Austerity Measures

Yesterday, the Greek government announced a series of austerity measures that it hopes will ease concerns about the country's public finances and put the economy on the right path to recovery.

The proposed measures are as follows:

• Pension System Reform: The Panhellenic Socialist Movement (PASOK) government intends to raise the average retirement age from 61 currently to 63 by 2015 in a bid to save the cash-strapped pension system. Furthermore, the government also proposes to ban early retirement and to establish a new fund to manage the reserves of 30 billion euro (US$41.3 billion). The new law should be enacted by April 2010.
• Tax Bill: The government plans to introduce a new tax scale on taxable income, which would also include capital gains from the short-term trading of stocks. Various assets, including dividends, short-term capital gains, distributed corporate profit, and real estate, would be taxed more heavily, while companies reinvesting or hiring young people would be entitled to tax brakes. Furthermore, the government plans to crack down on widespread tax evasion, mainly through electronic monitoring of business activity.
• Public Sector Wage Cuts: Greek public sector workers face a wage freeze in 2010 and a 10% decrease in allowances, which would together amount to a pay cut of approximately 4% for more than 500,000 public sector workers. Chief executives' salaries would be capped at 5,000 euro a month (the same as cabinet ministers) and their allowances would also be reduced. There would also be no pay increase for the prime minister and other ministers and their allowances would also be cut by 10%.

Strong Reaction from Unions

As expected, trade unions have not welcomed the proposed changes. Today, Greece's main public sector union, ADEDY, has staged a nationwide strike in protest at the proposed measures, paralysing ministries, local administration, schools, hospitals, and tax offices. Although the unions acknowledge that the public sector needs to be overhauled, they believe that public servants are having to bear an unfair burden. According to Ilias Iliopoulos, the general secretary of ADEDY, "The government had promised the rich would pay but instead they take the money from the poor." Today's ADEDY-led strike has also been joined by air traffic controllers, bringing the country's two main airports in the capital, Athens, to a standstill. The government is still dealing with the consequences of a strike organised by the Greek farmers demanding higher government subsidies, who have been blocking the country's roads and border with neighbouring Bulgaria since last month .Bulgaria—which is believed to be suffering a 3-million-euro loss per day as a result of the strike action, according to press reports—has now started proceedings in the European Commission against Greece for its failure to adhere to the regulations ensuring free passage of people and goods between European Union (EU) countries. The Greek prime minister has urged the unions to call off the industrial action, but Greece's main private sector union, GSEE, has already announced that it will also stage a nationwide strike over the proposed reforms on 24 February.

Outlook and Implications

The Greek government is very anxious to demonstrate its commitment to the three-year Stability and Growth Programme aimed at cutting the budget deficit and winning back the markets' confidence. Last week, the European Commission backed the country's fiscal plans and also issued a series of recommendations that it hopes will help Greece achieve its ambitious targets. The Greek government indicated then that more austerity measures would be announced, while the unions responded with a threat of further strike action. Today's nationwide demonstrations were to be expected; however, should they last much longer they could have a negative impact on the economy. Moreover, long-running strikes risk undermining the government's efforts to restore Greece's credibility in the eyes of international markets and investors. According to opinion polls conducted by Kappa Research, not all public workers agree with the demonstrations: more than 60% of 2,299 people surveyed believed that the proposed reforms are necessary and that the government is moving in the right direction. As a result, legislators may consider spreading the burden of reforms evenly among both the private and public sectors in order to gain the unions' support and push through the proposed measures. However, support for the deficit-cutting measures may disappear rapidly if the economic situation does not improve after the announced cuts and tax rises are implemented. The Greek unions are in a strong position and prolonged industrial action could halt the government's efforts to revive the economy.

Global Insight (Reino Unido)