Euro Crisis Forces Deep Cuts in Social Benefits

Countries face drastic reductions as debt rises

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The Fiscal Times
June 3, 2010

The Greek financial crisis, which has pushed Europe to the brink of economic ruin and ravaged world financial markets,will lead to a fundamental restructuring of the European economy, according to international financial and government experts.  But what will this restructuring look like?

Clearly, Europe is on the cusp of huge change. In the coming years, the post-World War II social benefit structure that benefitted Europeans for decades will undergo fundamental adjustments, drastically altering the way Europeans live and work. Three countries that best capture the drama and severity of the crisis are Greece, Germany and Spain. The Fiscal Times reviewed these three pivotal nations to determine how Europeans will likely adjust to the crisis, as well as the likely barriers to change. What we project is a more nationalistic Germany, a Greece where consumers and workers pay heavily for corruption by the government and the wealthy, and a Spanish government trying to prove to the world that the country’s economy can persevere through the crisis.

Pre-bailout: Better known for its corruption than its efficiency, the Greek economy is largely sustained by tourism, which accounts for 15 percent of the country’s annual gross domestic product. However, the public sector drives the Greek economy, accounting for 40 percent of GDP. Public sector workers have received generous salaries, including 13 and 14 months’ bonus pay, an early retirement age and job security. The Greek government estimates approximately 700,000 people — or about 6 percent of the population — work for the federal government, although independent estimates put the number of Greek bureaucrats as high as 1 million.

In recent years, government corruption has been widespread, with Athens awarding sweetheart deals to contractors to build infrastructure for events like the 2006 Summer Olympics. These projects were funded through government bonds (now practically worthless), which led to the government lying about its debt levels, which led to the debt crisis this year. Greek Prime Minister George Papandreou has tried to rein in corruption but brought his own credibility into question when he admitted to understating the extent of his country’s debt.

Corruption is not limited to the Greek government. Private citizens, especially the wealthy, are notorious for their failure to pay taxes. According to a New York Times report, only 324 of 16,974 pool owners in a posh Athens suburb paid taxes on their pool. This same report estimated that as much as $30 billion in taxes went unpaid in Athens last year, an amount large enough to make a dent in Greek debt payments.

Despite endemic corruption, Greeks still live the good life. According to the Economist Intelligence Unit, the Greek standard of living is the 22nd highest in the world.

Post-bailout: While the bailout will have little effect on Greek private industry, it will have a serious impact on Greek civil services. The austerity package recently passed by the government contains dramatic cost-cutting measures, including an increase in the retirement age from 61 to 65, limits on pay bonuses, and salary freezes. Jobs are no longer guaranteed, as the plan allows more freedom in making layoff decisions. In recent weeks public workers have taken to the streets to protest the plan, but with a debt problem as deep as Greece’s, the changes are inevitable.

Post-bailout Greece will also be a different one for consumers. As part of the austerity plan, taxes on alcohol, fuels and luxury goods have increased to 10 percent. Cigarette taxes were also increased to 10 percent, creating a large financial burden in a country where 42 percent of people smoke. This could have a negative impact on tourism, as goods purchased by visitors will be more expensive.

Growing pains: It remains to be seen if post-bailout Greece will be a less corrupt place. Papandreou has promised reforms, but his efforts to date have been inconsistent. Corruption as systemic as Greece’s is hard to root out. Without a concerted effort by both politicians and private citizens, corruption is likely to be a lingering problem.

It also remains unclear if Greek workers are committed to the austerity measures enacted by their governments. So far, strikes and protests have been small in scale. If the protestors gain traction, continued turbulent times for Greece are unavoidable.

Pre-bailout: German economic power is based on its robust manufacturing sector and exports. Since the fall of the Berlin Wall, German companies like Volkswagen and Siemens have gained a worldwide reputation for their reliability and quality. Germany is now the world’s second largest exporter and the economic engine of the European Union. It carries large trade surpluses, while its consumption of goods from elsewhere is stagnant.

German frugality also extends to personal savings. Germans in the baby boomer generation, hardworking and ever mindful of Germany’s turbulent past, are among the most frugal in the world. Credit for purchases other than a home or car is rare. A 2006 report from the Federal Reserve Bank of St. Louis found that German personal savings rates have hovered around 15 percent since the 1970s, second only to Japan and well above the United States.

One of the key reasons Germans have been able to save is because of the generous social benefits programs. Germany’s universal health care system dates back to 1883 and covers everything from prescription drugs to prevention holidays, or trips to German resort towns on the government’s dime. Employment benefits are also generous, including one year of full unemployment insurance, followed by a staggered subsidy if work cannot be found within the first year of losing a job. Housing allowances are also provided to unemployed workers. 

An editor-at-large for The Fiscal Times, David Francis has reported from all over the world on issues that range from defense to border security to transatlantic relations.