Passing the Third Greek Austerity Vote (and Waiting for Godot)

Yesterday evening the Greek Parliament passed the third major austerity plan, after the initial Memorandum of May 2010 and the Mid-Term Fiscal Consolidation Plan of July 2011. This third plan, nicknamed the “Multiple Law” in Greek, expands the austerity measures, including: 

·       Lifting collective bargaining agreements for a limited period

·     Placing 30,000 state workers in a labour reserve at reduced salary, prior to terminating their employment after one year

·       Reducing the tax free level from EUR 8,000 to EUR 5,000 per year

·       Reducing public sector salaries in the wider public sector by an average factor of 25%

·       Reducing public pensions over EUR 1,200 per year by 20%

·       Reducing public pensions for people who have taken early retirement by up to 40%

This law included measures agreed with the Troika (the representatives of the International Monetary Fund, the European Central Bank, and the European Commission/Eurozone). It met with widespread civil and political resistance.

A two-day general strike on Wednesday and Thursday brought hundreds of thousands of protestors onto the streets of Athens, Thessaloniki and other major cities. In Athens, violence erupted on Wednesday by protesters against the police lines, and on Thursday between groups of protesters, as well as against police. Some 40 people were hospitalised on Thursday; one person died during the protests, either from a heart attack or asphyxiation from tear gas (reports are mixed).

The conflict within the Parliament was no less vitriolic. Former Labour Minister Louka Katselli voted against article 37 of the law, which eliminates collective bargaining agreements for a period of 2 years. She was expelled from the ruling Socialist party. At least 8 additional Members of Parliament for PASOK, including party veteran Vasso Papandreou, declared that they would not be supporting any other austerity measures.

Attention now turns to two critical points: implementation of the law, and the long-awaited Eurozone decision on the second Greek bail-out as well as the wider role of the European Social Stability Fund.

On the record of implementation, the picture in Greece is mixed but does offer some encouraging signs. The main such sign is that the states operating deficit, rose to EUR 17.509 billion in January – September 2011. Deducting interest payments, however, the primary operating deficit is only EUR 3.746 billion.

If capital expenditure in the Public Investment Programme is added, then the total state deficit increases to EUR 19.164 billion, and the primary deficit to EUR 5.131 billion.

As strange as this may sound, this is real progress. Although this expenditure does not include the general government debt (which includes transfers to pension funds), it shows that the Minister of Finance’s contention of a primary state government surplus in 2012 is a real possibility.

Furthermore, I anticipate an improvement in the revenue / expenditure balance, since the tax-free level has fallen from EUR 12,000 per year to EUR 5,000 per year under the law passed yesterday, and since additional taxes are traditionally collected towards the end of the calendar year.

Operating Budget - State
Revenue	2010 9 mo	2011 9 mo
Gross Revenue	39.758	38.898
NATO Revenue	0.008	0.023
Tax Refunds	3.259	3.942
Total Revenue	36.507	34.979
Expenditure
Primary Expenditure	36.757	37.807
Transfer to Hospitals	0.3	0.434
NATO Expenditure	0.008	0.006
Military Procurement	0.247	0.176
Government Guarantees	0.104	0.032
Interest	11.652	14.033
Total Expenditure	49.068	52.488
Expenditure less Interest	37.416	38.455
State Deficit - Operations	-12.561	-17.509
Primary Deficit - Operations	-0.909	-3.476
Public Investment Programme
Revenue	1.348	1.877
Expenditure	5.438	3.532
Total State Deficit	-16.651	-19.164
Primary State Deficit	-4.999	-5.131

However, the key question on implementation is the extent to which Greece has a functioning public sector. The strikes and occupation of public facilities continues, the most important of which is perhaps the General Accounting Office and the Ministry of Finance personnel. The fact that PASOK has lost yet another MP, and has an additional 8 who have openly refused to back any more austerity measures, is indicative of the risks that the government could yet lose control of the situation.

One the European front, the situation is not much better. Continued differences between France and Germany on EFSF funding of the banking sector and a private sector haircut on Greek debt led to the inconclusive end of talks in Frankfurt on Wednesday evening. German press reports indicate that Angela Merkel wanted to cancel the October 23^rd meeting of Eurozone leaders altogether; reports yesterday indicate that a second summit is planned for Wednesday, October 28^th.

These reports indicate that regrettably, there is no clear consensus on how to deal with the crisis which is now gripping the European banking sector as well as the sovereign debt sector. As mentioned in previous posts, the banking sector has been affected by sovereign and commercial debt write-downs, rising non-performing loans, and over-leveraged loans and derivative positions. Economic growth is slowing, and several countries, notably France, Italy and Turkey, face large-scale debt roll-overs in 2012. The recent downgrades of Italian, Spanish and British banks and the negative watch on French sovereign debt illustrate the gravity of the situation.

If a real, workable plan of sufficient scale is not announced next week, a cascade of dominoes will begin to fall in the weeks and months to come. Europe must take action to restore public and financial sector confidence in the Eurozone institutions and the European banking sector before it’s too late.

© Philip Ammerman, 2011

Navigator Consulting Group 

www.navigator-consulting.com