Political considerations and recent court decisions deeming the wage cuts imposed on special categories of civil servants unconstitutional are making it harder for the bailout program to stay on track. This is not good news for the citizens who have borne the brunt of austerity measures since 2010, exceeding 30 percent of GDP, because they will likely be called upon to assume an even bigger burden in the future.
Greece has taken fiscal measures totaling approximately 63 billion euros or 34 percent of GDP to streamline its public finances since 2010, the year it requested the bailout program, through 2014. This breaks down into spending cuts of 33 billion euros and tax hikes of 30 billion euros to achieve a targeted primary surplus equal to 1.5 percent of GDP in 2014 from a primary deficit of 10.5 percent in 2009. There is no question that the fiscal adjustment is huge, amounting to about 12 percentage points of GDP in five years.
However, the effectiveness of the fiscal program is disappointing, standing at about 44 percent, since the country took measures of 63 billion euros to have revenues exceed primary spending by 28 billion euros to this year, assuming the 2014 target is attained. This largely reflects the bigger-than-anticipated drop in economic activity, which some attribute mainly to the overdose of austerity and others, like the troika, to insufficient progress in structural reforms.
We would expect the country to take advantage of the favorable international conditions for the europeriphery and intensify its efforts to surpass the fiscal target and exit the bailout program ahead of schedule. However, this does not seem to be the case. With elections for the European Parliament and local government just a few months away, the coalition government appears to be having difficulties in passing legislation opposed by some of its 153 deputies in the 300-seat Parliament, while the main opposition leftist SYRIZA party continues to take the lead in opinion polls. Moreover, the government also appears to be offering breaks to at least one group, i.e. to farmers demanding breaks on bad loans in a bid to fend off their protests about new taxation measures ahead of the elections.
Of course, this comes as no surprise as politics have almost never failed to disappoint in election years.
However, recent court decisions ruling that wage cuts to judges, the armed forces and other emergency services are unconstitutional have made the attainment of budget targets even harder. These decisions could mean a permanent increase in annual budget spending of 500 million euros from 2014 onwards while some 700 million euros may have to be returned to the above groups for cuts suffered over the 2012-2013 period. Moreover, talking to public sector workers in other areas reveals that there is a sense bitterness as they feel they have suffered more in terms of wage cuts and job losses but cannot hope for a similar outcome because they do not belong to the core state.
Under these circumstances, the achievement of the 2014 primary surplus is clearly at risk and may require additional tax hikes or/and spending cuts after the May elections to meet the target. But it will be even harder for the two-party coalition government to pass such restrictive measures if the conservative New Democracy and the center-left PASOK party do not do well at the polls. This may lead to greater political uncertainty and no or little fiscal action. However, Greece has no other source of financing other than the EU and the IMF, and it will be forced to take measures at some point.
History shows that the longer a country waits, the harsher new measures will be. Greece will be no exception and the burden will largely fall on the shoulders of workers who have no job security and are not shielded from pay cuts. Unfortunately, there is no way to avoid more pain and the cost of austerity seems to be unevenly spread by the state mechanism, which plays a central role in an economic model rooted in the 19th century.