As Greece’s economy careers towards collapse, Tsipras is forced to tighten the budget

Anna Sonny, 10 July 2015

Last night, Greece delivered new proposals to their creditors that appear to cut even deeper than those rejected by the Greek people last Sunday. In exchange for another three-year bailout loan, Greek Prime Minister Alexis Tspiras has proposed savings of €13bn in reforms.

Tspiras has tried to stand firm in his rejection of austerity at the European level, to ride on the defiance of the Greek ‘No’ in the referendum – but in the end, the creditors want reforms, and so he has made them. The proposals represent a capitulation on the sticking points of VAT and pensions. VAT exemptions for Greek islands will be abolished; the retirement age will be increased to 67 and supplementary pensions for the poorest will be phased out by the end of 2019 instead of 2020. If these don’t make up the €13bn, income tax will also be hiked: those earning below €12,000 will see tax go from 11 to 15 per cent, those who earn above €12,000 will be taxed at 35 per cent, up from 33 per cent.

It is hard to see how Tspiras will explain this yield to the Greek public after encouraging them to reject the creditors’ previous proposals. But the past few days of capital controls have proved to be unsustainable for the Greek economy. The ECB has refused to lift the cap on emergency liquidity assistance for Greek banks. While individuals may be able to survive, albeit with great difficulty, in the short-term living on a withdrawal limit of €60 a day, businesses grind to a halt when they can’t buy supplies or pay their employees. As the banks run out of money, trust depletes even faster – cash gets hoarded instead of spent, and the Greek economy is left careering towards collapse.

Over the past few months, Grexit has gone from being an implausible scenario to a very real possibility, with contingency plans being discussed in Brussels for humanitarian assistance to the Greeks in the case of another debt default. Tsipras’ proposals still need to be agreed by the Eurogroup, as well as six Eurozone parliaments, and further negotiations need to take place, but it is hoped that the ECB will raise its ceiling of emergency assistance to stop Greek banks completely running out of money.