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Defying hopes that negotiations could lead to an agreement between Greece and its creditors by the end of the week and ahead of the programme expiring, PM Tsipras announced on Friday evening that he would call a referendum to allow the Greek people to express their view about the latest creditors´ proposal. Based on Tsipras’ speech, the decision to call for a referendum rests on the government’s conviction that accepting the proposal on the table would be beyond its mandate, because the proposal would be in conflict with the electoral platform the government was elected on. Finance minister Varoufakis also commented along these lines, saying that for such a major decision the Greek government felt it ought to consult the Greek people and receive the backing of more than 50% of the citizens.

On Saturday night, the Greek parliament authorized the referendum, with a total of 178 lawmakers backing the proposal and 120 voting against it (the threshold for authorization being 151 votes). that deputies from the far right Golden Dawn voted with the government, while opposition parties New Democracy, PASOK and To Potami and the KKE Communist Party voted against. The referendum will therefore be held in a week, on Sunday the 5th of July. According to the , Greek people will be asked to answer the following:

"The Greek people are asked with their vote whether to accept the outline of the agreement submitted by the European Commission, the ECB and the IMF on the Eurogroup of 25th June 2015 and consisting of two documents, which form the basis upon the referendum question will be asked: the first document is titled "Reforms for the completion of the Current Program and Beyond" and the second document is titled "Preliminary debt sustainability analysis". 

Whichever citizen rejects the institutions' proposal votes NO.

Whichever citizen accepts the institutions' proposal votes YES"

The government will be campaigning for NO, rejecting the creditors’ proposal.

The Documents

If views on the primary surplus targets are now aligned, views on how to fill the fiscal gap in the supplementary budget are definitely not.

The referendum question will be based on the people's assessment of the creditors' proposal of June 25th. This is the proposal that was supposed to be sent to the Eurogroup for discussion - - and it is identical to the document by the European Commission “in the interest of transparency and for the information of the Greek people”. This proposal was considered unacceptable by the Greek government and incompatible with the mandate that it had received based on the electoral platform it had run on. Before talks broke down on Friday, however, the Greek government had advanced a counterproposal - which was also leaked and posted by the . It may therefore be useful to recall here the main points of the creditors’ proposal, as opposed to this later Greek counterproposal, which presumably the Greek government would consider acceptable and compatible with its mandate.

On the primary surplus target, the creditor text foresees targets of 1, 2, 3, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018. Both sides agree on these targets, and as already pointed out on this blog during the earlier phase of the negotiations, 1 percent of GDP in 2015 is below the target that finance minister Varoufakis unsuccessfully bargained for during the first Eurogroup he attended. This is a significant concession by the creditors from their initial demands, but the problem is that the deterioration of the Greek economy over recent months has been such that now even this “concession” translates into the need to adopt a supplementary 2015 budget (which would be effective as of July 1st). If views on the targets are now aligned, views on how to fill this fiscal gap in the supplementary budget are definitely not.

One set of measures would be based on corporate taxes. Both sides agree to an increase in the corporate income tax rate from 26% to 28% in 2016 budget (although the Greek side initially proposed 29%, scaled down by creditors). But there is disagreement on what to do in the shorter term. The creditors’ document asked for the introduction of a 100 percent advance payments for corporate income as well as individual business income tax by end-2016, which the Greek side eliminated in their latest counterproposal. On the other hand, the Greek government wanted to reinsert a one-off corporate tax of 12% on corporate profits over EUR 0.5 million, to meet the fiscal target for 2015. This was in the initial greek offer, but .

Another fiscal measure on which there is disagreement is military expenditure, which the creditors are asking to be reduced by 400 million whereas the Greek counterproposal offered 200 million, with the gap presumably  to be filled by “increased tonnage tax” and the implementation of an “effective taxation framework for commercial shipping”, two measures that were not discussed in the creditors´ offer.

On VAT reform – a highly debated issue over the last month – creditors backed down from their initial demand to unify VAT rates under a single one or two at most, and agreed to keep the three rates system – including reducing the lowest rate from 6.5% to 6% as in the initial Greek proposal. The counterpart of this would be a reshuffling of the items across the rate bands, with the objective to achieve a net revenue gain of 1 percent of GDP on an annual basis from parametric changes. One important concession from creditors on VAT is the acceptance of the Greek demand that energy remains in the 13% rate band rather than being moved to the 23% one.  One irremovable demand from creditors is instead the removal of the reduced VAT rates on Greek island, which is a politically difficult concession for the Greek government to swallow. The latest Greek counterproposal in fact wanted to reintroduce that discount, leading to a lower objective (0.93% of GDP) for VAT revenues gain than what was required by creditors.

