performance review system to evaluate the work of tax inspectors. The backlog of tax cases must also be reduced by half by next month.

To tackle tax corruption, Greece must set up an internal affairs service to focus on the revenue system.

A dedicated intelligence unit will be required from next month to audit annually at least 200 asset statements made by tax officials themselves. Procedures to rotate managers and protect whistleblowers must also be established.

To tackle tax arrears, the Greek state must expand its computer systems to cover refunds and establish standards for their processing and payment. Tax payments by cash and cheque must be discontinued next month and replaced by a bank transfer system.

There is more. A social welfare review, also due next month, must identify schemes to be discontinued and opportunities to rationalise and strengthen core programmes, while “reducing transfers to individuals who do not require them.”

The Greeks must also complete a plan to restructure government operations to achieve savings of at least one per cent of national output in 2013 and 2014.

The focus is on “closing and downsizing” government units, identifying opportunities for outsourcing, identifying redundancies, and restructuring the central and local administrations.

Defence spending, something of a sacred cow in Greece, must also be rationalised.

By next month, Greece must also enact laws to cut “special wages” in the public sector by an average 12 per cent, to yield sayings of €205 million.

A further rationalisation of pharmaceutical and hospital spending must also be identified. Greece must also concentrate in the health ministry all health-related decision-making procedures. All health insurance funds must come under the ministry’s purview and all other welfare or social assistance schemes now under its wing must move to the labour ministry.

At the same time, accounting officers in line ministries will be obliged to adopt and implement new organisational plans.

Greece must also enforce the obligation on accounting officers to report spending commitments, including by enacting sanctions against entities that do not submit data and taking disciplinary action against the officers concerned.

Furthermore, a new computer system to monitor the finances of government entities must cover 90 per cent of expenditure.

A plan for the clearance of arrears owed to suppliers by public entities must be published next month and Greece must ensure that the stock of arrears steadily declines.

The authorities must also revise the legal values of real estate it holds to align them with market prices.

Tricky reforms to boost the private sector must also be advanced.

Legislation to open up the legal profession must be adopted next month, alongside measures to amend or repeal laws on the pricing of legal services.

Laws must also be adopted to allow degree-holders from other EU countries the right to work in Greece under the same conditions as holders of Greek degrees.

The government must also submit a policy paper indicating how regional airports will be merged into groups to ensure they become economically viable.

It is a huge task. With Greek leaders back in election mode, the question naturally arises as to whether timely execution is at all feasible.