Greece and lenders trap themselves over labour reforms

Agora Contributor: Nick Malkoutzis
Photo by Panayotis Tzamaros/Fosphotos
Photo by Panayotis Tzamaros/Fosphotos

Monday’s Eurogroup is about to roll around and Greece does not seem much closer to an agreement with the institutions. Prime Minister Alexis Tsipras appears ready to go in search of the fabled, but rarely-seen “political solution” to secure the conclusion of the second review but given where the various sides stand at the moment, looking up David Copperfield might be more useful.

While negotiations appear to be creeping forward on the more incidental issues, such as the liberalisation of the energy sector, differences over fiscal measures and labour market reforms are obstructing the path to any deal.

On the fiscal side, there appears to be enough room for manoeuvre so that a compromise can eventually be found. There are regular exchanges between Athens and the institutions about what expansionary counter-measures Greece will be able to implement from 2019.

The Greek government, for instance, seems keen to pre-legislate a reduction in the property tax, known as ENFIA, despite its high collectability rate. It is seen as a counter-measure that can have a clear and direct impact on people’s pockets, especially the lower income groups which will be adversely affected by the fiscal measures that the lenders are demanding: A 1 percent of GDP reduction in the tax-free threshold for personal incomes and another 1 percent of GDP cut in pension spending. Also, it might not be a coincidence that a 30 percent reduction in ENFIA over three years is one of the few economic policies that New Democracy leader Kyriakos Mitsotakis has so far presented to Greek voters.

Also on the fiscal wrangling, Greece still harbours hope of reducing the 2 percent of GDP volume for the new fiscal measures. Athens believes that there is enough evidence in the 2016 primary surplus (which Athens believes may have exceeded 3 percent of GDP against a target of just 0.5) to show that this figure can be reduced, meaning pensions will not have to be cut so much. The problem is that the 2016 fiscal data will not be ratified by the European statistics agency Eurostat until April 24 (the Greek agency ELSTAT is due to announce the final number on April 21), which could lead to the talks with the creditors dragging on way beyond even the next Eurogroup, which is scheduled to take place in Malta on April 7.

However, at least a path to a compromise is visible as far as the fiscal issue is concerned. The same cannot be said with regard to the discussion (or lack of) on labour reforms.

Labour reforms

At various points during the last seven years, Greece and its lenders have managed to tie themselves in knots over issues that, in the big scheme of things, are of relatively minor importance. We are living through one of those moments now as the International Monetary Fund pushes for further liberalisation of the labour market that nobody else seems to think is desperately needed and the Greek side insists on returning some rights to workers, having publicly claimed that this would happen before agreeing to it with the creditors.

Greece has implemented a raft of liberalisation measures since the start of the crisis, making its labour market far more flexible and bringing down unit labour costs. Beyond the confines of the IMF, it is generally accepted that further deregulation is not going to bring any tangible benefits. In fact, the European Commission – one of the four members of the quartet of lenders – believes steps should be made to bring Greece “within the framework of the EU social model.”

At least, that is what European Economic Affairs Commissioner Pierre Moscovici told MEPs when he appeared before a European Parliament committee this week. He also said that Brussels fully supports the recommendations made by the eight-member panel of Greek and international experts appointed by Greece and the institutions to examine labour legislation in the country.

The panel delivered its findings last September and on the issue of collective bargaining, which is important for the Greek government, recommended:

-     Representative collective agreements (i.e. if 50 percent of the employees in the bargaining unit are covered) can be extended by the state on the demand of one of the negotiating parties at sectoral or occupational level

-     The time extension, the after-effect and the duration of collective agreements are decided by the social partners

-     If social partners cannot reach an agreement the terms of an agreement may be established through arbitration

The wise men disagreed on the principle of favourability. One part of the group argued that lower level wage agreements cannot undercut higher level national/sectoral agreements unless social partners agree. The other part argued that that micro wage flexibility is important and the hierarchy of collective bargaining should follow a subsidiarity principle.

In his comments to MEPs, Moscovici said that it has been agreed that the favourability principle would remain suspended until the end of the programme in 2018 but acknowledged that the discussion over the extension principle has yet to run its course.

“The question is to know when the extension principle, which is the fact that a collective agreement that covers 51 percent of employees in one sector could be extended to all companies, can be implemented,” he said. “This is part of the discussion, I hope it will be part of the final deal.”

The Greek government’s complaint seems to be that during the actual negotiations, the European lenders are not contributing anything to the discussion on labour reforms. Instead, the dominant position is taken by the IMF. The Fund has been pushing for an increase in the threshold for collective dismissals (currently at 5 percent of the work force per month) and the scrapping of the need for pre-approval from the Labour Ministry for such action. The Fund also wants to see “appropriate” quorum requirements for unions calling strikes and for employers to have the right to implement “defensive” lockouts. It is also adamant that there should be no roll back of previous reforms, including those regarding collective bargaining, at this stage.

Product market

However, the Fund itself admitted in its recent Article IV consultation document that the area of the Greek economy that really needs reforms is the product market, rather than the labour market.

“The reforms [carried out during the adjustment programmes] allowed for a significant reduction in labor costs, helping to narrow Greece’s wage-competitiveness gap relative to trading partners,” IMF staff wrote. “However, parallel reforms intended to address rigidities in product markets have not generated the hoped-for increases in productivity and competitiveness, due to slow implementation in the face of strong opposition from vested interests.”

All of which means we have arrived at an impasse: The IMF wants more labour reforms but acknowledges that the previous ones failed to fulfil their potential because of obstacles in the product market, the European Commission wants Greece to return to the EU social model but is apparently unwilling to ensure that the agreement needed to conclude the review reflects that, and Athens has elevated the return of collective bargaining to the centre stage as make-or-break issues in the talks while the unemployment rate is above 23 percent and the economy has stopped growing.

Everyone has backed themselves into a corner and donned their straightjackets. Some magic is needed to get out of this situation. 

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