10 July 2015

Initial review by the institutions of the reform commitments of the Greek authorities sent on 9
July 2015
•

The institutions have briefly examined the reform commitments of the Greek
authorities set down in a cover letter of Minister Tsakalotos to President
Dijsselbloem of 9 July 2015, as well as in a detailed list of prior actions.

•

The cover letter makes clear that in the context of a three year ESM programme,
there is a need to agree on a comprehensive set of reforms in the areas of fiscal
sustainability, financial stability and sustainable growth. It is clear that a new
programme will require not only agreeing on detailed prior actions to be enacted in
the near term, but also on deliverables over the coming year in the form of
structural benchmarks, milestones and quantitative benchmarks to have clarity on
the direction of policies over the medium-run. The new documents do provide an
indication of forward looking commitments in some policy fields, as some of the
suggested prior actions require follow-up implementation action and can thus feed
into this medium term strategy. Forward looking actions and some prior actions
need to be discussed further as there are a number of areas where greater
specificity and clarity need to be provided as part of effort to agree on a new ESM
programme.

•

The authorities have committed to reach and sustain the primary surplus target of
3.5% of GDP by 2018 in line with the proposals of the institutions that were made
public on 28 June 2015. In this context, they have committed to take measures
which generate a fiscal yield of 2.5 p.p. of GDP by 2016 from VAT, pension, and
subsidy reforms, as discussed previously with the institutions. Given the significant
deterioration in macroeconomic and financial conditions, this will be insufficient to
reach previously agreed fiscal targets. Additional measures would be needed to
reach the targets in the coming years, or the targets would need to be adjusted
with financing implications..

•

Compared to the previous commitments which the Greek authorities sent to the
Eurogroup on 25 June 2015, the authorities have moved closer to the proposal of
the institutions released on the web-site of the Commission on 28 June in key fields
of a structural nature. For example, the proposals are now aligned in the area of
privatisation. The Greek authorities have also accepted some proposals of the
institutions in the area of tax administration and compliance, for example to
modify legislation on garnishments from the bank accounts and salaries of
person/companies who are in arrears to the tax authority. The institutions also
welcome the alignment of many of the proposals on pensions.
In some policy areas, the Greek authorities have requested flexibility on the
timetable for phasing out/in measures. This includes the phasing of reforms to
eliminate the VAT discounts for islands, to eliminate the solidarity grant on
pensions, to eliminate the preferential tax treatment for farmers and to move

towards 100% advance tax payment for individual business tax. A phased approach
can smoothen the implementation of reforms, but it should be noted that a
number of reforms have already been significantly postponed. It also leads to a
lower fiscal yield during the transition period. It is imperative to have clarity on
the phase out schedule so that the fiscal impact can be properly quantified. The
authorities have indicated a number of compensating measures that could be
adopted in case of fiscal shortfalls, including proposals to increase taxes on rental
income and to increase the corporate income tax by an additional one percentage
point from 26% to 29% as opposed to 28% in the text of the institutions. The
proposed measures need to be examined carefully to properly quantify the fiscal
yield and to avoid a growth-unfriendly mix. As the proposed changes by the
authorities imply a reduction in the fiscal yield of the package, compensating
measures are needed and must be adopted up front.
•

The latest documents of the Greek authorities contain additional proposals beyond
those included in the published text of the institutions. This includes proposals for
a variety of actions to tackle tax evasion, to launch additional competitions
assessments with the OECD, to work with the OECD on issues such as reform of
State Owned Enterprises and avoiding risks in the public procurement, and to have
a medium-term programme in the area of justice. An in-depth assessment of these
proposals is not possible at this point given the lack of detailed information. The
authorities are therefore invited to work closely with the institutions in developing
and specifying these policies so as to ensure they are fully aligned with previous
programme commitments, and to develop a clearer road map of policy actions over
the medium-term. The intention of the Greek authorities to make full use of
available technical assistance is welcome and will be a critical factor for success.

•

Measures in the financial sector need to be updated and strengthened significantly.
The new proposal of the Greek authorities is aligned with the paper released by
the institutions as regards measures in the financial sector which deals with the
critical issue of Non-Performing Loans. However, the situation in the banking and
financial sector has deteriorated markedly as a result of recent developments that
led to the imposition of capital controls. This will involve strengthening of banking
system capital and the concomitant reinforcement of governance arrangements.
The government will engage in coordinated solutions with banks to address the NPL
problem and significantly step-up efforts to remove all remaining obstacles to NPL
resolution.

•

There are a number of areas where there is a need to have a clear common
understanding on the content and timing of the authorities' commitment so as to
have a clear basis for agreeing an ESM programme. In particular:
o

on pensions, significant risks have materialized after the Council of State
ruled pension reforms introduced in 2012 unconstitutional, which could
increase annual pension spending very substantially. The authorities have
also adopted several pieces of legislation with fiscal impact that have not
been offset with the current package of measures. While the authorities
have committed to addressing some of these fiscal risks, clear policies and

actions will need to be specified as a matter of priority. Similarly, the
authorities will need to specify policies on the implementation of the 2012
reforms (the zero deficit clause).
o

on product markets, there needs to be an understanding that the Greek
authorities will act on all recommendations under OECD Toolkit–I studies in
the coming months as well as open other closed professions (e.g., ferry
transportation). Specifically, the authorities should specify a timeline for all
actions, including for the implementation of recommendations on Sunday
trade, sales periods, over-the-counter pharmaceutical products, pharmacy
ownership, milk and bakeries. On the follow-up of the OECD toolkit-II,
manufacturing needs to be included in the prior action

o

on energy markets, the authorities have suggested that they may put
forward an alternative proposal to the privatisation of the electricity
transmission network operator (ADMIE). There needs to be a common
understanding that the presentation of a proposal alone would not suffice
to complete the prior action. There is a need to reach agreement with the
institutions that this privatisation must proceed unless replacement
measures can be found that have equivalent effect.

o

on labour markets, the proposed changes represent a weakening compared
to what was proposed by the institutions. There is a need to have a clear
commitment that a review should specifically cover existing frameworks of
collective dismissals, industrial action and collective bargaining. In
addition, the authorities should base any changes upon a consultation
process in line with the existing one on the determination of the level of
the minimum wage. There is a need to have a common understanding that
any changes to the framework for collective bargaining would not take
place before end-2015 and? would need to be agreed with the institutions.
Any changes should be based on international and European best practices,
and should not involve a return to past policy settings which are not
compatible with the goals of promoting sustainable and inclusive growth.

The institutions consider that the rapid adoption of legislation is essential to build
credibility. We encourage the government to utilize the extensive technical
assistance that had been offered in preparing some of the laws. In this regard, the
authorities should provide all requested clarifying information and draft legislative
proposals to the institutions for their review. Going forward, the government needs
to consult and agree with the institutions on draft legislation in relevant areas with
adequate time before submitting it for public consultation or to Parliament. The
authorities need to fully engage with the institutions to enable comprehensive due
diligence to take place.
•

On this basis, and under the condition of the understandings and commitments set
out above, the proposals of Greek authorities provide a basis for negotiations on a
new ESM programme.