Monday, 6 February 2012

Yes, but…

Reading the headlines this Monday morning, I’m struck by the fact that in what concerns Greece, one could conclude that if we really analyze the motivations and mindset behind certain statements, everyone is right, but everyone is also wrong.  

The creditor countries, led by Germany and The Netherlands, are right that Greece has failed to deliver what are euphemistically known as its “reform programme.” However, they are wrong to state that no reforms have taken place at all, as we see in many statements made in the press this past week. Illustrative is that of Jean-Claude Juncker in today’s Financial Times:

If we were to establish that everything has gone wrong in Greece, there would be no new programme and that would mean that in March they have to declare bankruptcy,” he warned.

The fact is that not only is the central government within 2.5% of GDP of a primary surplus, but that public sector headcount has been reduced by approximately 100,000 people in the past 2 years. Public sector wages and pensions (the latter cover the entire society) have been cut by a minimum average of 20%. The semi-governmental sector is being scales back and prepared for privatisation. There have even been privatisations, albeit on a limited basis, which have brought EUR 1.5 billion into government coffers in an extremely adverse market environment.

We can treat the presumed negotiating positions of Greece’s political leaders in the same way. They would like to avoid the latest Troika demands, which include cuts in the private sector minimum wage, cuts in the 13th and 14th salaries, and the further reduction of 150,000 public sector staff. Their reasons for doing so are obvious: these policies will worsen the recession. This is definitely true: in and of themselves, these measures will undeniably worsen the recession in the short term, and will lead to Greece missing yet more of these vaunted “reform targets”.

But over time, these measures could be supported, provided certain conditions are met. For instance, the demand to reduce the public sector by a further 150,000 staff is not new: the condition has been agreed by the previous PASOK government over 14 months ago. Given that the public sector has been turned into a vast, low-productivity patronage machine, something must be done. Since the Greek parties refuse to do something about it, e.g. provide a realistic, means-tested plan for a productive public sector, the Troika is pressing ahead with its demands. “Power abhors a vacuum”, as the saying goes.

Similarly, the elimination of a 13th and 14th salary does not, of itself, imply lower wages: unions and employers are free to re-adjust a wage on a 12-month basis at the same level as the previous 14 month salary. Whether they will do this is, of course, debatable.

We can also debate the logic of the Troika in demanding these conditions. On the one hand, lower wages would be an advantage in some labour-intensive sectors such as agriculture or tourism. On the other hand, any reduction in wages at the present time will lead to lower tax revenue and higher business closures in Greece. Furthermore, the state of labour inspections in Greece are so poor that many businesses employ illegal labour, violate labour law (e.g. on maximum work hours) and under-report wages.

The elimination of the minimum wage is likely to lead to lower salaries and lower consumer spending (and therefore lower tax revenue), no matter what. In all this debate, however, it’s surprising that the Troika doesn’t address a key issue in Greek wage competitiveness, which is the high social charges faced by employers and employees (average 44% IKA tax for salaries employees).

So the first question I have to ask this morning (and all through the weekend), is why the insistence? Why is the Greek side insisting that they are locked in a struggle for survival, when this has been known for some time now? And why is the Troika insisting on measures which will have a short-term deleterious effect?

For the Greek side, and by this, I mean the political representatives in government, the answer is pretty clear. The same political class that has led Greece into this mess is now charged with leading it out. What better way than to create an external enemy and man the barricades against it? Yes, they may be right in many respects, but … they knew this was going to happen, and they are collectively and individually responsible for it. With each new crisis their apparent indispensability becomes more apparent—this has been clear since the disastrous referendum idea in October 2011.

From the Troika side, I detect a real uncertainty on how to proceed. The debate has become politicised in northern European creditor countries, where the elected leadership feels they have to bash Greece in order to save it. This tactic has already backfired, and it will only get worse. Another problem is detected at the level of the ECB, which has a totally different perspective and legal framework, and is more concerned with bank stability than anything else.

And from the IMF: the only thing new in the policy prescriptions it is implementing is that they are in Greece. We’ve seen so many of the same policy failures in Africa, Latin America or Asia, that it’s difficult to recount the similarities of the Greek “reform” programme to historic ones. One difference in Greece: there is no scope for lowering tariff barriers to free trade (a traditional IMF concern), given that Greece is a member of the Eurozone and WTO. Instead, the IMF is coming at this from a different angle: non-material “liberalisations” of pharmacies, taxies, public notaries and other professions which will do absolutely nothing to solve the problem in its current form.

Nikos Xydakis has summarised the current situation well in his Kathimerini article on Sunday:

As the first victim of the euro crisis, Greece is being subjected to mutually exclusive and conflicting panaceas concocted by weak leaders and irresponsible technocrats who are feeling intimidated and constantly being defeated by global markets.

Precisely because there is no clear solution, I expect both more austerity, and more financial crises. I expect both PSI and a further bail out to be approved, but to be so unworkable as to result in many further years of recession, low growth and missed targets in Greece. This will, however, lead to certain economic benefits in some sectors of the economy. 

The problem is not being solved; the root causes are ignored. This is seen in Greece as in practically all of Europe. We are a long way from returning to a pro-growth market equilibrium on sustainable terms, to the extent where I wonder if it will be possible to do so, at least for a long period of time.

(c) Philip Ammerman, 2012 
Navigator Consulting Group 


  1. Dear Philip, can we reduce the public sector without updating it, investing in more effective, less beaurocratic working methods, such as replacing all those ugly dusty dossiers with interlinked computer data bases? Reducing in size, but retaining the same model will only end up making it completely inefective-- if papers continue to have to go around from office to office to get signatures or get lost in piles as they now do, and departments work with no coordination, blocking one antother.
    I have seen no push to this goal, which to my experience, from Athens Municipality at least is the most needed and would in the long run save alot of money. However, this would require a real investment and metality change. Same should happen to Greek legislation, as it is now just makes most things impossible...we are only going towards shrinkig up but not changing. The discussion shoud be about "how" and not "how much". Working method and not size should be the priority. We should spend on changing our methods and then we could really see what positions/functions in the public sector are required. Some should be reinforced, others dissapear. Social economy, if planned out with transparency (if!) could also be an itermediate solution to privatization, producing a safety net for those at a disadvantage.

  2. Geia sou Philippe. I agree 100%. As I've said before here, the idea of blanket headcount reductions without a productivity plan and a vision for the public sector will only result in chaos.

    I don't know if you've read this post, but the actual data on public sector employment are also misrepresented.

    The debate as to what Greece wants from its public sector has never been held. There is no end of slogans, such as “free education for all”, or “permanent employment in the civil service” but these slogans do not reflect reality. We have not heard a debate or seen any analysis as to which sectors of the public sector deserve higher salaries and investments in productivity (and there are many such sectors), and which sectors require a down-sizing or restructuring. There is no global plan for liberalising state involvement in some sectors, such as education and healthcare, or for improving services to citizens through the use of egovernment.