As I write, the leaders of the three main parties in the current ‘bankers’ government’ in Greece are preparing to capitulate yet again to the demands of the dreaded ‘troika’ of the IMF, the EU and the ECB to make yet further cuts in the living standards, public services and jobs of the Greek people in order to receive yet another bailout package. This is a package designed to make Greece pay debts built up by successive governments owed to the banks of Europe and to restore the competitiveness of Greek capitalism so it can stay in the euro.
The draft of the bailout includes plans to cut the minimum wage by about 20-22%. This will lower the minimum wage to the level of social benefit. Private sector pensions worth over 1,200 euros a month will be cut by 15-20%. This time, the bailout package will include private sector involvement (PSI), namely Europe’s banks will accept a ‘haircut’ on the value of the debt they are owed of up to 70% of the value of the Greek government bonds they hold. This sounds a lot but it will cut Greek government debt by only 20% of GDP, still leaving the debt ratio at around 140% by the end of the decade. And the banks will receive new Greek government bonds with a maturity of 30 years earning 3.5% a year guaranteed by all the Eurozone governments plus a little cash as a sweetener. Even this deal is unacceptable to some speculative hedge funds who are holding out for their full pound of flesh, comforted by the thought that they have insured fully against default in the credit derivatives market. On top of this, the privately owned Greek banks will receive up to €50bn of taxpayers money to recapitalise after their losses so that they remain in private hands.
But there is no such aid to the Greek people. The party leaders are being asked to impose 150,000 job losses in the public sector (civil servants, hospitals and teachers), along with the wage cuts on top of the already imposed austerity measures (mainly massive tax increases) introduced in previous bailouts and Troika demands. The Troika is furious that Greece has not kept to its side of the bargain in imposing austerity up to now. In May last year, then Finance Minister George Papaconstantinou announced a plan to collect an extra 2.5 billion euros in 2011 from fighting tax evasion and 4.4 billion euros this year. But the plan was abandoned because revenues were too weak and Greece now aims to collect 1.5 billion euros in overdue payments this year, which officials view as more realistic. Tax officials have seen their own pay cut, reducing for some the incentive to tackle reforms. The shadow economy still accounts for more than a quarter of the 220-billion-euro official output — the highest proportion in the euro zone. Annual tax evasion stands at 40-45 billion euros. Tracking down rich Greeks who have not paid taxes and sneaked their money abroad or getting them into court to pay up is failing.
The negotiations have been stretched and tortuous because the main party leaders in the coalition are basically being asked to capitulate to the Troika. They have been reluctant to agree because they know that when it comes to the planned election in April, the electorate is likely to give them a sharp message. A recent poll showed that 90% of those asked were not prepared to accept this new round of austerity measures! The former government party, the social democrat PASOK, has seen its poll rating plummet from 44% it got in the 2009 election to just 8% now! Even the conservative New Democracy party which likes to claim that it opposes austerity (it is in favour of the decimation of the public sector, but not in favour of higher taxes on the private sector) can only poll 30% of the vote. If there was an election tomorrow, the smaller leftist parties outside the coalition would probably hold the balance of power in the new parliament and they are opposed to the Troika demands. No wonder PASOK now wants the election called off and the banker Papademos to continue as prime minister.
Nevertheless by the weekend it will probably be announced that the party leaders have all lined up like ducks to agree to Troika demands – indeed, the current PASOK finance minister Venezelos has said that his reputation depends on it! For the social democrats and conservatives alike, they see no alternative way out. That’s because they accept the economic arguments of the Troika that, if Greece is to stay in the euro, then it must cut costs and become ‘competitive’. Thus, there must be what is called an ‘internal devaluation’ of production costs of the Greek economy. Greek capitalism is not efficient and so is not pricing for its goods and services competitively. Consequently, it runs a huge deficit in its trade with the rest of the world and runs up more debt to pay for these deficits. Compared to Germany, its unit labour costs (the cost of labour per unit of production) are higher. This is because Greece’s productivity level is lower, even though Greek wages are much lower than in Germany.
The answer to this problem from mainstream economics is that, to get costs down, wages must be cut. Chief economist at the Bank of America, Mickey Levy tells us that the answer for the ‘bloated south’ of Europe is to “keep wages low”(Diverging competitiveness among EU nations: Constraining wages is the key; http://www.voxeu.org/index.php?q=node/7536). He admits that productivity growth in Greece, Portugal and Spain in the last decade has kept pace with Germany or surpassed it (Greece) – see my post, Europe: default or devaluation?, 16 November 2011. The reason for Germany being more competitive in the last decade “contrary to the commonly held notion that German workers are more productive, was German wage restraint”. As Levy admits, this was forced on German workers through companies moving production to cheaper eastern Europe and employing more temporary labour, while governments cut social benefits to force workers accept lower rates. Levy sums up the policy answer for the Greeks: “For Eurozone nations unable to devalue their currencies and with limited upside potential to increase productivity, there is only one way to restore competitiveness: deflationary reductions in real wages”.
