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Greece sent its proposal to Brussels yesterday, in an attempt to pave the way for the negotiation of a third ESM programme. The package makes significant concessions to the creditors’ position, compared to the previous proposal from the Greek side, including in politically sensitive areas. This raises the important issue of what the reason for holding the referendum in the first place was. Nevertheless, it is well worth examining the proposal in detail.

Primary surplus target

This is the issue on which agreement had been reached already, and the proposal retains the targets that were in the previous version: 1, 2, 3, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018 respectively. What is interesting is that these targets are now in brackets, which means they could be changed before the document is actually approved. The reason for this, is the dismal state of the Greek economy: the deterioration since the beginning of the year has been such that even the 1% target for this year would require the supplementary package of fiscal measures outlined in the document. This package is not changed much compared to the version submitted before capital controls were introduced, but controls are likely to have worsened the situation even further, making these assumptions optimistic. It is worth reminding that July is a key month for revenue formation in Greece, as we pointed out earlier. This is hardly a typical July.

Compensating measures

The fiscal package includes two compensating measures to deal with potential shortfalls (which are likely, as highlighted in the previous point). The increase in corporate income tax rate from 26% to 28% remains unchanged, but the rate could be increased by an additional percentage point (i.e. from 28% to 29%), in case of a shortfall. A second compensating measure in case of a worse than expected fiscal position would be the increase in the tax on rental income. For annual rental incomes below €12,000 the rate would increase to 15% (from 11%), creating an additional revenue of €160 million. For annual incomes above €12,000 it would hit 35% (up from 33%) with an additional revenue of €40 million.

Military spending

The document also sees €100 million additional cuts to military expenditure, which would bring the total cuts to €300 million (100 in 2015 and 200 in 2016). This is closer to the 400mn the creditors were asking.

VAT System

The Greek side converges on the 1% revenue target asked by creditors, with new legislation to be adopted now and effective as of 1 July 2015. The rates will be 23%, 13% and a reduced 6% for pharmaceuticals, books and theater tickets. The Greek proposal agrees to the creditors’ demand to move processed food into the 23 % bracket, while keeping energy and hotels in the 13% band. It also foresees the elimination of the discounts on islands - a highly debated issue in negotiations and a politically difficult one for the Greek side. However, the document says that the elimination will start with the islands with higher incomes and which are the most popular tourist destinations, excluding the most remote ones. The new VAT rates on hotels and islands will be implemented from October 2015, but clarification will likely be asked on this specific point.

Pensions

On pensions, the text proposes a compromise. The 2012 pension reform legislation will be implemented in  October 2015, with a set of prior actions from July. The Greek side concedes to increase retirement age by 2022, as asked by creditors, while the Greek side initially proposed 2036 and later offered 2025. On the EKAS “solidarity grant”, which provides top-ups for poor pensioners, and has hugely contentious in previous negotiations, the proposal offers a middle ground. Creditors asked initially for the phase out of this grant by 2017; this proposal sets 2019 and it delays the phase out for the top 20% of beneficiaries to March 2016, rather than do it immediately as the creditor asked. This is a reasonable proposal and the delay could perhaps allow this cut to be somewhat acceptable, so long as the third programme includes measures targeted at the humanitarian crisis as this government has been asking since the beginning.

A viable compromise?

Overall, this proposal looks like a good attempt to create the ground for compromise, as it moves closer to the creditors on significant issues. However, it remains uncertain whether it solves the issue in economic terms.

This proposal as it stands does not include any mention of debt relief. This is not surprising. After all, the last review of the current programme is not yet closed and this package of prior actions had been initially conceived to extend the current programme by some months, before the request for a new loan was sent to the ESM. Merkel suggested this week that commitments for a new multi-year programme would need to go beyond this, which leaves an element of uncertainty as to what this proposal can actually achieve.

The Greek government could have signed a similar deal before the referendum, without having to introduce capital controls and hurt the economy even more. It said it could not without getting a sign from the people that it supported this agreement. The Greek people overwhelmingly rejected it. The current agreement concedes even more to the creditors on several politically sensitive issues without even a mention of debt relief. Bluntly speaking, it seems ex post that the only result of last Sunday's exercise of democracy has been to show what was obvious: in a monetary union made of 19 democracies, a referendum in one country cannot force the others to change their minds.

There were reports yesterday of an “explanatory memorandum” sent to the Greek Parliament together with this document (and only available in Greek), saying that the final agreement will include the commitment from lenders to negotiate with Greece over making the Greek debt sustainable after 2022. This however does not appear in any of the documents sent to Brussels and published. If such clear understanding between Greece and the creditors exists behind closed doors, it should be made explicitly public. Tsipras needs some solid and credible commitment from Europe to talk seriously of debt relief, so that this deal can be justified before the parliament and the Greek people as a necessary bridge to that discussion. He needs it now. Greece with this package is showing efforts to come closer to the creditors' position and signs of goodwill to embark on what its finance minister defines as "the Herculean task" of fundamental reform. It is high time for the creditors to move too, from whispering to making bold and credible statemen