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IMF's Thomsen indicates flexibility on wage cuts

By Tom Ellis

In an interview with Kathimerini, the International Monetary Fund’s chief of the IMF mission for the Greek economy, Poul Thomsen, has suggested that Greece’s lenders might accept a move to avoid private sector wage cuts if the government can prove that other reforms will increase the country’s competitiveness.

Thomsen also stressed the need to restore the balance between structural reforms and fiscal consolidation, admitting that there has been too much of an emphasis on fiscal measures so far.

People say that the IMF has changed its view on Greece, become much tougher, or even given up believing that we can succeed and will have to leave the eurozone. Is this accurate?

We want Greece to succeed. The cost of leaving the eurozone would be enormous, in the form of a sharp increase in unemployment and deep decline in wages, much worse than what we are seeing now. The fact is that the reforms and modernization of the Greek economy that are needed to restore competitiveness inside the eurozone are the same as those needed for Greece to compete in the global economy. Membership in the eurozone comes with huge advantages that make this modernization much easier than if you were outside. What the IMF has been saying is that after a very impressive start, the reform and modernization effort needed for the economy to become competitive and restore growth have lost momentum. We need to restore this momentum. There is no disagreement between us and the Government that reforms need to be reinvigorated.

What do you think about the strong criticism of Greece from abroad? It seems to suggest that we have achieved nothing. Are we incapable of doing what needs to be done?

I share the frustration of many Greek officials that much of the criticism from abroad overlooks the fact that Greece has done a lot, at a great cost to the population. While much still needs to be done, Greece has already come quite a long way. Failing to recognize this, will not help mobilize support for the program in Greece.

In this regard, I think that officials—myself included—need perhaps to be more sensitive to ensuring that we send a balanced signal when we say that the program is off track. While most of the targets and benchmarks for end-December were missed, this is not that surprising given the political turmoil during the last quarter of the year, and the fact that the new Government did had very little time to try to catch up. We need to resist sweeping conclusions about Greek support for reforms on the basis of the exceptional circumstance during the fourth quarter. This being said, reforms were too slow even before the recent political turmoil. Again, we need to restore the momentum.

Aren’t you concerned that the policies that you are recommending are causing a deep recession?

Yes I am. Recession, decline in wages and rising unemployment are unavoidable for a country that has to tackle a dual problem of excessive fiscal deficits and lack of competitiveness—that has to undertake painful fiscal consolidation and sometimes equally painful reforms at the same time. This is why the IMF has cautioned against an excessive pace of fiscal consolidation. While Greece certainly will have to continue to reduce its fiscal deficits, we would want to ensure—considering that social tolerance and political support have their limitations—that we strike the right balance between fiscal consolidation and reforms. We have argued to go a little slower as far as fiscal consolidation is concerned and move faster—much faster—with the reforms needed to modernize the economy. I think that you will see this reflected in the new program.

Are you advocating wage cuts?

Let me begin by saying what I think we all agree on. Greece still has a large competitiveness gap. Closing this gap will require actions on many fronts, not only wages, but it is clear that wages for the economy as a whole are too large compared to Greece’s productivity. One could hope to magically raise productivity to levels that will justify the current wage level. We are trying, but there is a limit to this. Thus, part of the adjustment must come by more closely aligning productivity in individual enterprises with wages. Reforms to the wage setting mechanism, to the system for collective agreements could help in this regard. I think that most of us agree on what I have said so far. Where we need to be more convinced, is that such reforms can deliver results in the foreseeable future. If not, we believe that the government should consider more direct interventions for a temporary period, until reforms become effective. These could include limitations on the minimum wage and possibly the 13th and 14th salaries. We are still discussing this. It is too early to say. We need to better understand what kind of reforms the government has in mind.

You have come under personal attack recently. You are said to be the problem.

Yes, this is unpleasant, but not surprising. And it reflects a deep misunderstanding of how the Fund works. Everything I say here, all the policy proposals and conclusions that we make during the discussions, have been carefully vetted by our colleagues in Washington before we come here. We go through a long and difficult internal review process where our colleagues take a very critical look at what we are proposing. This is really one of the strengths of an IMF mission: when senior officials speak to me, they speak to the IMF. My person is really not interesting in this regard. But I understand that there is a tendency to focus on the messenger rather than the message.

ekathimerini.com , Wednesday February 1, 2012 (09:52)  
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