Delayed Mediterranean pension and labour market reform

Although Greece experienced exceptional growth rates, reaching almost 4 per cent of GDP between 1999 and 2008, growth failed to translate into improved competitiveness and healthy public finance. The global financial crisis of 2008-9 and the related economic downturn imposed an enormous strain on Greek public finances. Public debt rose from 106 to 127 per cent of GDP in 2009, when the fiscal deficit had to be revised to 15.4 per cent of GDP. Financial markets responded by increasing spreads on Greek bonds and by lowering credit ratings. Since the largest overruns in the state budget concerned the social security funds, and given the projected increase in public pension spending, cuts were imperative.

The new social democratic government led by Georges Papandreou, which came to power after the elections in 2009, indicated a turn to the left. The PASOK government pledged to make truly draconian spending cuts and boost tax revenue in return for a €110 billion bail-out from the EU, and the IMF approved in mid 2010, when unemployment was reaching 15 per cent. In order to avoid default and to manage servicing its public debt, the socialist government was forced to reconsider its public spending in the form of strict budgetary austerity. Along with the higher taxes and wage reductions, Greece's austerity packages included severe social security cuts, aimed at improving public finances. In the area of pensions, Papandreou set out to curb widespread early retirement schemes (Greek Government, 2010a). The average retirement age was raised from 61.4 to 63.5 and all pensions frozen over a three-year period. In July 2010, the Greek parliament agreed to a new structure for the pension system, whereby assistance and insurance functions are separated (Greek Government, 2010b). Immediate austerity measures, designed to save €3 billion by 2012, put a freeze on all pensions during 2010-12, abolished the 13th and 14th monthly payments, and introduced a 'pensioners' solidarity contribution', a progressive tax of higher pensions above €3,500. Many existing privileges enjoyed by certain groups were abolished. The statutory retirement age was set to rise to 65, voluntary exit plans to be abolished, and pension benefits to be linked more closely to lifetime contributions (Greek Government, 2011). From 2015, pension benefits will be made up of the newly introduced basic (flat rate) component, amounting to €360 at 2010 prices and granted on a 12-month basis, and a PAYG element based on life-time earnings (Natali, 2010). The era of retiring at 50 on full pension has passed; people will need to work until 65, with 40 years' full contributions. Social insurance transfers have been cut and more means-testing introduced (Greek Government, 2010a). The Greek government hopes to collect more social security contributions by cracking down on evasion and undeclared work. Labour market reform has primarily been directed at enhancing flexibility, including more scope for temporary work, and the liberalization of services and closed professions. In a new round of austerity measures adopted in early 2011, the Greek government cut nominal wages in the public sector by 15 per cent and public and private pensions in the order of 10 per cent (Greek Government, 2011). Cuts in public sector employment will add up to 82,400. One civil servant in ten retiring in 2011 will be replaced and only one in five in coming years. In the area of education, two thousand schools were closed and had to merge. On the revenue side, excise taxes were raised by 33 per cent on fuel, cigarettes, and alcohol. Top income tax rates were traded up, compensated for by lower tax rates for lower income groups. On the other hand, the income tax-free bracket was lowered from €12,000 to €5,000. Moreover, VAT rose from 19 to 23 per cent. Finally, the government aims to raise €50 billion from a large privatization strategy by 2015: selling stakes in banks, port operators, state land, airports, and mining rights. All tax allowances apart from child support were abolished. New property taxes were introduced and excise duties were also raised considerably. Contrary to the tradition of effective resistance to reform on the one hand and widespread social conflict, the welfare austerity package has largely been implemented. In the long run, the social reforms implemented in recent years could lay the foundations of a financially viable and socially fairer pension system (Matsaganis, 2011). This is, however, contingent on necessary administrative reform of the ineffective Greek state, which constitutes a long-term process. On the other hand, there is the risk that additional austerity reforms (introduced in September and October 2011), negotiated with the EC, the ECB, and the IMF, could push Greek economy with spiralling unemployment figures into years of protracted stagnation, with the highly unwelcome consequences of extreme political backlash.

