Greece: Between bailout and default

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

With the negotiations balancing on a thin line between bailout and default, what the Greek economy needs is a major reduction of the public sector followed by privatisation and tax reductions, writes Anna Visvizi from the American College of Athens.

Anna Visvizi , a political and economic analyst, is an associate professor at Deree, the American College of Greece.

"This week the Troika insisted that the government in Athens agreed on a list of nine conditions, prerequisites of an agreement on the new rescue package for Greece. The basic terms and conditions, i.e. the quantitative and qualitative conditionality criteria, attached to the new assistance scheme will include further fiscal adjustment efforts as well as labour market reforms and liberalisation of restricted professions (lawyers, lorry drivers, pharmacists etc.).

One of the initial suggestions of the Troika, and for that matter the most contentious one, was to slash the 13th and 14th salary in the private sector. Following negotiations it was agreed, however, that instead the minimum-wage be reduced by 20-22% (from €751 gross); corresponding changes in the regulatory framework concerning wage bargaining and labour market flexibility will follow. 15% reduction in auxiliary pensions was announced. It was also agreed that only in 2012, 15,000 public sector employees will be fired.

By 2015, the public-sector employment will have to be reduced by 150,000. Finally, the general government expenditure will have to be reduced by €3.2 billion, i.e. about 1.2% GDP, in 2012 alone. Given the experience of the last two years, when virtually none of the structural reforms declared were implemented, and fiscal adjustment was attempted (to no avail) via multiple and several increases in taxation, rather than through expenditure reduction, questions arise as to the logic behind the measures under negotiation and as to their appropriateness. As a result, once again, Greece finds itself between bailout and default. In order to understand the undercurrents of today’s developments in Greece, it is necessary to have a closer look at the chain of events that preceded them. 

When in November 2011 the interim government was sworn in Athens, due to its provisional nature and lacking democratic legitimacy, it was endowed with a limited mandate. The purpose of the government led by Lucas Papademos, former vice president of the ECB, was threefold, i.e. to ensure that the 6th tranche of the EU/IMF rescue package was disbursed; to negotiate the 50% voluntary bond exchange programme with private creditors along with provisions for Greek bank recapitalisation scheme; and, to pave the way to parliamentary elections tentatively scheduled for 19 February.

The hype of positive expectations, fuelled additionally by the establishment of technocratic government of Mario Monti in Italy, soon gave way to concerns about Greek public finance sustainability. Indeed, as time passed, no progress was detectable as regards either components of the government’s mandate. Oblivious of the limitations imposed on the interim government, Western press lamented on the misfortune of the talented PM whose attempts to implement reforms, so the press said, were blocked.

The alleged social resistance and alleged stubborn and short-sighted stance of main political parties to the reform process were identified as the main culprits. Overall, the Greeks were portrayed (undeservingly) as unable and/or unwilling to reform their country. That hardly any constructive discussions on the reform process had taken place up to February 2012 could be attributed to the fact that the discourse on reforming Greece did not entail any viable proposals as to how to address the weaknesses of the Greek economy. The rather illusory talk of reforms notwithstanding, the most important developments that weigh heavily on Greece’s current irreconcilable dilemma of bailout or default were defined during negotiations involving the Institute of International Finance (IIF), the Greek government and the Troika.

Clearly, questions of the value of the voluntary bond exchange programme, of debt sustainability, and of the necessary fiscal adjustment in Greece converge. Considerable delay in negotiating terms of the agreement with private creditors was observed in January 2012. Three contentious issues that could be linked to that delay included: the law selection clause, i.e. British versus Greek law, the latter favouring the debtor; interest rates (from the initial 5.2% the IIF agreed to 3.7%), grace period, and maturity; and terms and conditions behind the re-capitalisation scheme of the Greek domestic banks affected by the bond exchange programme (most recent information suggests that the state will re-capitalise respective banks by purchasing ordinary shares with limited voting rights, thus preserving entrepreneurial independence of banks).

Amidst suggestions that a 50% voluntary agreement with bondholders may not suffice to ensure Greek debt sustainability, by the end of January significant progress in negotiations on debt reduction was marked. Consequently, discussions on specifications of the second EU/IMF financial assistance programme (€130 billion) have become feasible by the end of January 2012.

By being explicit on the nine prerequisites, whereby wage reduction is the major component thereof, the Troika suggests internal devaluation, i.e. reduced labour cost is expected to enhance Greece’s competitiveness, and thus trigger growth. Even if this strategy could have worked elsewhere, it will not work in Greece. First, it is based on the incorrect assumption that efficiency of both private and public sector in Greece is the same, and thus that reductions in wages in the public sector (implemented as of November 2011) have to be matched with reductions in the private sector.

Second, the strategy of de facto internal devaluation assumes that once competitiveness is restored, Greece’s export will revive and thus the economy will recover. The problem with this assumption is that the value-added of industry as a % of GDP has fallen to 17% in 2011, whereby services make 79% of a corresponding value. As the services’ sector in Greece is driven largely by domestic demand, wage reductions will lead to further decline in consumption, no investment and even deeper recession.

What the Greek economy needs is a generous reduction of employment in the inefficient and overgrown public sector (currently 750,000 in general government plus 250,000 in state-owned enterprises) followed by privatisation (understood primarily as quintessential component of the restructuring of the economy, rather than quick revenue generator), and reduction in taxation (corporate, property, non-salary cost of employment). Only in this way the private sector will be given some space to breath, to absorb the unemployed, to start producing, to induce consumption, and to spur growth."

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