The change in the Greek negotiating team appears to have helped reinvigorate the talks with the official creditors. However, insufficient progress has been made that would allow a resumption of aid payments. Aid has been cut off since the middle of last year, six months before Syriza’s election.
The official creditors have three demands for conditions for resuming assistance. The Greek government’s proposals must be 1) fiscally sustainable, 2) facilitate financial sector stability, and 3) not undermine competitiveness.
The first two conditions are not problematic. The political paralysis has weakened the economy and what was once projected to be a primary budget surplus this year is looking like a deficit. Nevertheless, the government seems willing to commit to a primary surplus of around half of the previous agreement of 3%. The Syriza government also recognizes the importance of a stronger banking sector.
The rub is the third condition: competitiveness. The official creditors appear to think about competitiveness in terms of labor costs. This is wages and benefits, including pensions. The Syriza government is resisting such pressure. It argues that austerity in those areas weaken the economy, as well as creating more social dislocation (what it calls a humanitarian crisis). The IMF has previously indicated that it under-estimated the fiscal multiplier–or how mush austerity impacts the economy but seems reluctant to correct its error.
It is in this context that yesterday’s parliamentary action needs to be understood. Parliament approved the government proposals that in effect reverse earlier public administration reform. Greece’s parliament approved plans to re-hire 13,000 civil servants. It also eliminated the annual evaluations and merit-based promotions.
The re-hiring plans include the municipal policy force that had been disbanded about a year and a half ago. There are also “several thousand” caretakers at state schools that will be re-hired. Some 600 cleaning women in Varoufakis’ finance ministry will also be re-hired, as early as next month, according to reports.
