Greece crisis: What the deal with eurozone demands

Now that Greece has agreed to wide-ranging reforms in order to secure a third bailout from the eurogroup, it is facing a strict timetable to approve and implement those changes. The conditions it has agreed to will require a restructuring of its economy and, in many respects, its society.

What follows is a closer look at the specifics of the deal and how Greece will carry out the reforms its creditors have demanded.

• Greece reaches deal with European creditors
• Full coverage of the Greece crisis
• Analysis: No mercy for Greece in Merkel's Europe

The so-called troika representing Greece's creditors (the European Commission, the IMF and the European Central Bank) has outlined a series of measures the government of Prime Minister Alexis Tsipras must get approved in the Greek parliament over the next two weeks before it can begin negotiating a final memorandum of understanding that will free up the promised €82 billion to €86 billion in new bailout funding over three years. According to a document released Sunday, some of the legislation that paves the way for reform must be passed by as early as Wednesday.

This is really major surgery, and it's not localized to one part of the body.–Ian Lee, Sprott School of Business

"They're trying to completely rebuild many of the public institutions — from the tax system to the judiciary to the public service to the model that governs labour relations," said Ian Lee, an assistant professor at Carleton University's Sprott School of Business who has been following the crisis talks. "This is really major surgery, and it's not localized to one part of the body. They're trying to do major surgery on multiple parts of the body simultaneously."

Pensions

The eurogroup has asked for "upfront measures to improve the long-term sustainability of the pension system" to be adopted by July 15. That doesn't mean the retirement age will go up overnight, but it is meant to signal a commitment to "comprehensive pension reform."

"It's basically asking them to take a goodwill step … to smooth negotiations over the next three months that should allow them to get a finalized deal," said Anastassios (Tassos) Anastassiadis, assistant professor of history and the Phrixos B. Papachristidis chair in modern Greek studies at McGill University.

Reforming the pension system will be a gargantuan task and will likely involve:

• Raising the retirement age from 65 to 67.
• Increasing the penalties for retiring early.
• Eliminating some of the exceptions that allow workers in some professions to retire in their 50s. 
• Merging the many sectoral pension funds into fewer streamlined funds. 
• Forcing pension funds to be self-sustainable through contributions and not allowing them to be bailed out through indirect taxes or by siphoning government budgets.

The reform package also asks that Greece adopt policies to "fully compensate for the fiscal impact" of a 2012 Constitutional Court ruling that said raising the retirement age and cutting pensions by five to 10 per cent could be unconstitutional and delayed the implementation of such reforms.

Taxes

The deal demands that legislation streamlining the value added tax (VAT) system and broadening the tax base be passed by July 15. Reform will likely involve simplifying tax rates and expanding the VAT to more products and eliminating some of the exemptions that currently exist.

• Read the full Euro summit document

Anastassiadis warns, however, that the success of this reform depends on the stability of the broader economic situation. "If consumption plummets, you won't be getting any VAT entries," he said.

As well, Anastassiadis said, the pain of reforms like the VAT increase will be mitigated by the €35 billion in EU funds that the deal frees up (independent of the €86 billion bailout), which are intended to stimulate growth and job creation, and by the fact that less of the revenue raised by austerity measures will have to go to servicing debt and can be diverted to programs that help vulnerable parts of the population or create economic growth.

Judiciary and state administration

The deal demands adoption of a Code of Civil Procedure by July 22 as a means of speeding up the judicial process and reducing costs. Anastassiadis foresees the introduction of mediation and other non-judicial methods as a way of freeing up a deadlocked system overburdened with cases. He sees these, along with the "de-politicizing of the Greek administration" the deal calls for as part of a broader attempt to tackle the cronyism and corruption that has plagued Greek society — and blocked reform — for decades.

"This government may be [the EU's] best chance for implementing a number of these measures, because these people are maybe the least connected to the political and socioeconomic mechanism and equilibria that actually blocked any effort of reform of the Greek economy or Greek society in general," said Anastassiadis.

Banking, budgets and accounting

Two of the reforms Greece must pass by July 15 are what Anastassiadis describes as relatively straightforward "institutional measures": setting up an independent fiscal council that will initiate "quasi-automatic spending cuts" in the event that Greece deviates from the budget surplus targets specified by the treaties governing the euro currency union; and introducing safeguards to ensure that ELSTAT, the state agency that collects economic and demographic data, is fully independent of the state. The agency has been accused of suffering from political interference and manipulating some economic data in the past.

The troika has also asked that Greece:

• Align its banking regulations with the EU's bank recovery and resolution directive, which provides an EU-wide framework for dealing with failing banks, by July 22. 
• Eliminate political interference in the Hellenic Financial Stability Fund. 
• Take "decisive action" on non-performing loans.

Market reforms

The deal also aims to tackle the "oligarchical aspect of the Greek economy," said Anastassiadis. Its aim is to break up the monopolies that control certain sectors. It highlights pharmacies, bakeries and milk producers as being in need of market reform and calls for the opening up of professions that, in Anastassiadis's words, had, through their political connections, "managed to create a socioeconomic system that functioned in their favour."

Ferry companies, which the document cites as one example, have been allowed to monopolize and set prices on certain routes. Other maritime trades, the legal profession and medicine have similarly remained difficult to penetrate for outsiders thanks to their alliances with past regimes.

Breaking up this kind of crony capitalism won't be easy, said Lee.

"Not only do you have enormous unfairness where a dollar is not taxed equally depending on who you are or what industry you're in, but it also introduced enormous inefficiencies into the economy," he said.

The deal also calls for the privatization of the electrical utility and the selling off of €50 billion worth of state assets through an independent fund supervised by the troika. Twenty-five billion euros of the profits would be used to recapitalize banks, €12.5 billion to reduce the debt to GDP ratio and the rest for investment.

Labour reforms

The new deal is short on specifics when it comes to labour reforms, other than calling for "modernization" and the implementation of "international and European best practices" when it comes to collective bargaining, industrial action and layoffs. But it's expected that Greece will have to loosen the rules around collective bargaining and the limits on the number of people that can be laid off and scale back the size of its notoriously bloated public service.

Such reforms could work to the ruling Syriza Party's advantage, since its support is strongest among youth and the unemployed — i.e., those currently shut out of the labour market (unemployment for those under age 29 is over 60 per cent).

"If they manage to find a way to modernize the labour market in a way that allows youth unemployment to go down and facilitates entry in the labour market for the youth, they will have succeeded in their mandate," Anastassiadis said.

Anastassiadis doesn't see the reform package as a complete capitulation for Greece. Last week, the ultimatum on the table was accept austerity or leave the euro and the dynamics were very much Greece against the world (or at least the eurozone).

Now, he said, Greece has "managed to shift the balance of power" and get support within the EU for a deal that includes provisions for longer grace and repayment periods that effectively amount to the debt relief that Tsipras was looking for.

Read the full summary of the eurogroup's demands.