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Dimitri B. Papadimitriou

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Greece: How to Slow the Nosedive

Posted: 02/ 9/2012 3:36 pm

The latest negotiations between Greece and its lenders have ended, at least momentarily. Athens has agreed to endure ever-more painful pension, spending, and wage cuts, with monthly minimum salaries dropping 20 percent. The powerful leaders of 'the troika' -- the International Monetary Fund, the European Union, and the European Central Bank -- have charted the direction of Greek public policy for years to come: substantial austerity measures, including the lay-offs of thousands of workers.

Within those confines, how can Greek competitiveness be rebuilt? The overwhelming, key, and most urgent imperative should be to raise employment levels. Here's why:

  • The long-term effects of extreme unemployment on an economy have been well documented. The loss of output is permanent. Workers' skills deteriorate and become outdated, making the labor pool unattractive to potential employers.
  • "Informal" work -- the 'shadow' sector -- swells at the expense of the nation's formal economy, and in Greece, the grey-market is not just a statistical ding. It's widely estimated to compose (as is also the case in Italy) more than one quarter of the GNP.
  • Inequality increases. In Greece, Ireland, Portugal and Spain the recent rise is estimated to be as much as 10 percent. Dangerous ideological shifts accelerate, too.
  • Social cohesion disintegrates rapidly. Poverty, homelessness, and crime go up, along with poor health, depression, suicide rates and countless personal tragedies.

Greece now stands directly in the path of this onrushing apocalypse express. Between spring 2009 and mid 2011, its unemployment rose a heart-stopping 91.8 percent. The overall unemployment rate is now 20 percent; among youths, it's close to 40 percent, and expected to keep climbing. The damaged lives include 20,000 homeless, living in makeshift shelters during a miserably severe European winter, and an upswing in suicides and poverty.

As joblessness continues to snowball -- and if the odds-makers in the credit markets are right, expect an avalanche -- the unemployed themselves can involuntarily become a powerful force that prevents economic growth.

Until now, the Greek government has responded with small interventions to preserve jobs in the private sector. The emphasis has been on shortening the workweek (with the thought that more people would share the available work), and on employment subsidies.

But in places where reduced workweeks have been tried -- Germany, the Netherlands, Belgium, France, Australia and Japan -- they have failed to generate jobs. Employment subsidies have also been unsuccessful; they've tended to distort market mechanisms by interfering with employer decisions, and current workers end up being traded for newly subsidized ones.

Now, finally, in addition to those policies, a better option is being tried on a small scale: A labor department direct public service job creation program with an initial target of 55,000 jobs. Participants are entitled to up to five months of work per year, in projects -- implemented by non-governmental organizations -- that benefit their communities. A similar, streamlined, Interior department program, this one without NGO participation, will generate up to 120,000 openings.

This approach is the Greek government's best shot at slowing the nosedive in employment, and at circumventing further catastrophe. The plans have been designed to specifically address and avoid the nepotism, corruption, and favoritism that plague poorly conceived 'workfare' schemes. With proper targeting, monitoring, and evaluation as the projects move along, the outcomes should be impressive.

The alternative to an active government labor policy is to rely on the private sector to provide enough work to derail astronomical unemployment. What is the realistic likelihood for this in a nation where jobs are already scarce, and where the public sector, now being dismantled, has composed 40 percent of the economy? It's hard to be optimistic.

A privately fueled reboot of Greece would require colossal input from start-ups, large ventures, and foreign capital. Historically, these investors have found Greece unattractive. Its competitiveness is likely to erode further as the engineered recession advances beyond the first phase of austerity. The massive unemployment fallout will seriously degrade the climate that's desirable to the same private sector sources being counted on to make Greece more competitive.

Greece's economy is also characterized by a high percentage of self-employment and small businesses, totaling about 35 percent of all workers. The destabilizing events that accompany high unemployment include a downward push on retail sales and other consumption; global demand shock is amplifying the problem. As the economy contracts, how will these enterprises survive without intervention?

Before the crisis, Greece drove its growth with public spending and jobs. Now that the government is shrinking, the range of employment policies needs to grow. Public service job creation programs are the government's best prospect. During the coming years of austerity, thousands of Greek workers will remain idle because policymakers believe that this makes economic sense. It simply does not.

Dimitri Papadimitriou is president of the Levy Economics Institute of Bard College, which, with underwriting from Greece's Labour Institute, has been instrumental in the design and implementation of a social works program of direct job creation throughout Greece. He recently co-authored a report on Greek labor trends.