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Greek Parliament Approves Crucial Austerity Package as Global Markets Reel

Published: 07 May 2010
The Greek parliament yesterday approved a crucial austerity package, paving the way for a bailout from the European Union and International Monetary Fund.

IHS Global Insight Perspective

 

Significance

Greek legislators yesterday approved a tough austerity bill that will bring about more cuts in public-sector pay, pension reform, and further tax increases.

Implications

The vote is crucial in helping Greece to secure financial aid from the European Union and International Monetary Fund.

Outlook

Social unrest in Greece is on the rise and demonstrations could intensify when the new measures come into effect.

A Loathed Austerity Package

Despite increased social unrest and ongoing demonstrations, the Greek parliament yesterday approved a tough but crucial austerity bill. The legislation is essential for Greece to secure a 110-billion-euro (US$140-billion) bailout from the European Union (EU) and International Monetary Fund (IMF), which is vital to save the Greek economy from collapse. As many as 172 legislators, including members of the governing Panhellenic Socialist Movement (PASOK) and the opposition far-right Popular Orthodox Rally (LAOS), supported the bill, securing a majority in the 300-seat parliament. The opposition New Democracy (ND), the Communist Party of Greece (KKE), and the Coalition of the Radical Left (SYRIZA) voted against the legislation. Three PASOK deputies abstained from the vote and were consequently immediately expelled from the governing party, leaving Prime Minister George Papandreou with a parliamentary majority of just seven seats.

The following are the main measures enacted by the parliament:

  • Expenditure Cuts: Bonus 13th- and 14th-month wages will be scrapped for high earners and capped for low earners in the public sector. There will be a wage freeze for all public-sector workers. In the private sector, the legal maximum proportion of employees a company can lay off each month will increase from the current 2% to 4%. In the long term, the government will reduce the number of people working in the public sector.
  • Pension Reform: The new bill seeks to prevent early retirement, setting the minimum retirement age at 60 years instead of the current 53 years. The retirement age for women will be raised from the current 60 to 65 by 2013, bringing it in line with the retirement age for men. From 2015, the minimum number of years a worker will have had to have worked in order to qualify for a full pension will increase by three years to 40 years. Pensions will be reduced to reflect workers' average working pay rather than their final salary.
  • Tax Reform: Value-added tax (VAT) will increase from 21% to 23%. VAT on various products and services eligible for reduced rates will also see a slight increase. Alcohol, fuel, and tobacco products will be subject to a 10% rise in VAT. A new tax will be imposed on illegal construction.
  • Labour Market: The austerity bill will also make the labour market more flexible, ease the process of laying off workers, and open up various highly regulated professions to competition.

The measures are intended to cut the fiscal deficit from a currently estimated 13.6% of GDP to less than 3% of GDP by 2014 in order to comply with the Eurozone Stability and Growth Pact (SGP).

Markets Slump Worldwide

Greece's fiscal crisis and the risk of contagion elsewhere in Europe were the main factors behind a torrid day for the global markets yesterday. The U.S. Dow Jones Industrial Average was down a staggering 1,000 points at one stage, although it seems that trading errors contributed to this. The index ended the day down 347.80 points, or 3.2%. Asia and Europe have picked up today from where North America left off, sacrificing much of the gains made in recent months. Japan's Nikkei 225 closed down 3.1% today, on top of a 3.3% fall yesterday. Many have predicted a correction in overly exuberant markets, but this week's sell-off has been particularly severe. Sentiment was undermined in particular yesterday by the perceived inaction of the European Central Bank (ECB) as it failed to discuss buying government bonds at its regular meeting. Governments are now battling to counter perceptions of complacency. G7 finance ministers are holding a conference call later today to discuss Greece, and leaders of Eurozone countries will also meet in Brussels (Belgium) today to sign off on the support package for Greece. Agreement of this package and the Greek government's approval of the austerity measures have come as some relief, but the continuing surge in the yield on benchmark Greek bonds shows that markets remain doubtful that the country will be able to avoid debt rescheduling. The Bank of Japan has meanwhile pumped some ¥2 trillion (US$22 billion) into financial institutions today in a bid to ease liquidity and soothe markets. This is the first time it has made such a move since December 2009, when it acted amid global fears over Dubai's troubles. There are tentative signs that U.S. markets will lead a global rebound later today, easing the pressure on policy-makers somewhat.

Outlook and Implications

The Greek government and international markets will have breathed a sigh of relief when the unprecedented measures received parliamentary approval. Greece's economy is in tatters, and according to the government the IMF-EU bailout is the only way to prevent Greek insolvency. Although the bill was eventually passed with a majority of more than 20 votes, the outcome was for a long time uncertain. PASOK currently holds a parliamentary majority and Papandreou relied on this to push the reforms through. However, not all PASOK members are united in their support for the package, which contradicts the party's general social welfare policies somewhat. This had raised concerns that Papandreou's own party members might turn their backs on the crucial reforms. Furthermore, the opposition parties also rallied against the bill, arguing that the measures are too draconian and could exacerbate Greece's economic problems.

There is also a lack of support from the Greek public for the measures. For most of this week, Greece has been paralysed by a general strike, which claimed three lives when the Marfin Egnatia Bank in the capital, Athens, caught fire after demonstrators broke a window and hurled petrol bombs at the building (see Greece: 6 May 2010: Three Die as Greek Anti-Austerity Protests Turn Violent). Tensions have eased since the tragic accident, but demonstrations continued yesterday as some 10,000 people marched peacefully through Athens, while thousands of trade unionists protested in front of the parliament building. More protests are likely later this year when the austerity measures come into effect.

Yesterday's vote means that an important hurdle has now been cleared on the road to securing much-needed funds and hopefully a brighter future for Greece's economy. However, nothing is set in stone yet: the IMF and EU are likely to monitor very closely whether the required reforms are implemented in an efficient manner. The Eurozone/IMF funds should help to ease liquidity concerns in the short run. However, Greece's main problems are longer term and the government now needs to focus on implementing reforms to make the economy more competitive and assure the long-term sustainability of the public finances, including pension reform. This will not be easy: social tensions in Greece are likely to last and this could undermine the government's resolve to continue with reforms in the future. With this in mind, Greece will remain at the centre of international attention for many months to come.

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