Government workers make up 20% of the Greek labor force. Worse yet, most of them cannot be fired for virtually any reason. That is about to change, and it’s a much needed change for the better.

However, the idea that it will reduce the budget deficit to required levels by 2012 or even 2014 is ludicrous. When that does not happen larger haircuts will be unavoidable.

Reuters reports Greek cabinet to approve ’12 budget, plan to sack state workers

The Greek cabinet is expected to approve a contentious plan Sunday to lay off state workers, and sign off on a draft of next year’s budget, in a race to slash spending, free up bailout loans and stave off bankruptcy.

Without the release of an 8 billion euro ($10.7 billion) tranche of an EU bailout, massively indebted Greece could run out of money to pay state wage bills within weeks.

To persuade the troika to release the loans, Greece has promised to raise taxes, cut state wages and accelerate plans to reduce the number of public sector workers by a fifth by 2015.

But all eyes will be on their forecasts for 2012-2014. If the inspectors conclude that Greece’s recession will continue to be worse than predicted, EU officials have suggested that banks that agreed to write-off 21 percent of the value of Greek debt in July may be forced to take more pain.

Sunday’s budget figures will indicate whether forecasts need to be revised. The government has been falling behind an ambitious deficit target of 7.6 percent of GDP for 2011, partly because of a deeper than expected contraction of the economy.

No part of the package is more contentious than the plan to lay off state workers — who make up a fifth of the Greek workforce and are guaranteed jobs for life under a constitution that bans firing them under nearly all circumstances.

The government plans to begin layoffs by putting 30,000 workers in a “labor reserve” by the end of this year. They would be paid 60 percent of their salaries for a year, after which they would be dismissed.

But the government has yet to announce how the plan would work. If most workers placed in the reserve are near pension age and planning to retire soon anyway, the savings would be negligible and the inspectors are likely to be unimpressed.

The deputy leader of the Christian Social Union, one of three parties in Chancellor Angela Merkel’s center-right coalition, said Sunday Greece may be better off leaving the euro zone if it cannot restore its fiscal health.

Alexander Dobrindt told Deutschlandfunk radio that a Greek exit from the euro would be a last resort measure and Greece would find it easier to recover outside the currency bloc.

“I believe it is a solution, if one wants to bring Greece back into an economically stable competitive condition, that this would be done outside the euro zone,” he said.

Unconstitutional Action?

From an eventual economic recovery standpoint, even more government workers should be fired than proposed. Moreover, the retirement age of workers needs to be increased, and pensions reduced.

However, such actions are against the Greek constitution and I see no reference the Greek constitution was actually changed. I can only find a call for a change by prime minister George Papandreou, on June 19, 2011: Greek PM calls for constitutional change amidst enduring crisis

Democracy International discusses the proposed referendum on July 15, 2011 in Direct Democracy in Greece & the 2011 Referendum

Greek Economy in Depression, will Further Collapse

Since government spending adds to GDP by definition, Greek GDP will collapse.

Worse yet, tax hikes are precisely the wrong thing to do in the midst of an economic depression, and will not aid the recovery in any time frame.

There is no chance Greek can make its budget deficit estimates unless they are radically changed, and probably even if they are radically changed (on my assumption the budget estimate changes will not be radical enough).

It will be interesting to see what kind of unrealistic haircuts the Troika comes up with next. Anything under 50% is ridiculous (with some estimates running as high as 90%). Yet I will take a wild stab at 30%, (up from 21%).

Looking ahead to the Exit of Papandreou

Looking ahead, prime minister George Papandreou will not survive the next election. He is hanging by a thread now, with a mere 4-seat majority in Parliament.

Will the next government go along with all these proposals? I highly doubt it.

What if Greece Says “* You” to the Troika?

All these actions by the Troika are based on the silly belief the Troika is in control of a Greek default and can set the parameters thereof.

The Real Deal

Greeks are so pissed at banks, at bailouts, at austerity, at Greek Prime Minister Papandreou, and at the Greek parliament the majority simply does not care if a revolt is worse than further austerity measures.

Greek citizens they have been lied to so often they probably cannot tell the difference between relatively good scenarios and disastrous ones if they tried. The one thing they do correctly understand is bailouts were not setup for the benefit of Greece, but rather the benefits of lenders.

So what would you do if you were Greek?

If you were wealthy and mobile you would pull your money out of Greek banks and leave. Otherwise, you would be at the point of telling the EU, ECB, and IMF “* You”.

Portugal and Spain are in the same boat, just not as advanced.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List