Internal devaluation means a massacre of real wages. But does it work? This was the policy adopted in the small state of Latvia when economic crisis hit them back in 2008. They cut wages by over 50%. Latvia has become more ‘competitive’. But that has done little to restore production to pre-crisis levels, let alone the living standards of the people. They remain some 25% below where they were in 2007. This ‘supply-side’ policy has been a manifest failure for the people. Yet it is what the Troika and the Bank of America offer.
They present Germany itself as the model for this policy. Germany’s competitiveness has been sustained in the last decade not by rising productivity. Productivity growth has not been high. Competitiveness has not been maintained by cutting jobs. German unemployment rates are relatively low. It has been done by cutting wages for a whole layer of workers. Under various reforms, first introduced under a social democrat government and followed by the conservatives, wages for a whole range of low value added jobs were slashed. This kept unit labour costs from rising.
The social consequences for a whole layer of German workers has been devastating. Poverty wages are the order of the day in one of the richest economies in the world. The German low wage sector grew three times as fast as other employment in the five years to 2010. Germany has no nationwide minimum wage and wages can go well below one euro an hour, especially in the former communist east German states. Data from the European Statistics Office suggests people in work in Germany are slightly less prone to poverty than their peers in the euro zone, but the risk has risen: 7.2% of workers were earning so little they were likely to experience poverty in 2010 versus 4.8% in 2005. It is still lower than the euro zone average of 8.2% but the number of so-called “working poor” has grown faster in Germany than in the currency bloc as a whole.
So there is a layer of German workers in what are called mini-jobs that don’t provide a living, along with casual, temporary jobs at poverty rates. Temporary jobs have been key to ‘competitiveness’ in Spain, where temporary workers have become a way of life for millions: no security of employment, no training, no holidays or benefits. This forces millions to join the so-called ‘informal economy’ where incomes are paid on the sly by employers without taxes or social security. This divorce is a deliberate way of keeping many EU capitalist economies ‘competitive’.
Ironically, there is a growing realisation from mainstream economics that such an approach is destroying the value of human capital, lowering its productivity. And yet, this will be the result of the Troika’s demand to sack 150,000 government workers, cut the minimum wage and rights of the private sector workers and ‘liberalise’ labour markets. The Troika highlights ‘protectionism’ in Greek (and other) labour markets. It has tried to break various safeguards that workers have established over the years: an expensive licensing system for truck drivers was scrapped in a 2010 law hailed as a victory over vested interests. It has yet to be implemented. The government agreed to open up ‘closed professions’ such as taxi drivers, where operators cannot work without hard-to-obtain licences. And the Greek parliament resisted a measure from Papademos to ‘free up’ and extend pharmacy opening hours.
The problem is that the Troika demands won’t work and indeed are impossible. Greece has reduced its public deficit from over 15% of GDP in 2009 to 9.4% last year. But as a result, the country has just entered a fifth consecutive year of recession, making it harder to bring the debt and deficit ratios down. Greece’s debts, both public and private, are too large; its capitalist sector is too weak. So tax revenue targets cannot be met as the economy slumps into a major depression. The government has fallen far behind on a Troika target to raise €50 billion from privatisations by 2015. It raised just €1.7 billion last year, mainly from a pre-arranged stake sale in telecoms company OTE and gaming concessions, missing an initial €5 billion target and even a revised €4 billion target. The government has promised to raise another €9.3 billion this year by selling assets such as buildings and stakes in oil refinery Hellenic Petroleum and gas companies DEPA and DESFA. But privatisation agency chairman Ioannis Koukiadis has said that the target is not achievable and the agency is now aiming for €4.7 billion. The main reason is that the market value of state-owned companies has plunged, together with most Greek stocks. And Greek workers are already experiencing the policy advocated by the Troika and Bank America: to cut real wages. Hourly earnings fell 4% in 2011, or over 6% in real terms and yet Greece is still not ‘competitive’.
Default on Greece’s debts is inevitable. Indeed, a ‘voluntary’ default is about to be announced. But even that will not save Greek capitalism. Down the road, probably in not more than six months, Greece will have to admit defeat on meeting the Troika’s demands. It could happen earlier if Greeks elect a government opposed to more austerity. Then a new policy will have to be adopted.
I have discussed an alternative policy in previous posts (An alternative programme for Europe, 11 September 2011). It would mean a programme aimed at creating jobs and restoring incomes to get the economy going, not the opposite. This is not utopian if the banks and major industries come under public control and are used to invest in new projects (Chinese-style if you like), ideally with EU help. If a Greek government adopted a policy based on negotiating away its current debts and applying a state-led investment and employment programme, no doubt the current conservative European leaders (as well as Greek conservatives) would oppose it and wash their hands in ‘bailing out’ Greece. They would probably demand that Greece leave the euro. The government could mount a pan-European campaign to win support for its policies. Even if that failed, at least Greeks would have some control over their own destiny instead of capitulating to the Troika.