Devaluation was invariably the path to survival for weaker European economies in the days before the euro. But when devaluation is no longer an option, there is evidently no choice for failing economies but to squeeze public spending and slash labour costs in the hope of paying off debt and restoring competitiveness.
A striking aspect of the Greek case is the attack by the troika of ECB, IMF and European Commission on wages and non-wage costs in Greece’s private sector. This also means an attack on Greek trade unions, which have always been extremely powerful players. I well recall a meeting with the CEO of a major firm in Athens which was having trouble with Brussels, and being told that the union chief had his office just down the corridor. That was a big problem for the client!
The negotiations over recent weeks have shown just how tough is the new reality. The Athens talks have demonstrated a fierce determination by the troika to force a transformation in the Greek economy.
The deal now approved by Athens imposes a range of measures which, according to Athens News includes cutting the minimum wage by 22 per cent plus a further 10 per cent for young workers, a freeze in basic wages until 2015, a reduction in pension provisions (still to be finalised), lower social contributions and elimination of the 13th and 14th months’ salary to which private sector workers are entitled. A further reduction of 15,000 people in state employment will be required this year as part of a longer term cut of 150,000 and another €300m of budget cuts as yet unspecified. The scope of the troika’s demands will not be lost on other peripheral eurozone countries.
The troika negotiators are taking nothing on trust. Greece’s main political parties have been obliged to commit themselves to the deal as a condition of receiving the €130bn bailout in advance of April elections. Antonis Samaras, who leads the New Democracy party, was holding out, but all the main parties have now signed. Finance minister Evangelos Venizelos headed to Brussels today in the hope of striking an agreement with the eurogroup.
The German idea of putting a Brussels-based manager in charge of the Greek economy may have been a humiliation too far for Greek sensitivities, but the requirement to channel bail-out funds into an escrow account to ensure that interest on the loans will be paid on time would effectively amount to external control of budget management.
When is a default not a default? When Greece keeps the euro, I suppose. After difficult negotiations with the banks and others there does appear to be agreement on the haircut for private sector debt, with the writing off of 70 per cent of the face value of Greek bonds and an interest rate of 3.5 per cent on replacement paper. As part of the final agreement it seems that ECB president Mario Draghi has said that the ECB will agree to forego the face value of the €40bn of bonds which it acquired at a knock-down price last year, knocking a further €10bn or so off the Greek debt mountain.
So the price to be paid for Greece to remain in the eurozone is high indeed. There is no doubting the suffering faced by the Greek people. The bitter truth is that the alternative of all-out default and quitting the euro could be even worse. The test will be whether a real reduction in labour costs and a freeing-up of the economy will provide sufficient stimulus for Greece to climb out of the abyss.
An accountant friend of mine has proposed a simple solution to the crisis: Give all we other Europeans a voucher for two weeks’ holiday in Greece. That should get the Greek economy moving again!