Thursday 15 September 2011

When “Austerity” and “Reform” are Probably Meaningless

The latest austerity measures announced by the Greek government in an effort to comply with the Troika’s demands for meeting fiscal targets are certain to prolong and exacerbate the current economic recession, and transform it into a depression.

These measures include:

·       The cut of one entire monthly salary for all public sector workers. This is on top of the elimination of nearly one monthly salary for most workers (through reduction of the thirteenth and fourteenth salary “bonuses) as well as the fact that salaries above EUR 1,500 were reduced.

·       The levy of an additional special tax on property values. This is estimated based on varying rates per square meter, adjusted by a regional coefficient as well as other factors, and multiplied by the number of square meters of floor area. This tax is collected on electricity bills, which already contain municipal taxes, a wealth tax, a tax for the public television broadcaster, and value-added tax. It should also be remembered that there are already two additional property taxes in effect.

·       Rationalisation of semi-governmental organisations as well as placing some 30,000 public sector workers in a “labour reserve”, which implies reducing their salaries to a level of 60% their former salary for a period of 12 months. If they do not find another public sector position in this time, they are fired.

·       Acceleration of other structural reforms, including privatisations and the implementation of a uniform pay structure in the public sector.

Whether these measures are justified or not in the name of greater public sector efficiency is debatable. It is difficult to see a strategy which translates into greater efficiency or productivity in the public sector. Most likely, the burdens on the citizen and company will increase, since the public sector will simply under-perform yet further.

What is not debatable is the deleterious impact these “reforms” will have on the real economy. Public sector salaries have already been cut extensively: cutting an entire additional monthly salary is not only a major counter-incentive to productive work, but it bears a real price in terms of consumer spending.

Given that Greece’s GDP (as with that of most countries) is based on consumer spending for about 70% of total economic activity, it is only logical that reducing spending reduces GDP, which in turn reduces VAT income as well as income taxes.

As September nears its end, we expect a further decline in basic economic indicators:

a.     The tourism summer boom is over. Seasonal employment is ending; tourism enterprises are closing for the winter. Unemployment is likely to accelerate dramatically, perhaps reaching 18% by the end of 2011.

b.     The collection of the new property income taxes for 2009, 2010 and 2011 will shortly start to occur. Today, several classes of self-employed professionals also received supplemental income tax demands. These will now be increased by the latest round of tax increases and payment cuts.

c.     As the winter approaches, heating fuel will be distributed, priced up at least 100% over 2010 prices due to the increase in taxes designed to bring the price of heating fuel to the price of diesel gasoline.

All this translates into a major shock to consumer disposable income, either due to wage cuts or tax increases. Together with continuing government cutbacks in the public investment programme and operating expenditure, this means that the recession will probably continue at a rate of at least 5% GDP in 2012, while unemployment may rise to 20-22%.

It is remarkable that, looking back to September 2010 when the Prime Minister made his last “Speech to the Productive Classes” at the Thessaloniki Trade Fair, just how little the fundamentals have changed.

With the Athens Stock Exchange index trading between 800 and 900 points, privatisation income from the sale of state-owned enterprises is likely to be less than 50% of most enterprise book value, depending on how the privatisations are handled. The National Bank of Greece, for instance, has assets of EUR 119 billion and a total market capitalisation of just over EUR 3 billion. Other companies on the privatisation list have far lower valuations.

Although Spain, Luxembourg, France, Italy and Belgium have passed a national law expanding powers for the European Financial Stability Fund (EFSF), other countries face delays. This means that the second bail-out package for Greece remains in limbo. Results on participation by private banks in Greek loan restructuring, coordinated by the IIF, remains unknown. It is ironic that Greece is being pressed to implement its commitments, when so few Eurozone commitments have been implemented.

A pushback against talk of a Greek Eurozone exit or default has thankfully started. Yet the fundamentals remain the same, while the domestic and international economies are slowing. Angela Merkel’s CDU has lost five regional elections in Germany this year; this Sunday, it is likely to face its sixth loss. 

Absent a major, concerted effort to address the fundamentals of this present crisis, we are likely to see a continuing failure to meet fiscal targets in Greece, and a worsening economic situation in Europe. In such a situation, neither “austerity” nor “reform” are the panaceas they are made out to be.

We see the manifest signs of the real crisis: international companies are pulling their expat staff out of Greece and preparing for the worse. The number of empty apartments and commercial sites has reached record numbers. Sales at all retail outlets are down. The number of homeless people is apparently the highest it’s been since World War II.

On July 22, 2010, I concluded a blog post with these words:

My advice is: prepare for the worse-case scenario to materialise. The clock is ticking. The scale of the problem is clear; the end-date in the best case is late 2012 or early 2013: it may come sooner than we think if the bond yields on recent issues are any guide. 

Regrettably, so little has changed in this assessment. What is unfortunate is how long all this has been visible, and that so little has been done to reverse it.

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© Philip Ammerman, 2011

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