Alexander who destroyed Thebes

For Brussels and Berlin any challenge to austerity must be rejected, even if it were to lead to Grexit. Punish Athens to warn Rome, Madrid, Lisbon or any other eurozone's capital

The young Alexander (before becoming the Great), who had recently become head of the Macedonians, is preparing to consolidate the boundaries to the north, when he learns that Thebes and Athens rebelled (apparently for the false report of his death). Lightning Alexander reverses, besieges and destroys the city of Thebes (saving only Pindar’s home). Athens will bend to his will. Note that it is not directly Alexander the Great that decreed the destruction of Thebes but the Corinthian League, of which Alexander is the Supreme Commander.

We come to this day, and the tug of war between Brussels (Berlin) and Athens. At the turn of May and June it seemed that the agreement was a done deal. Then Friday, June 5, Tsipras, in his speech to Greek Parliament, rejects the Commission's proposals. Juncker is offended. Yet if we look at the proposals on the primary surplus made by the Commission, and which are made by the Greek government, we notice something strange: 

Primary surplus proposals


European Commission

Greek government
















Both proposals converge in 2018 at the same rate, and the differences are at most half a point. The Commission reduced by one point his claim, given that previously the primary surplus was supposed to reach 4.5.

But when we get into details, differences manifest themselves immediately. The Commission wants to unify the two VAT rates of 6.5% and 13% to 11%, while the Greek government's proposal is that of reducing the lowest tax rate to 6%, reducing to 11% the second, and leaving 23% the greater. As for pensions, the Commission wants to close immediately on early retirement, which means, along with other measures, realising a cut of spending of a point of GDP. Claiming from Brussels (Berlin) of a pension system in balance is amazing. With a fall in employment and wages it is obvious that the contributions are reduced;  even the German pension system is based on large transfers from the public budget.

The Greek government proposes a more gradual approach, with an increase in average retirement age from 60.6 (2016) to 63.1 in 2020. However in 2016, the measure is expected to give about half a point of GDP, 900 million. The Greek document presents two other important points: one regarding the reintroduction of collective bargaining and the other the increase in the minimum wage, points obviously absent in Brussels document.

In essence, the Commission's proposed measures are exactly the same as those proposed in all European countries; cuts costs, increases in consumption taxes, wage compression; in Ireland the recipe worked. But the share of Irish exports exceeds the level of GDP (110%), while Greek exports are only 30%, half consisting in agricultural products. The Commission does not seem touched by the idea that a budget tightening of two points of GDP causes a new fall of the economy; a repetition of what has happened continuously over the past five years.

The Greek government proposes support to lower income groups, leading to an increase in consumption, and therefore GDP; this in turn will lead to higher tax revenues. However, in the Greek government's plan there are also tax increases on higher incomes, both on individuals as well as on large enterprises.

Essentially the clash takes place on the line of the austerity imposed fiscal compact: “do your homework”. Any challenge to austerity must be rejected, even if it were to lead to Grexit. Punish Athens to warn Rome, Madrid, Lisbon or any other capital. The latest reports say that Tsipras has proposed to increase the primary surplus to 0.75% in 2015 and 1.75% in 2016 reducing the gap between the two proposals. It also proposes an increase from 6% to 7% and from 11% to 12% rates VAT (leaving the top rate to 23%), but Juncker is not satisfied.

Probably a part of the European ruling class sees Grexit as the preferred, more as an unpleasant consequence, due to the stubbornness of Syriza, who do not want to bend. Amounts due to the ECB and the IMF in maturity are the tool to try to bend Tsipras. In the space of a few weeks we will see if Brussels (Berlin) will have won. Otherwise it opens a terra incognita  (in Draghi’s words).

Ruggero Paladini

Economist - Professor of "Scienza delle Finanze" at University "La Sapienza" Roma; Member of the Economic Board of Insight -