GREECE CRISIS : AUSTERITY CAUSES PROBABLE FREEZE OF SALARIES

courtesy; Sunday Times


The Greek austerity measures have already caused riots and a worsening of the economic picture in Greece.  As many predicted, the austerity program, while trying to reign in profligate spending and replete the coffers emptied by decades of tax evasion and corruption, has had a negative side effect.  It has contracted the economy, and made unemployment worse.  

That translates into less revenue, and less tax collection.  And that ultimately leads to the problem the Greek government is facing now: the inability to pay its employees by the beginning of summer.  What is worse, it might be unable to pay its pensions.

Many have criticized the austerity measures from the onset.  A reduction in spending causes a reduction in revenues.  And that nullifies the austerity measures principal goal: to enable Greece to repay its debts.  

And if the civilian salaries go unpaid there could be the premise for a full scale civil war.  

One of the problems that was discussed during the bailout talks, was Greece's large financial burden in the subsidization of pensions that were too generous and were given for too long a period of time.  Right now Greece has 1.3 million pensions to subsidize.  It also has 800,000 state employees, who represent a staggering 25% of the working force in the entire country.  

If Greece is unable to pay these commitments, the impact on the population and by reflection the state revenues will be very large.  And the promise of repayment of the staggering debt Greece has accumulated, will fade even farther into the future.

Salaries and pensions had already been targeted by the austerity program, and cuts were as high as 40% to both. But the bailouts have a staggered increment reduction of those payments, and this year it is supposed to hit 50%.  People then would have half the money to purchase goods and pay taxes than they had years before.  The goverment has also implemented new taxes to try and bolster their revenues.  

Another cause of unrest is the government's piecemeal sale of critical interests such as road management and gas and energy companies.  As the private companies assume management of  the interests, they start to charge citizens for services that were once free or were regulated against price increases.  

The problem with the austerity then, is that it strikes at both sides at once and that, many say, is not a sound plan.  The citizen cannot be asked to forego half his salary and also pay increased taxes.  What that does is render the citizen unable to pay for goods, necessary and not, and in so doing causing a severe contraction of the economy.

In fact, unemployment in Greece is now almost 27% and it could reach 31% next year.  

Another thing that is causing concern is that the money raised by the increased taxes and cuts made by the government are going to pay off lenders, and to boot to serve interest, not even capital.  None of the money generated, it seems, is coming back to the Greek economy.  The result is that debt is increasing instead of being reduced.  

Debt was 120% of GDP at the onset of the crisis.  Now it is nearly 175% and could rise as high as 190% by next year. 

What many people are calling for is an entirely new plan, one that would devote some of the raised revenue to the country itself, and the rest to repay the debt.  They need to that, most are agreed, to elicit some economic growth.

The other thing that is undercutting Greece, is that the reduced salaries of people who are now seeing their minimum wages reduced by 40-50%, are not generating any new business investment from abroad.  The measure was taken to foster foreign investment and better competition.  But foreign investors have stayed away, and more and more businesses are closing.

Some contend that this is just growing pains, and that the economy is turning around.  There are small signs of hope, such as significant increases in export activities.  They even predict that the recession will end by the end of 2013 or beginning of 2014.

But that is only possible if the summer crisis is averted and the unemployment numbers fall.

Partial sourcing: Al Jazeera 2.24.13       
    

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