February 13, 2012
There's something puzzling about the austerity bill embraced by the Greek parliament overnight. The package includes measures such as government layoffs that seem logical for a country flirting with default. But news reports are also discussing private-sector wage cuts. How is the government able to slash salaries in the private sector, and why would it imperil much-needed tax revenue by reducing people's incomes and embarking on what Reuters is calling "among the most radical steps backwards inflicted in peacetime in modern Europe?"
For starters, the Greek government isn't strongarming companies into cutting salaries; it's modifying labor law by lowering the minimum wage by 22 percent to €586 a month (around $780) -- roughly on par with Portugal's -- with a 32 percent cut for workers under age 25. Greece's foreign lenders -- the European Commission, European Central Bank, and International Monetary Fund -- have long demanded the cuts in exchange for a second bailout, and over the weekend Greek Prime Minister Lucas Papademos publicly endorsed the measure, which had nearly torn his governing coalition asunder only days earlier. The austerity program may be a bitter pill to swallow, Papademos allowed, but it will stave off bankruptcy and "restore the fiscal stability and global competitiveness of the economy."
Platon Tinios, an economist at the University of Piraeus in Greece, explains that the cuts championed by international financial organizations are intended to structurally revamp economies and make them more competitive. "Greece has a very rigid labor market, which has translated in the past 10 years into what essentially was jobless growth," he explains. "The point is to intervene in the labor market so as to increase the probability of jobs being created faster when the recovery comes."
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