Further contraction and unabated decline in domestic demand took a toll in worsening labour market conditions, with unemployment reaching close to 17 per cent in July 2011. Structural reforms in the areas of taxation, collective bargaining to promote wage flexibility, pensions and welfare benefits, and the liberalization of professions progressed only slowly, held back by poor administrative capacities, intensified social resistance of key occupational groups, and a disconnect between legislation and implementation, while privatization plans were delayed (IMF, 2011 я).

Recessionary pressure made it increasingly difficult to keep up adjustment progress. In early November 2011, after months of bitter social protests, Greek prime minister Georges Papandreou tried to secure broader support for further adjustment through a referendum. A massive political backlash by other eurozone leaders and the EC President, threatening to call off an already overdue tranche of €8 billion of international aid, and domestic politicians, including ministers from his own PASOK government, ultimately made Papandreou willing to resign and make way for a three-party coalition government of national unity, comprised of PASOK, the main opposition party New Democracy, and the LAOS party, and led by a technocratic prime minister, Lucas Papademos, a former vice president of the ECB, which remained in office until new elections in 2012.

In Portugal, by the end of 2010, the public deficit stood at an estimated 7.3 per cent of GDP and the debt-to-GDP ratio had risen to 84.6 per cent, while unemployment hovered around 12 per cent. Public services were paralysed by a general strike in November 2010. By the early spring of 2011, borrowing costs rose precipitously, and it became clear that after Greece, Portugal also required EFSF assistance. In May 2011, Portugal became the third eurozone country, after Greece and Ireland, to receive EU-IMF bail-out support of €78 billion. The social-democratic government of Jose Socrates announced a range of austerity measures aimed at cutting the 2011 deficit to 4.6 per cent with the aim of accelerating budget reduction to below 3 per cent by 2013 (Portuguese Government, 2010). In the austerity drive top earners in the public sector, including politicians, saw a 5-10 per cent pay cut. The standard rate of VAT rose from 20 per cent to 23 per cent. There were to be income tax hikes for those earning more than €150,000. By 2013 they will face a 46.2 per cent tax rate, up from 42 per cent in 2009. Military spending is to be cut by 40 per cent and the launch of two high-speed rail links—the Lisbon-Porto and Porto-Vigo routes is delayed. As with Greece, in education, teaching staff is to be reduced by 5,000 through more efficient class formation, teaching allocation, closures of small schools, and reductions in scholarship support. Pensions and other social benefits were frozen, family benefits, unemployment assistance, and pension tax allowances cut, and indexation in social benefits suspended. Moreover, social transfers became subject to means-testing. On the other hand, employment services expanded with a strong focus on active labour market policies and training programmes. New programmes for young jobseekers include the launch of 50,000 apprenticeships and financial support for the hiring of young people. In addition, employment services are to be improved by professionalizing account management, job placement sector agreements between employment agencies and business associations, and more focus on the improvement of basic skills of the unemployed on social assistance. With respect to labour market regulation, new legislation of 2011 served to decentralize collective bargaining and establish a new model severance pay, aimed at reducing the costs of corporate restructuring. It will become easier to shift to temporary reductions of working hours. A new centre-right coalition government took office after elections in June that is able to rely on a large enough majority in parliament to enact additional austerity measures under the EFSF bail-out conditions. The new government, led by Pedro Passos Coelho, that came to power after the election in June 2011, aimed at bringing the budget deficit down to 5.9 per cent of GDP by the end of 2011. The new government entered consultation with the social partners over temporary adjustments to working, unemployment insurance, fair criteria over dismissal, and wagesetting procedures, all with an eye to making the labour market more flexible (IMF, 2011b).

