BRUSSELS Dec 12 The International Monetary Fund
is against further austerity in Greece and instead is calling
for the creation of a modern welfare system financed with cash
from a rebalancing of the Greek tax system and far too generous
The head of the European Department Poul Thomsen and chief
economist Maury Obstfeld wrote in an article the Fund believed
that euro zone insistence on a Greek primary surplus of 3.5
percent in 2018 was wrong and 1.5 percent would be enough.
"We warned that this would generate a degree of austerity
that could prevent the nascent recovery from taking hold," the
two senior IMF officials wrote of the higher euro zone target.
The article appears as the IMF and the euro zone struggle to
find common ground on the way forward for Greece that would
allow the Fund to take part in the latest bailout for Athens,
the third one since 2010, now fully financed by the euro zone.
Some euro zone countries like Germany believe that not only
should Greece reach a primary surplus of 3.5 percent of GDP in
2018 but it should keep it at that level for the next 10 years.
The IMF believes this would be counterproductive.
"Perhaps through a Herculean effort Greece could manage the
spending cuts needed to achieve the 3.5 percent...in the short
run. But experience has shown that it cannot be sustained and is
inconsistent with Greece's ambitious long-term growth target."
Germany insists on the higher primary surplus target because
it means lower, or even no need for debt relief for Athens -- an
important factor in an election year in Germany where public
opinion is suffering from bailout fatigue.
Berlin believes that if Greece carries out all the agreed
structural reforms there would be no need to grant it any relief
on its debt mountain of almost 180 percent of GDP, now mainly
owned by euro zone governments.
But the IMF, which Berlin very much wants on board for
credibility reasons, has a different view.
"Greece's debt is highly unsustainable and no amount of
structural reforms will make it sustainable again without
significant debt relief," the IMF said.
The Fund believes that instead of further cuts in government
investment and discretionary spending on public services or
healthcare, Greece should tackle its income tax system, under
which more than half of households don't have to pay any tax.
In the other 18 countries sharing the euro, the average
number of households exempt from income tax is 8 percent.
Also Greece's pension system is extremely generous according
to the IMF. Greece spends 11 percent of its GDP on pensions a
year, providing a nominal pension similar to Germany's, while in
other euro zone countries the average is 2.25 percent.
Greece has tried to reform pensions but the attempts were
stopped in courts, or were inadequate, the IMF said.
At the same time Greece does not have unemployment benefits
and other welfare payments that are commonplace elsewhere in
Europe, the IMF said, adding they were critical for broad social
support in a modern market-oriented economy.
The lack of such an unemployment benefit scheme made the
Greek government reluctant to liberalise labour laws to allow
for mass lay-offs, the IMF said.
"Rather than provide support to dismissed workers, the
government instead restricts the ability of firms to dismiss
them," it said.
"Pensions are no substitute for an adequate safety net, as
this ad hoc arrangement has not been able to address the rise in
poverty of the most vulnerable groups," it said.
Broadening the base for income tax and changing the pension
system to a sustainable one should provide money to increase
spending or cut taxes to support growth, the IMF said.
"The authorities should further reduce current pensions
while increasing spending on a modern and well-targeted welfare
system to protect those that are most in need," the IMF said.
"More should be spent on other essential public services and
key public investments too. Rationalizing current pension
benefits would also ensure a fairer inter-generational
burden-sharing of the reform costs," it said.
(Reporting By Jan Strupczewski)