In this guest post, former IMF staffer Peter Doyle argues that in pushing for pensions, VAT and labour reforms, creditors are only stoking the latent explosiveness of Greece...
This is one of the most spot on post about Greece I’ve read for months now. The Greece problem is pretty complicated and I’ve been always averse of simple and easy conclusions in this matter. Yes Greek economy has some pretty fundamental problems:
Prior to 2009, Greece stands out with lower participation rates for this cohort than all but Hungary (males) and Malta (females). And the gender participation gap is also somewhat higher in Greece, but evolving.
So Greece is unusual, but why? Possibly early/generous retirement; possibly underreporting due to tax-evasion, low-pay, and/or predominance of agriculture and services; or perhaps skills outdating/mismatching and non-participation hysteresis; or public provision of education (easing the direct financial burden on parents of young adults); or health issues; and maybe slow-evolving gender cultural choices.
But if one thinks, that this problem is easy to fix, one can be mistaken:
Alongside, prior to 2009, unemployment rates in this cohort in Greece were either low (males) or middling (females); but no evident Greek stand-out. These unemployment data clarify that relatively low participation rates in the 50-74 cohort prior to 2009 did not evidently reflect withdrawal due to lack of jobs for them to find, the “discouraged worker” effect. Instead, they were, in that sense, some kind of voluntary/structural feature of the labor market.
To get a handle on the nature of those voluntary/structural characteristics of low Greek participation rates in this cohort, consider post-2008 developments.
Given how much room there was for them to rise towards European “norms”, it is astonishing that participation rates barely budged despite an extraordinary battering from policy changes aimed to shift them—with average pensions, wages, and public employment cut broadly by 50, 40, and 30 percent respectively. Greek male participation only edged up to end-2012 while Greek females continued their slow rise through early-2011. Then participation rates for both fell relative to their trends.
So, the conclusion is pretty straightforward:
This makes clear that any notion that the evident disfunction in the labor market in Greece—and hence the country’s long-term growth performance—is amenable even to enormous short-term parametric fixes on early-pensions, VAT, and wages in the current negotiations can be set aside. Disfunction is very deeply entrenched indeed.
The implication is that further draconian policy requirements on these matters in the current negotiations will primarily impact household income and fiscal out-turns, rather than raising potential-growth prospects over any policy-relevant horizon.
But if these pension, VAT, and labor reforms are, as evident, not potential-growth enhancing but immiserating, they are not “tough for Greece to swallow” but rather they are technically incoherent and so will not work. They “blindly” concern the supply-side when demand is the issue, and they aggravate demand problems. And if the corresponding debt reduction commitment is insufficiently clear or deep to radically dislodge the primary surplus targets, this “high political” deal will certainly be no means to avert disaster. It will only stoke the latent explosiveness of Greece.
So, instead, rather than compound the dire consequences arising from 2010 onwards occasioned by serially faulty IMF numbers on Greece, it is time to insist that IMF numbers do, finally, add up. And in that context, creditor proposals should be rendered technically coherent by withdrawal of these three unsubstantiated reform red lines and by immediate deep public debt write-offs to avert need for any further increases in primary surpluses.
Unfortunately, the events of last couple of weeks shows that the narrative and actions of the troika is consistently different. While I do find some kind of rationale behind the actions of Syriza I really cannot find it in the actions of EU. To me where there should be political desperation to hold Greece in the EZ, there is only the narrative that pushes Greece against the wall in the attempt to get them out, regardless of what EU politicians are officially saying.
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