Brussels can help Greece overhaul public sector, boost competitiveness

The recent package of austerity measures may suffice to cut Greece’s budget deficit to 8.7 percent of gross domestic product this year from 12.7-12.9 percent in 2009 and help sooth market concerns about a liquidity crisis, provided it is fully implemented. However, the package cannot do much to alleviate concerns about the solvency of the country in the medium-term, unless another set of structural measures is adopted to make the economy more competitive and ensure the stabilization of debt metrics such as the public debt-to-GDP ratio. In this regard, the European Union can help the Greek economy become more competitive by insisting that it remove the most important obstacle to the modernization of the public sector: immunity from dismissal in the public sector. Greece was able to attract bids for 5-year bonds worth more than three times the amount of 5 billion euros it sought from the markets last Thursday, although at an expected steep interest rate, dismissing fears it could not access international markets. Undoubtedly, the restrictive measures and the successful sale of the bonds constituted a step in the right direction, which was long overdue. However, one should not expect market pressure to fall significantly in the next few weeks without clear evidence of real progress in fiscal consolidation and some stabilization of the country’s credit ratings. Of course, the spreads could fall significantly if some state-controlled banks in other EU countries were generous enough to advance to Greece a large loan to the tune of 10 to 20 billion euros, at a much lower spread than the market currently prices in, presumably after these banks get state guarantees from their governments for the loans. Nevertheless, Greece cannot rely simply on fiscal measures to rehabilitate its public finances in the medium-to-long term and put its economy back on a stable growth trajectory. This requires the adoption of far-reaching economic structural measures that no Greek government will be able to take without being pushed by Brussels and others, due to their high political cost. Facing an economic crisis and under pressure from the markets and its EU allies, the present government appears to be willing to go some way to reforming the ailing social security system, including taking measures to raise the retirement age and lifting barriers to competition in some sectors such as transport. In so doing, it vindicates those who argue that it is easier for a left-leaning government to take painful austerity measures than a right-leaning one, because it can convince the people more easily of its good intentions and provoke the least possible social unrest. Even so, this or any other Greek government would have to come under intense pressure from the European Commission to undertake more comprehensive structural reforms to boost productivity and make the economy more competitive in the long run. According to many analysts, one structural measure which really stands out is to do away with the immunity from dismissal in the public sector. The vast majority of Greek civil servants and others working in public enterprises are guaranteed lifetime employment. This practice arose from the country’s recent past, when any new government coming to power would fire the employees hired by its predecessor and replace them with its own supporters. Unfortunately, immunity from dismissal has been abused and simply offers hundreds of thousands of employees shelter from changing economic conditions. The fact that these employees cannot be fired, except for extremely serious reasons, has contributed to the decline of productivity in the public sector. Moreover, public servants are guaranteed promotions based on the years they are at work and can only move faster up the ladder if they have good connections with politicians and trade unionists. The latter resist any new hiring from the market, arguing that there are plenty of public servants who can do the job instead. It is like a soccer team that has to compete by relying on the same players without the right to acquire somebody new on the transfer market. This explains why the Greek public sector has ended up with employees who have few incentives to be more productive. It also has difficulty attracting talented people from the market for two reasons. First, it is difficult for the government to pay them market rates and second, the workplace culture fostered by the trade unions is quite abhorrent to them. This situation is not right but it may be easier for one to accept the bloated public sector when the economy is growing. However, it is not the same when there is a recession and some people are offered lifetime employment while others in the private sector, who may be more talented and productive, are called upon to finance the former and their jobs remain on the line. Of course, apart from being unfair, this also makes no economic sense and does not strengthen the competitiveness of the economy in the medium term. So, this situation has to end – but no Greek government has the guts to do it, because of the high political cost. Brussels can help it resolve this difficult dilemma.