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In May 2011, I attended a conference in Barcelona, at which a European Commission spokesperson gravely assured me that political cooperation between the then ruling Socialist party and the main opposition party, New Democracy, was a precondition for success for the bailout programme.

In November, this condition was realised when a government of national unity was formed, comprising deputies from PASOK, ND and the right-wing LAOS party, under a “technocratic” prime minister, Dr. Lucas Papademos.

Since then, the true nature of Greek “political unity” has become painfully apparent. While the parties have cooperated to pass a 2012 budget, it is increasingly clear that the implementation of the reform programme as well as the laws already passed has stalled or even reversed.

No party is willing to pay the political cost of the real structural reforms that are required as a condition of the first and second bail-out packages. Instead, there is a continual jockeying for political positioning, while the Prime Minister, bereft of any political party support, tries to remain above the fray.

This lack of implementation is clearly seen in the lack of progress in implementing the “labour reserve” plan. This plan is intended to reduce the central government’s public sector headcount by 30,000 positions in 2011. Under the original plan, some 30,000 people were to be selected based on non-partisan, “objective” criteria, including their educational attainment and years of professional experience. They were to have been placed in a “reserve” status, which means they were to continue receiving a reduced salary (at a 60% reduction), while being required to take on minor tasks for a period of 12 months. If after these 12 months, they had not been permanently re-assigned to another permanent public sector position, they were to have been fired.

This labour reserve was first announced in July 2011, and is included as an objective from the first bail-out agreement in May 2010, but not as an explicit target. The numerical target appeared in the spring of 2011, and was ratified in July 2011.

The record of implementation since then has been slow. Public sector workers who met these criteria were supposed to voluntarily report themselves for inclusion in the reserve. Not surprisingly, few did, and the directors of the administrative units for which they worked did not either. As a result, last week the government had to take the step of threatening to withhold salaries from those workers who did meet the criteria, but failed to step forward.

So far, approximately 16,000 workers have been transferred to the labour reserve. This first round is apparently mainly comprised of workers with at least 33 years of experience, meaning that they are close to retirement anyway. Other press reports indicate that a large portion of these workers has chosen, or may choose, early retirement in advance of being placed in the reserve.

New Democracy objected to the choice of these individuals, and together with other “opposition” parties has issued statements claiming that political motives were behind the choice of many of the people placed on the reserve list. In one instance, New Democracy claimed that it would reverse many of the choices “when it came to power.” In another instance, ND claimed that the previous PASOK government hired 10,862 civil servants in 2011, twice the limit of 5,333 set as a condition of the bailout plan.

Greece’s creditors, and Greek citizens and taxpayers, are therefore confronted with two obvious dilemmas:

a. If the progress of implementation of the first 30,000-person labour reserve has proven to be so badly-managed, how will Greece implement the full cutback of 150,000 staff it has promised as a condition of the first and second bailout?

b. If there is such discord while ND and PASOK are members of the same government, what will happen in the next elections, when it is clear that probably one of the two parties will be in opposition?

The entire decision on the labour reserve illustrates the challenges facing the Greek bailout plan. First of all, the decision apparently has been taken based on purely arbitrary numbers: reducing the government headcount by 150,000 will do almost nothing in itself of improving public services, while it will create a financial burden in terms of social spending (unemployment insurance and pensions), as well as reducing consumer disposable income.

Taken together, these three elements may be equivalent to the public spending costs, which are intended to be cut through the labour reserve measure. The calculation of this is simple:

Lifetime costs of dismissal =

  • 1 year labour reserve at 60% salary for 30,000 staff +
  • 1 year statutory unemployment benefits for those on unemployment after termination +
  • early retirement costs (pensions + lump sum payment) for those taking retirement +
  • unspecified higher costs of lost productivity and staff promotions as a result of dismissal +
  • lost income, social insurance and value added taxes due to reduced consumer spending

Second, if this is to be managed correctly, there needs to be an integrated strategy and plan for the Greek public sector, including a retrenchment away from areas that it is no longer competent to function in, as well as a productivity improvement and e-government plan for the remaining services. None of this has been done.

Third, by removing the people with the longest experience in the public sector, the government is inadvertently removing many of the most competent people. While this is not necessarily negative (since many of these people are corrupt or not productive), the fact remains that you cannot simply gut a civil service on the basis of years of service and not expect an even greater dysfunction.

Fourth, using the years of service as a criterion for dismissal is, in most legal jurisdictions, discriminatory, and is likely a violation of employment rights and European law. Rather than protesting on the streets, I would expect the unions to challenge this decision at the Greek Supreme Court, or at the European Court of Human Rights, and win.

This is not to say that I am not in favour of a public sector rollback: I am, but only providing that certain assumptions and conditions are met. As I have stated in many other posts, I believe that there are any number of government positions where more front-line staff are needed, and that these staff need to be more properly remunerated.

The conclusions I draw from the current situation are that neither the Troika, nor the government, are working on a real, means-tested plan which is based on common sense and reality. There are many short-sighted, spasmodic gestures, which look good in an academic context or on paper, but cannot be implemented in the real world. The fact that the Greek political parties are, without exception, positioning themselves for February elections while avoiding real structural reform only exacerbates the situation.

Because I do not believe the situation will change in 2012, my longer-term conclusion is now quite simple: only a European political decision keeps Greece in the eurozone. January 2012 will bring a renewal of the war of words between the Troika and Greece, with additional instability for the eurozone. A future exit of Greece from the eurozone, or a termination of the second bail-out package, can no longer be discounted.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Public Sector Cutbacks And Political Paralysis In Greece