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Will Greece be a model for attacks on public sector workers in other countries?

Below is a recent New York Times article on the possible effects of the wholesale attack on public sector wages and working conditions in Greece. This article suggests that the attacks may cause significant economic problems (deflation, recession, increased government deficits) and will not ultimately be accepted by the public.

I think it is safe to say, however, that the majority view from the mainstream media is that the current economic problems in Greece are an opportunity to hammer public sector workers, reduce public sector services, and change the balance of power between labour and business in favour of the latter.

Whatever the ultimate outcome, the battle in Greece will likely influence the treatment of public sector workers in all developed nations (including Canada). With its strong unions and left wing parties, Greece will be a tougher nut to crack than many other nations.

Leftwords: Defending Public Healthcare:

New York Times PARIS — Greece, effectively bankrupt and with a European gun to its head, committed itself to years of austerity on Sunday when it signed a financial bailout deal with the European Union and the International Monetary Fund.

But there are serious questions about whether the deep cuts in salaries and benefits the agreement calls for are politically sustainable over time, even as deflation will make it impossible for Greece to grow its way out of debt.

There is a consensus that the Greek economy is broken and needs major structural reform, and the deal done on Sunday is intended to give Athens a couple of years of breathing room to change the fundamental pattern of Greek behavior.

The government is now committed to whack back the public sector, including pensions and popular social benefits; to raise consumption taxes to record highs; and to promote tax reform, in an effort to shrink the enormous black market, reduce tax evasion and increase government receipts.

Some influential economists, however, fear that such harsh measures risk killing the patient, even as they see the intensity of Greek pain as a serious warning to other countries that use the euroto get their own economies in order before the currency union itself is undermined by rampaging market speculation.

This new wave of austerity also risks pushing the entire European Union into a period of artificially low growth just as economies are trying to recover from the recession of last year, caused by the huge housing and banking crisis that started in the United States. Negative or low growth will increase already sizable unemployment and put new pressure on government spending, as well as on the banks themselves, and make it harder for everybody to reduce their debts.

“How can Greece grow out of its debt if there is deflation?” asked Jean-Paul Fitoussi, a professor of economics at the Institut d’Études Politiques in Paris. “Deflation increases the debt burden, so we are following this virtuous circle that is bringing us toward hell. Economics has nothing to do with virtue, which can kill an economy.”

There is also some doubt whether this latest package of 110 billion euros over three years will be enough to calm the markets, which may then turn on other vulnerable countries, like Portugal or Spain.

Some countries that use the euro — Germany, in particular — need to pass legislation to come up with the money, although European Union officials said Sunday night that funding would be in place before May 19, when the next major tranche of Greek debt must be rolled over.

Embedded in the euro and thus no longer in control of its own currency, Greece cannot take the easy way out of its debt by devaluing. So Greece must either cut its spending sharply or default on its loans — which would badly damage German and French banks carrying a lot of Greek debt.

That is considered one reason President Nicolas Sarkozy of France has been so quiet on the Greek crisis, Mr. Fitoussi said. The Greek deal “is an indirect way of bailing out French and German banks,” he said. “The French understood this from the start, but Germany didn’t seem to.”

Katinka Barysch, an economist and deputy director of the Center for European Reform in London, said that that realization had hit home in Germany. “It might be unpopular for the Germans and Europeans to bail out Greece, but it will be even more unpopular for them to bail out the banks that owned Greek bonds,” she said.

Thomas Piketty, the founder of the Paris School of Economics and a professor there, thinks that the demands on Greece, driven by a market frenzy, are simply too high.

“Austerity can be justified, but 8 percent interest rates on a debt that amounts to more than 100 percent of gross domestic product is just crazy,” he said. “They will have to restore their public finances and then pay back this huge debt at the same time — and Greek debt amounts to so little when you compare it to what was needed to bail out the banks” last year.

“Not only is this not going to help growth, it’s going to end very badly, politically speaking,” Mr. Piketty said, referring to Greece. “Taxpayers cannot accept this in the long run.”

On Sunday, the Greek finance minister, George Papaconstantinou, forecast a deeper than expected recession of 4 percent for 2010 and 2.6 percent in 2011, before the economy supposedly returns to growth of 1.1 percent in 2012. “We will be in recession for the next few years, which means that we have to run faster to reduce the deficit,” he said.

But no one really knows what will happen in 2012, or if the Socialist government of Prime MinisterGeorge A. Papandreou, elected on a platform of increased prosperity, will still be in office. Standard & Poor’s suggested last week that the euro value of Greece’s gross domestic product may not return to last year’s level until 2017.

“Unfortunately for economists, there is democracy,” Mr. Fitoussi said. “If you impose too strict a program, the population will refuse.” Some countries, he acknowledged, have responded quietly so far to deep cuts, like Ireland and Latvia. “But Greeks are not Latvians,” he said, citing serious worker demonstrations already this weekend.

Yet the problem is deeper for Greece than for other vulnerable and relatively uncompetitive countries, like Portugal and Spain, where the budget situation before the crisis was fairly good, even if overly reliant on a housing bubble. “If growth stays negative or low in Greece, the fiscal debt will continue to increase, whatever they do,” Ms. Barysch said, while difficult structural reforms to liberalize the economy will take time.

The economists she speaks to “don’t really see a solution for Greece in the longer run,” she said. Some argue that Greece should stop using the euro, as Argentina dissociated itself from a peg to the dollar in 2002, devaluing its currency and soon returning to growth, although with high inflation. But others say that since Greek debt is denominated in euros, leaving the euro zone will be too expensive and disruptive for a society in crisis.

Greece is functionally bankrupt, Ms. Barysch said. “For most European officials and experts, it’s not about fostering Greek growth, it’s about the stability of the euro zone.”

For Nicolas Véron, a senior fellow at Bruegel, an economic policy research organization in Brussels, Greece is paying for its past sins of easy credit and false statistics, and has no choice now but to restore the health of its public finances.

“I don’t think there is an economic debate on this, because restoring fiscal sustainability must be the first step,” he said. “They can focus on growth afterward. But at this point, there is no way for Greece to escape this very painful process.”

Still, Mr. Fitoussi warns that the crisis is not over — that the market will move against other countries, to see if the Europeans have the will and the funds to protect them, and that the Greek government will not survive the painful adjustment.

“There will always be another government,” he said. “But in the process Europe will have lost its credibility, by imposing on a country an unbearable program.”


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