On pensions, which was probably the most sensitive and politically charged subject of discussion during the whole negotiation phase, the 25th June offer shows that positions still remained divergent as of last week. Creditors asked for the retirement age to be increased to 67 by 2022, while the Greek side initially proposed 2036 and later offered 2025. The biggest point of contention is however the EKAS “solidarity grant”, which provides top-ups for poor pensioners, and is therefore an extremely sensitive issue. Creditors asked initially for the phase out of this grant by 2017, but the June 25th proposal appeared to agree to phasing out by 2019, one year earlier than the Greek side was ready to offer (2020). The institutions would however require that the phase out starts immediately for the top 20% of beneficiaries, something that Friday’s Greek counterproposal was rejecting, together with the request to freeze monthly guaranteed contributory pension limits in nominal terms until 2021. Concerning the increase in health contributions for pensioners - which was originally proposed by the Greek government - the creditors´ proposal includes an increase from 4% to 6% on average.

The Question and polls

The attempt of this summary is to be informative about the existing positions, as objectively as possible.

Surveys have consistently shown that a significant majority of the Greek people want to stay in the euro.

As is often the case in referendum votes, objectivity is not the only variable, and the way the question is asked and presented by the different parties can have a significant impact on voters’ behavior. Based on Tsipras´ speech and the accounts of parliamentary discussions, it seems the government will frame the vote as a decision between preserving sovereignty and accept the imposition from creditors who – Tsipras said in previous occasions – would attempt to humiliate the Greek government and people. The opposition will instead frame the vote as a decision on Greece’s eurozone membership, which a NO vote could de facto undermine.

Polls seem to reflect a similar polarization. Over the past months (and years) surveys have consistently shown that a significant majority of the Greek people want to stay in the euro. But polls specifically about the support for a deal with creditors have varied significantly.

A survey by the Alco polling institute Thema newspaper and reported by reuters, said 57% out of 1,000 respondents were in favour of reaching a deal, while 29% wanted a break with creditors. Another poll by Kapa Research, which asked  1,005 respondents how they would vote if a new "painful" agreement were put to the vote in a referendum, yielded a significantly lower 47.2% of respondents in favor of an accord and 33% against, with more than 18% of undecided. This means that there are a very high number of swing voters. The same poll showed a worryingly small 48.3% of respondents saying they would not support any move by the government which could place Greece outside the euro zone. These polls were all taken before the imposition of capital controls, therefore a crucial question will be how the latest developments have shifted the votes of the undecided.

Timing and general conclusion

The Greek programme expires tomorrow. The Eurogroup statement issued on Saturday 27 July plainly reiterates this fact, but does not include any indication that the deadline will be extended a few days after the referendum. Without extension, the referendum will be pointless. I agree with my colleague Zsolt Darvas that at this historical moment euro-area leaders should allow Greek people to make their voices heard, and that the Eurogroup should explicitly grant this exemption. If the outcome of the vote is a YES, than a deal will still be possible. Many aspects of the current proposals will likely need to be reconsidered, in light of the period of capital controls.

The time has really come to live up to promises, on both sides.

In particular, it is worth remembering that the summer months (especially July) are key months for  state revenue collection, as has been previously shown on this blog. Revenues were already significantly underperforming in May, and we don't know what the impact of the current situation will be. The  shows that a more pessimistic position from the creditor side could be possible, in the case of a YES vote. It says that "the understanding of all parties involved was that this Eurogroup meeting should achieve a comprehensive deal for Greece, one that would have included not just the measures to be jointly agreed, but would also have addressed future financing needs and the sustainability of the Greek debt". This is something creditors committed to in 2012.

On his part, PM Tsipras also made promises to his people, which certainly did not entail capital controls or euro exit. The commission statement also makes reference to  a " package for a new start for jobs and growth in Greece, boosting recovery of and investment in the real economy", which should be part of the deal and allow Tsipras to fulfill at least some of the commitments he made his people for a brighter future. My personal opinion is that the time has really come to live up to promises, on both sides. But this will only be possible if the Greek people take the leap of faith to vote for a YES.

Read more:

Economic and legal observations on capital controls

A democratic Europe should allow Greek people to decide on their future