Greece faces new unrest over pension reforms

Greece faces new unrest over pension reforms

As part of its third bail-out package in summer 2015, the Greek government agreed to reduce its large – and growing – burden of state pensions. The proposed reforms, however, are likely to cause new unrest and impede growth.

 After more than five years of austerity and declining living standards, Greece convulsed in 2015. In January the left wing Syriza party won a general election on a platform of anti-austerity and embarked upon a strategy of seeking a new bail-out from creditors through a charm(less) offensive by finance minister Yanis Varoufakis.

After painful concessions were agreed upon, Prime Minister Alexis Tsipras called a referendum on the deal — Greece said no — , negotiated a very similar agreement, and then called another election, which Syriza won despite losing much of its more radical wing.

As Europe has been concerned with other matters, the spotlight has moved away from Greece. Nevertheless, the roll-out of these new austerity measures is running far from smoothly.

The events of last year derailed the fragile Greek recovery. The country dipped back into recession in 2015 and is still imposing capital controls, introduced at the height of the Grexit panic last summer. The Syriza government are hoping to stabilize the economy in 2016, and targets 3.5€ billion of privatization proceeds over the course of the year.

More salient, however, are the problems likely to be caused by pension reform. Greece spends a comparatively high amount – by EU standards – of its GDP on benefit and pension payments, and these was targeted for cuts by the creditors. The IMF in particular, although pressing for debt relief for Greece, has demanded cuts in pensions.

The government has tabled reforms that would make cuts in monthly state pension payments and transfer the burden to employers and employees. In addition, it aims to condense six pension funds into one. The proposed cuts amount to 1.8€ billion, or 1% of GDP.

In theory, reducing the huge level of Greek debt and size of the public sector could stimulate economic growth. The pension reforms, however, may have the opposite result.

In an economy where as many as 25% of the working age population are unemployed and tax rates are now prohibitively high, requiring employers to pay more tax in the form of social security is likely to obstruct new hiring.

Protests have already taken place against the pension plan in Athens, and unrest has the potential to mushroom over the issue.

It has also recently been reported that 60,000 Greek businesses have now relocated to Bulgaria in order to avoid higher levels of taxation and the panic induced by the capital controls imposed in 2015. Others have moved to Cyprus where the tax on companies is similarly lower compared to Greece. Offices have appeared in the northern city of Thessaloniki advising businesses how they can make the necessary legal arrangements to emigrate to Bulgaria.

A combination of the strictures imposed by the Troika and governing incompetence in Greece has perversely assisted employment levels in Bulgaria.

Huge, and most likely untenable, levels of debt are the millstone around Greece’s neck. Macroeconomic adjustment and retrenchment have been the main focus of the Troika but there have been far fewer ideas about how economic activity will increase in the country and allow it play a fuller part in the European and world economies.

The nitty-gritty reforms will need to tackle corruption and a sclerotic central bureaucracy, as well as devolving power to regions and cities, such as Thessaloniki under the reform-minded Yiannis Boutaris.

The Tsipras government has a majority of just three. A new crisis – caused by resistance to pension reform or other austerity measures – has the potential to lead to yet more elections.

During the crisis years Greeks have deserted the established parties – PASOK on the centre-left and New Democracy (ND) on the centre-right – over well-founded grievances that it was they who led them to the precipice.

As a result, voters have flocked to the extremes inhabited by Syriza, and even the neo-fascist Golden Dawn. This week, however, ND chose a new leader: the free-market orientated Kyriakos Mitsotakis.

By most European standards, Greece has plenty of room for liberalization. Despite the attentions of institutions such as the IMF and ECB, Greece has declining scores on rankings like the World Bank’s Ease of Doing Business and Heritage Foundation’s Liberty Index list, where it is now considered ‘mostly free.’

For the time being, however, the government will struggle on with its paradoxical programme of anti-austerity rhetoric, whilst implementing the conditions of the bail out. Its pension proposals, in particular, could spark new problems in Greece.

Categories: Economics, Europe

About Author

Robert Ledger

Robert Ledger is an analyst on European affairs, with a particular focus on the Balkan and Caucasus regions. He has an MA in International Relations from Brunel University and a PhD in political science from Queen Mary University London.