Tuesday, 18 September 2012

Is Greece Headed For A Crash?


This post has been published on Al Jazeera.

The Greeks are being told to eliminate $16bn of public spending in a new wave of austerity. That is three times the size of the cuts that caused last February’s violent riots in Athens. Can the government convince parliament that the cuts are fair, or will it unleash a new storm of unrest?
 
ELPIDA IS EXCITED about starting first grade this week. Oblivious to the budget crisis that envelops her country, she spends evenings running around the park of her central Athens neighbourhood. Two swings are missing and the slides and climbing frames are patched with repairs, testimony to penury at every level of government after years of recession and falling tax revenues. And if Greece doesn’t cut another $16 billion of government spending soon, amounting to almost a fifth of its budget, it would forfeit a bailout loan that keeps it from going entirely bankrupt. 

The cuts have had a deep impact on everyday life. Elpida’s family stands with the majority of Greeks in a culture that revolves around personal rather than institutional authority. It lacks access to power, and has fallen unaided on particularly hard times. Before the crisis they were middle class, running a jewellery shop in the centre of Athens, but couldn’t stand up to the competition. A few years ago they spent their last 30,000 euro setting up a coffee shop. It, too, failed. Elpida’s mother and two aunts moved into a small apartment with their parents and, armed with little more than high school diplomas, went out in search of work.

Two of the three sisters, including Elpida’s mother, have since been laid off. One of them can claim unemployment benefits for a few more months. The third is clinging to a job selling dried fruit and nuts, but hasn’t been paid in six months. The family lives off the father’s pension and the precarious dole. “I keep looking for work,” Elpida’s mother says forlornly. “I knock on several doors a day. But there is nothing. When I did get a job waitressing, the employer reneged on his promise to pay my social security and I left after two months.”


The storm-tossed vessel of Elpida’s family demonstrates the extent to which Greece never managed to establish a true welfare state. There is no national pension for those who haven’t paid social security for at least 15 years, including homemakers like Elpida’s grandmother who made working life possible for her husband and children. There are next to no benefits for single parents. Yet Greece’s high deficit and debt are almost entirely the result of overspending by the state. And it is becoming increasingly clear that that overspending did not benefit the majority.  

What Greece’s Creditors Demand 

The key demand of Greece’s creditors is balancing the budget. Unless that happens, there is no point in alleviating the country’s accumulated debt or throwing more money into its economy, since its annual finances will remain a sieve.

The European Commission, the European Central Bank and the International Monetary Fund, have asked Greece to pass 2013-2014 budgets in October which eliminate the annual deficit in three key ways:
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  • The public payroll must come down by at least 1.5 percent of GDP, producing savings of about $3.7bn. This requires laying off or retiring at least 150,000 people.
  • Government operating costs must come down by 1 percent of GDP by moving out of leased properties, abolishing hundreds of committees and public entities that produce nothing, and even outsourcing some government functions. The troika says this could produce savings of about  $2.5bn
  • Spending on pensions and healthcare must come down by 3 percent of GDP, producing savings of about $7.5bn.
These spending cuts must be put to parliamentary vote by October 1. 

The reason why they are so heavily focused on essentially two areas – social spending and state administration – is that these claim a disproportionate amount of the budget. Out of this year’s 88 billion euro budget, 18bn will go to state salaries and 35bn to topping up pension funds, the finance ministry says.

Greece is perhaps not to blame for its poor demographics – 1.3 million people receive pensions in a population of 11 million – but the million-man state is a purely Greek monstrosity. Even after four years of austerity that forced many public servants into early retirement and saw contract workers go unrenewed, Greece’s creditors reckon that at least 770,000 people remain on the public payroll. Greece’s active population is only about four and a half million strong, which means that one in four working people is paid out of the taxes of the other three.

Now the troika wants at least 150,000 public servants to go. Not everyone is convinced that it is enough. “At this point, I don’t think the problem will be resolved even with 300,000 dismissals,” says Andreas Andrianopoulos, a former cabinet minister who now directs the Institute of Diplomacy at the American College of Greece. “I am afraid that we will end up both with bankruptcy and with mass layoffs from the public sector.”

Andrianopoulos believes the political will for cuts is so weak, that the government is waiting for the state to run out of money in order to acquiesce to them. “Our chaps don’t want to make a decision on anything. They want to leave it all for later. But this time their interests are aligned with those of the troika, which also wants to bide its time, because very soon, around mid-October, the state will not have a penny in its coffers. At that point there will be absolutely no leeway. The Greeks will have to accept whatever the troika wants, no matter who is in power.”

Some of the excesive spending is fraudulent – the government says it has saved 300 million euro a year by weeding out thousands of pensions that were going to people who weren’t entitled to them. It has also begun to aggressively prosecute crooked public functionaries. In a high profile case last week, a senior manager in the state unemployment agency, OAED, was brought up on fraud charges. He had apparently regaled friends and associates with benefits for the vision impaired, pocketing a commission. A worker at the Social Insurance Foundation pleaded guilty to a similar fraud last spring, in which she made a million euro selling entitlements to pensions and benefits.

Perhaps the biggest fraud is committed by self-employed workers in their tax declarations. This year, two thirds of them declared income below the taxable threshold. The government’s commitments include a complete overhaul of the tax service to raise tax revenues by almost $4bn a year.

It is not income, however, but expenditure that remains Greece’s biggest liability. The Greeks’ love affair with the public payroll began in earnest three decades ago, when the newly elected socialist party, Pasok, appointed favourites to state posts in an effort to invest itself permanently in the political culture of the state. When the conservatives alternated in power they adopted the practice. A former socialist minister recently decried the sheer ethical abyss this involved. “When… the state administration needs no new hires, yet thousands of positions are advertised… what we're talking about is an egregious theft and waste of public resources," wrote outgoing interior minister Tasos Yannitsis in an online journal. 

That bloated state is precisely what the present coalition government seems to have set out to protect. The ruling conservatives, along with their centre-left partners, the socialists and Democratic Left, promised to fire no-one in a policy statement issued five days after the last election. They are still clinging to this mantra. “For us, there is no question of dismissals from the public sector,” said socialist leader Evangelos Venizelos as he emerged from talks with the other party leaders on September 12.

Although legal provision exists for placing civil servants in “auxiliary” status, where they receive 60 percent of salary for up to two years before being dismissed, the government has shied away from this. Two weeks ago, Finance Minister Yannis Stournaras spoke of a new status of “availability” where employees would still claim 75 percent of salary, but even that has been dropped. This week Venizelos spoke only of early retirement, which would slim the state payroll but bloat the pension bill.

The result of all this wrangling is that for Elpida and thousands of other families, the system is not only failing; it may be headed for a crash. Andrianopoulos’ fears are voiced by many here: If the worst global economic crisis coupled with the most interventionist European Union policy in half a century cannot bring political change, perhaps outright bankruptcy is the only medicine the system will understand.

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