Approval for Pension System Overhaul

In a historic vote, the Greek parliament yesterday approved a major overhaul of the country's pension system in a bid to revive its economy. The reform was initially agreed by the centre-left Pan-Hellenic Socialist Movement (PASOK) government in May, but was since amended a dozen times before receiving final government approval last week, and eventually the approval of parliament yesterday . The bill has received the support of all 157 PASOK parliamentarians, against 134 lawmakers from the opposition right-leaning New Democracy (ND), Communists (KKE), leftists (SYRIZA), and nationalists (LAOS).

The bill unifies the retirement age at 65 for men and women, cuts pension benefits, and reduces payouts by calculating salaries on lifetime income, as well as reduces the red tape for dismissing workers.

Revolution Did Not Happen

The bill was approved amid the 6th nationwide strike this year, organised by Greece's major trade unions to protest the proposed measures. An estimated 12,000 protesters marched through the streets of the capital Athens while lawmakers discussed the bill. In addition, dozens of flights were cancelled, public transport—including some ports and railways—was paralysed, journalists produced no news content, and hospitals treated only emergency cases. Parliament workers also staged walk-outs, providing only a skeleton staff during the pensions debate. Nonetheless, the strikes—although affecting flight and ferry services and thus having an impact on the tourism industry—are somehow losing momentum. In previous demonstrations the attendance was considerably higher, and in May even escalated into violence that left three people dead. The intensity of the protests has probably subsided in the wake of the previous violence, but also due to the fact that protesters have begun to realise that the government is determined to push the reforms through despite public opposition. Therefore, although many Greeks disagree with reforms, the protests are starting to be symbolic, as the urgent need for major overhaul and austerity measures gradually sinks in. The dwindling public outcry eases pressure on legislators and increases the chances that the future reforms will be passed without any major obstacles.

Test of Survival

Yesterday's vote was very important for the ruling PASOK party, and represented a test of its unity. The harsh austerity measures generally go against the party's leftist ideology, and PASOK has come in for strong criticism from the opposition, public, and trade unions alike as a result. The latter are in principal allies with the left-leaning government and losing their support could be a major blow for government stability. The PASOK government has recently shrunk its 10-member parliamentary majority into 7 seats, after three of its members refused to back the austerity measures during the May vote and were consequently expelled by the party leader and current prime minister, George Papandreou. Papandreou was expected to apply such measures after yesterday's vote, but that would have considerably lowered the party's already thin majority, jeopardised implementation of future reforms, and undermined government stability. The government collapse in the middle of testing times would have had a detrimental impact on the country's economy and future outlook. PASOK's unity during the pension vote assures markets that such trends will continue in the future, and that government stability is assured—at least for now.

Outlook and Implications

With the pension system reform bill successfully out of the way, the government can concentrate on future steps to reduce the country's debt and curb the deficit. Although ministers recently assured the public that there are no short-term plans for further austerity measures, the healthcare system is also in need of major overhaul and can be next in line on the government's agenda. A second bill proposing an increase of the retirement age to 65 for civil servants is scheduled for a parliamentary vote next week, and the privatisation process is also already under way. It is important that the government also tackles the low competitiveness of the economy by making its domestic markets more flexible—although some progress has already been done.

The public protests will be subdued in coming weeks as many Greeks break off for the summer holiday, but the social tension could once again escalate in the autumn when the previously agreed austerity measures come into force and the public starts to feel the pain. Furthermore, much will also depend on the success of these reforms, given that Greece could experience a major outcry if the toughening measures fail to pay off and the state of the Greek economy does not improve.

IHS Global Insight believes that the success the government has had in implementing pensions reform should have a positive impact on its credibility in international markets. There is a consensus that the economy faces a long-term solvency problem, and the pension system was seen as an important source of uncertainty. Although this reform reduces the risk of a debt structuring in the future, risks still remain high and the government still has a long road ahead before its fight is won.