In a note from JP Morgan this morning, analyst David Mackie takes on Greece’s fiscal troubles head on by describing a pseudo fiscal union of sorts that would help Greece reduce retirement and pension obligations.
Mackie brings up solid points, like the fact that Greece’s unemployment rate is only slightly higher than the European region as a whole. And it’s recession hasn’t been that deep.
The problem really, says Mackie, is one of too-low taxes, and too-generous pensions.
JP Morgan: The region as a whole needs to engage in some fiscal tightening. The only way that Greece can avoid the pain of a more significant fiscal tightening would be if the rest of the region were to permanently transfer a very significant amount of tax revenues to Greece. This could in theory hap- pen, but it is not an obvious consequence of a move to a fiscal union.
A fiscal union might deliver higher structural transfers to Greece, but not necessarily by a huge amount relative to what Greece already receives from the EU budget. Indeed, neither the US nor the UK fiscal unions would deliver the magnitude of structural fiscal transfers that Greece would need to prevent it from having to engage in a significant fiscal consolidation.
Of course, the rest of Europe will hate any kind of transfer of tax dollars to the Mediterranean nation. So good luck with this.