Civil servants in the firing line

The government may be scrambling to meet the demands of the troika in cutting this year?s budget deficit close to the target and accelerating the implementation of structural reforms and privatizations to get the next bailout tranche, but the best message to the vested interests in the public sector may indeed be the delay of the next disbursement.

Whereas more than 1,000 Greeks were losing their jobs in the private sector every day in August, the government was assuring civil servants with lifetime tenure that their job privileges were not in danger and the so-called reserve pool was not intended for them but only for employees in the greater public sector.

Moreover, more and more people who are in work are not getting paid in what seems to be a unique case by Western European standards as companies face a drop in sales along with a liquidity squeeze as the credit crunch engulfs more and more companies.

In the meantime, many Greeks were surprised to hear the government had hired between 15,000 and 20,000 people in the public sector in various forms since the start of 2010.

At the same time, they were also hearing Deputy Prime Minister and Finance Minister Evangelos Venizelos claim the new, special property tax, which aims at raising some 2 billion euros or more per year in 2011 and 2012, was fair and analogous to each person?s economic situation.

Apparently surprised by the negative attitude toward Greece he encountered at the meeting of the EU finance ministers in Poland, Venizelos appeared more determined to take the additional austerity measures and satisfy the troika, with the approval of Prime Minister George Papandreou, who canceled his trip to the US to preside over a meeting of his key ministers yesterday.

It is true this government has repeatedly shown decisiveness in raising taxes or introducing new ones but much less willingness to slash spending in the overblown public sector. This has hurt its credibility with the troika, Greece?s EU partners and the markets.

By all accounts, the European Commission and the IMF would have been more willing to show leniency regarding Greece?s difficulty in reducing its budget deficit to 17.5 billion euros in 2011 from some 24.5 billion in 2010 if the government had taken advantage of the available time to implement some structural reforms, such as opening up many professions to competition, closing down one or two money-losing state entities, such as the the Hellenic Railways Organization (OSE), and privatizing state assets, not merely selling gaming licenses.

As we have said in the past, we find it awkward for a country facing the prospect of bankruptcy not to cut general government spending to around 44-45 percent of GDP from just below 50 percent last year. Equally, we find the government?s decision to increase taxes consistently to tame the budget deficit in the midst of a three-year recession appalling.

It is true that this is the result of widespread resistance from the major trade unions of the public sector as well as politicians, including ministers in the current government, who have thrived politically because of their positions or other business-favors-for-votes schemes which bind together the public sector and the Greek ruling political elite.

Since Greece is not facing a major bond redemption until December, which means the threat of default is not prevalent, its international creditors have an opportunity to send home the message that the government cannot rely on the next bailout tranche to pay salaries to civil servants and others unless it demonstrates in a short period of time its willingness to cut primary spending and start dismantling the monster that is holding back the Greek economy.

But cutting primary spending should not translate into the politically convenient cuts in the Public Investment Budget (PIB), partly co-financed by EU funds. As a matter of fact, PIB expenditures were down 30 percent year-on-year in the first eight months of 2011 to around 3.25 billion euros compared to a target of 8.5 billion for the year.

The kind of urgency shown by the government in meeting the demands of the troika may also be aimed at convincing hardliners in the public sector to accept changes which were unthinkable a year or more ago.

So the troika can facilitate the government to this extent by dragging its feet as long as necessary for the anti-reformist forces to get the message since Greece cannot default. This could mean the disbursement of the next tranche of 8 billion euros might have to be delayed and some civil servants may not be paid fully in time. It is something many in the private sector have already experienced but the general public is not fully aware of this.