Greek woes exacerbated by demands not connected to debt

Experts say creditors have tried to make Greece accept labor market reforms not directly connected to debt repayment

The Greek debt negotiations have always been about more than Greek debt: At one point they were even about the definition of fresh milk.

Last year, with the future of the European monetary union on the line, Greece and its lenders haggled over whether milk could be considered “fresh” after remaining on the shelf for more than five days. Greece’s interlocutors — known collectively as “the troika” and comprised of the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB) — insisted that the five-day shelf life discouraged milk imports, thereby driving up prices for consumers and contributing to a less competitive economy.

Compared to the other issues at stake, the fresh milk controversy was a minor point of contention. But that wasn’t the only time the troika demanded a policy change seemingly disconnected with the issue of debt repayment; in fact, Greece’s creditors have often demanded regulatory adjustments and labor market reforms that did not have an obvious bearing on the country’s financial stability.

“They’ve put forward a whole series of demands for policy reforms that have nothing to do with budget issues and are really more focused on labor market deregulation,” said Joshua Mason, an economist at John Jay College of Criminal Justice in New York.

In public statements regarding the negotiations, members of the troika have repeatedly emphasized the need for Greece to lower its debt and become financially sustainable. But Mason and other experts believe creditors are more focused on ensuring Greece adopts free market reforms.

“They have an agenda that goes beyond their supposed mandate,” said Mason. “It’s an agenda of essentially rolling back social democracy, of liberalizing labor and other institutions in Europe."

Labor regulations have served as a bigger target than fresh milk. Proposed creditor reforms have included extending the maximum length of the work week to six days and “[decompressing] the wage distribution” for public sector workers — essentially, paying the lower-paid workers less so that the higher-paid workers can earn even more.

Greece’s left-wing ruling party, Syriza, has been locked in a months-long stalemate with the nation’s creditors over the terms for debt relief. Tensions reached a fever pitch last week when Greek Prime Minister Alexis Tsipras announced he would put the troika’s latest terms directly to the voters in a July 5 referendum. On Sunday night, Tsipras decided to effectively shut down the country’s banking system until after the referendum has taken place, an emergency measure intended to prevent devastating capital flight.

An IMF spokesman said the organization would not comment on negotiations, but troika officials such as ECB executive board member Jörg Asmussen have previously suggested that “renewed competitiveness” in Greece would be necessary to resolve the crisis.

"How can we reverse the dramatic increase in unemployment? Reducing minimum wages in the private sector, removing rigidities in the wage-setting system: these are key elements of the strategy for accelerating the internal devaluation,” said Asmussen during 2012 remarks at a dialogue on Greece in Brussels. "They may not be popular, but there is no way around it if we want to create the basis for renewed competitiveness and employment growth."

But Pavlina Tcherneva, a Bard College economist who has written about the Greek debt crisis for Al Jazeera, called the requested labor market reforms “punitive.” In some of the harsher demands for reform, she sees an attempt to undo Syriza’s domestic economic platform.

“It’s difficult not to interpret this whole discussion as an attempt to discredit and marginalize a left-wing, progressive government,” she said. “It seems the existence of a progressive government is incompatible with the neoliberal market policies of the EU."

As evidence, she pointed to some of the recent back-and-forth between Syriza and Greece’s creditors over taxation. The Greek government has proposed increasing corporate taxes to reduce its debt burden. But the troika is seeking a higher value-added tax (VAT), meaning that more of the tax revenue would come from Greek consumers instead of corporations.

“If the objective is to raise revenue, why reject this particular tax move but insist on raising the value-added tax for the most vulnerable?” said Tcherneva. “There’s a logical inconsistency in that."

Mark Blyth, a professor of political economy at Brown University, was similarly critical of efforts to make Greece more competitive by reducing public investments and liberalizing the labor market. Blyth questioned the necessity of creating more labor flexibility in a country that already has 25 percent unemployment, and he mocked the idea that “what’s holding back foreign investors is the massive power of the Stalinist Greek unions."

Blyth, instead, argued for debt relief as the path out of crisis. Austerity has only exacerbated the problem, he said. Some empirical studies of the Greek economy, including one conducted by the IMF’s own research department, have suggested that sharp budget cuts slow down economic growth and further limit the government’s ability to cover its debts.

To Blyth, the notion that Greece should adopt further cuts is “a dangerous idea." 

“The definition of a dangerous idea is it’s a zombie,” he said. “It keeps coming back, and it’s immune to critical evidence." 

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