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Cutting wages in Greece is inevitable, says Reichenbach

19 January 2012 / 23:01:34  GRReporter
2843 reads

Victoria Mindova

"You will not get away with wage cuts," is the meaning of the message of the head of the European Commission advisory group on economic growth for Greece Horst Reichenbach, who spoke to the members of the Athens Chamber of Commerce. He explained that competitiveness is related to productivity and economic growth, but also to the cost of labour. In the early years of the crisis, the cost of labour managed by trade unions was seriously overestimated. Therefore, Greece has significantly lost its competitiveness to other countries. As a result, it must reduce the wages until the competitiveness of Greek products returns to the pre-crisis levels. Reichenbach clarified that his statement has no political implications but is his personal opinion of an economist and it has no weight in the negotiations of the Greek government with the supervisory Troika.  

The European adviser said that this is one of the fundamental elements of economic and fiscal reforms - if a country loses its competitiveness by greatly increasing the level of wages and is not able to offset the difference in another way, their cuts in times of recession are inevitable.
The issue of cutting the wages in the private sector is one of the most pressing problems that the supervisory Troika of the International Monetary Fund, the European Central Bank and the European Commission will put on the table before signing the second bailout agreement. In Greece, the issue raises serious unrest.  Not only trade unions, but some representatives of employer organizations disagree with the wage cuts. The main argument of trade associations is that this will reduce the purchasing power of people even further, which will lead to further reduction of turnovers and thus, the state will not be able to collect the required tax revenues.

Reichenbach has agreed with the general feeling in Greece that the policy mainly of financial cuts without economic incentives pursued so far cannot continue. However, nothing can be done before the negotiations for the debt exchange are completed and the bailout agreement is signed. He stressed that these two conditions are necessary to assure investors that the country will continue to pay off its debts in euro in the medium term. Meanwhile, the government should not abandon its obligation to solve the most pressing tasks, such as cutting the red tape and streamlining the public sector.

According to Reichenbach, the main challenge remains how the sacrifices of the Greek people will be utilized in order to achieve positive results. He described the coming weeks as the most decisive. After the main concerns of PSI are clarified and the new Memorandum is prepared technically, Greece should receive the next tranche. The adviser stated that his group will undertake two major projects - the concession of several highways with a total length of 1,000 km and the launching of a waste management programme as Greece is seriously behind in it. Highway concessions will bring revenues of at least 1.1% of GDP and will open several thousand jobs. The beginning of the year saw the start of cooperation of Greece with French experts who will make a road map for the reforms in public administration.

Tags: EconomyMarketsReichenbachCrisisWagesCuts
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