Why an agreement on Greece is so difficult

On Tuesday, Greece failed to make a payment to the International Monetary Fund. On the same day, the second joint European Union-IMF package for the country expired. For many, the fact that either event happened seems almost incompressible. There is general consensus that a “Grexit” hurts both sides. Surely they should have been able to reach agreement to prevent a Greek default.

To understand the situation, it is helpful to review the last positions of the two sides and to consider why one issue in particular remains outstanding. Helpfully, the European Commission published its final proposal whileadditional documents circulated to German parliamentarians were leaked. These documents together suggest that both sides had already agreed on the primary surplus target in coming years. There were minor remaining differences on a “wealth” tax, which the Syriza government wanted to impose and which creditors feared would retard growth. Prime Minister Tsipras as well as Finance Minister Varoufakis railed against an increase in value-added tax on hotels after the breakdown of negotiations, which are critical to the Greek tourist industry, but the documents make clear the creditors had backed down on this one and agreed to a lower 13 percent rate instead of a much more onerous 23 percent rate. The main contentious issue is what to do with pensions. It seems that creditors will not back down on the need for pension reform, which, despite what E.U. President Jean-Claude Juncker claimed on Monday, really does mean cuts in pensions.

Why are the creditors so insistent that there has to be pension reform?  Any sustainability analysis will want to see how this category of spending develops over time.

So what do Greek numbers look like? Pension spending represents almost18 percent of gross domestic product, more than any other E.U. country. Half of that comes from a subsidy from the taxpayer. That is, the Greek public sector budget balance would be nine percentage points higher if contributions covered expenses.

For understandable reasons, there are more people opting for early retirement, which is better than being unemployed. And the society is aging, as the latest European Commission report on aging makes clear. This means the expected payments in the future continue to go up. So the pension burden is big in terms of the economy and unsustainable. The argument from creditors that one is throwing good money after bad without any commitment to pension reform makes sense. Note that Syriza pledged in the election to add a thirteenth payment to pensioners each year. While popular, it is understandable why creditors ask why they should pay for this electoral promise.

Now take a look at the Greek side. The monthly amounts the average pensioner receives are not particularly generous: about 833 euros on average, with close to half receiving less than the poverty line of 665 euros.  The pensions are often the only source of income for a given household. Why would these people support a cut in what they get each month? Moreover, they represent about a fifth of the population. Syriza, one should remember, did not win a majority of seats in parliament this past January. While the party is especially popular among the young, the elderly have more difficulty emigrating and are likely to express their anger at the ballot box.

So there are understandable reasons for each position. On the Greek side, it appears that the pensioners are the key veto players in this game; this is at least what Syriza suggests when it leaves negotiations instead of conceding further cuts that fall on this key group.  The job of the creditors then is to convince the pensioners that their losses will be a lot bigger if their government fails to agree to what the creditors have on the table. A period of bank holidays at the end of the month when pensioners receive their payments is certainly a stark reminder.

There is also a logic to the Greek government holding a referendum on the creditor proposal after a period of intense pain that promises plenty more if Greece remains without another program. It can then claim that it did everything possible, but that it was the people who took the final decision. What remains puzzling is why the government has so strenuously urged its population to vote no, especially if Prime Minister Tsipras is expected to resign if the final vote is “yes.” Why not accept the will of the people and remain in government to execute, and doubtlessly to steer, the policy decisions in the coming years while blaming all the while the creditors for the inevitable cuts in pensions?

This text has first been published on the Washington Post’s blog The Monkey Cage.