Unemployment and discipline
I have to admit that until recently I was puzzled by troika’s calm, to the extent to be considered indifferent, approach and response to the runaway unemployment in Greece.
Greece’s partners, and new creditors, set foot in the country back in May 2010 with the intention, we were told, to bring order to the public finances and bring them back to a righteous and sustainable path that would allow the country to pay off its obligations.
The combination of the program’s austerity nature, the Greek government’s hesitation and the public sector’s inability to respond to the challenge led to fiscal targets being missed. In every single such occasion, the troika did not recognise the impact of the deep recession, refused to accept error in their projections and adjust the program, constantly adding pressure on the Greek government to meet the targets that provided they are short-term could not be done through acceleration of reforms, that usually need a longer horizon to bear fruit, but monotonously looking on the revenue side with increased taxation or one-off solidarity and emergency ‘contributions’ just to make the numbers look good and please the program’s financial contributors.
This further reduced the disposable income in the economy, leading to lower consumption and investment, deeper recession, higher unemployment and back to fiscal targets being missed, a vicious cycle that like a virus that is feeding from itself while at the same time contaminating the Greek economy.
The outcome was as predicted by many, from a deficit target of 8.5% the annual deficit of 2011 is expected to be in double digits, with some projections bringing it between 10.5%-11%. A complete failure of planning, projections and implementation.
ELSTAT’s unemployment release for September 2011 puts the official rate close to 18%, the employed population now in Greece is less than the inactive population with approximately 860’000 Greeks out of work, youth unemployment at 46.4% and a staggering 400’000 jobs lost since September 2009, a month before PASOK socialist government came into power.
With recession and unemployment so obviously impeding the progress of the troika’s fiscal consolidation program, one would expect some kind of reaction to this deterioration of the economy and jobs, some measures put in place to counterbalance this adverse, and expected, effect of austerity. But there was none.
All this did not make sense until yesterday, when the new transitional Prime Minister of Greece told employer associations and trade unions that a relaxation of the labour market regulations is one of the conditions that the troika has put on the table in order to continue the financing of Greece and in the event that Greeks did not accept in the short-term to be “poorer” Greece was facing a hard and disorderly default in the end of March.
Greece’s new creditors seem this time determined to push for what so far has only been discussed in the periphery of negotiations and evaluation missions. They consider Greece having a competitiveness problem and, in a particularly narrow-minded approach, they find labour costs to be the main contributor towards this lack of competitiveness.
According to reports, troika appears to have put on the table a number of private sector labour aspects, from general labour rights and employment contracts to review of the national collective bargaining, the national minimum wage of EUR750 gross, the 13th and 14th salary, the decrease of the employers social insurance contributions and as a result the reduction of basic and supplementary pensions.
In economics, there is a school of thought that considers unemployment as a ‘discipline device’, a device that returns real wages to the level that firms are willing to pay. Part of this theory directly links wages and unemployment benefits on the basis that the more ‘painful’ unemployment is the more willing people will be to accept lower wages subsequently reducing the bargaining, collective or individual, power shifting the advantage of wage setting at the side of the firm. Further, the more people out of job the higher the competition of the already scarce job openings, creating the ideal hiring market for the firms with people willing to accept lower wages in order to get the job.
Next week, trade unions in Greece will enter the discussions with employer associations with yet again a threat of default over their heads and having to consider close to 1’000’000 unemployed Greeks. Does anyone still have any doubts why the rocketing unemployment in Greece was not a concern for the troika?