In Spain, unemployment doubled to about 20 per cent of the workforce between 2007 and the end of 2010. Meanwhile, the Spanish budget deficit rose to over 9 per cent of GDP. Over 2008 and 2009, the Spanish government, led by the social-democrat Jose Luis Rodriguez Zapatero, introduced a stimulus package including a new benefit for jobless workers who have exhausted unemployment assistance, a new personal tax credit, together with a partial mortgage moratorium for the unemployed, and various other measures. By mid 2010, as a response to financial market pressures and calls from the European Commission, a set of austerity measures was approved for 2011. These included a tax rise for the top earners (at 44 and 45 per cent) and 8 per cent spending cuts, amounting to €27 billion in 2010-11. Civil servants pay was cut by an average of 5 per cent (up to 9.7 per cent) in 2010 and frozen for 2011. A freeze was also applied to public pensions, together with cuts in cash benefits and a tightening of the eligibility conditions for the temporary unemployment assistance scheme. The tax on tobacco rose to 28 per cent together with an increase in the standard VAT rate (from 16 to 18 per cent) and excise duties. In addition, the Zapatero government planned to sell 30 per cent of the Spanish lottery and a minority stake in the country's airport authority. A tax rise of 1 per cent was applied to personal income above €120,000. Smaller savings included an end to newborn-child benefits. Madrid also stopped paying a monthly subsidy of €426 to the long-term unemployed who were no longer eligible. Finally, the Zapatero government pledged to reform the pension system, including a rise in the retirement age from 65 to 67. The Spanish government agreed with the social partners to suspend the revalorization of pensions in 2011, excluding minimum and noncontributory pensions. What is strikingly different from the austerity packages of Greece and Portugal is that Spain, under socialist rule, tried very hard to preserve social protection and investment in human capital. Emergency measures included special benefits for the long-term unemployed reaching the end of their entitlement to regular benefits, minimum and non-contributory pensions, extra assistance and benefits for the dependent groups in society, and child tax deductions. Expenditure on education continued to rise, including an overall increase in scholarships of 107 per cent in value and 30 per cent in the number of beneficiaries from 2004. The socialist government also kept up the pace in the expansion of education for 0-3 year old children, with a 101 per cent increase since 2004. Finally, the government continued to place strong emphasis on activation, mainly through a special focus on the reskilling and re-employment of people losing their jobs as a consequence of the crisis. In the area of labour market regulation, the government approved moves to give employers more control over the deployment of workers, while making it cheaper to fire—and therefore easier to hire—permanent employees.

In Italy, the budget deficit was estimated at 5 per cent of GDP in 2010. The centre-right government led by Berlusconi, re-elected in April 2008, implied a turn to the right. Berlusconi approved austerity measures in the order of €24 billion for the years 2011-12, amounting to about 1.6 per cent of GDP (Italian Government, 2010). The government decided to cut public sector pay and freeze new recruitment, replacing only one employee for every five who leave. Progressive pay cuts of up to 10 per cent are planned for high earners in the public sector, including ministers and parliamentarians. Retirement will be delayed by up to six months for those who reach the retirement age in 2011. Pressed by the ECB, the Berlusconi government had to step up its austerity ambitions by August 2011. The new 2011 austerity package was intended to cut the fiscal deficit by €48 billion and balance the budget in 2014. However, the new package added only marginally to deficit cuts worth €25 billion that the government approved in 2010 to rein in public finance in 2011 and 2012. The new consolidation measures included cuts to the budgets of central government ministries (worth a total of €1 billion in 2012, €3.5 billion in 2013, and €5 billion in 2014), a salary freeze for public workers, to be extended to 2014, important cuts in subsidies of provinces and towns (worth €3.2 billion in 2013 and €6.4 billion in 2014), cuts to health spending (worth €2.5 billion in 2013 and €5 billion in 2014), savings from state pensions, including delayed retirement and a tax on pensions over €90,000 p.a. At the same time, the retirement age for women working in the private sector was raised from 60 to 65, but not until 2032.

Rising youth unemployment (30 per cent in 2011), as in Spain and Greece, has exposed many of the deficiencies of the Italian system of insider job and welfare protection, in the absence of a legal minimum wage and adequate social assistance protection. However, the Berlusconi government continued to reason that structural reform was unnecessary, favouring buffering solutions for labour market insiders, rather than more proactive reforms to improve the plight of labour market outsiders. Social assistance was perhaps the main victim of the budget cuts, through the massive curtailment of regional transfers for social policy. In August 2011, the Berlusconi government agreed to implement a new austerity package, including spending cuts and tax increases, aimed to balance the 2013 budget. But after the ECB started to buy Italian sovereign bonds to calm financial markets, Silvio Berlusconi, pressed by the Lega Nord, immediately watered down his austerity measures. In early November, when the ten-year bond yield jumped up to close to 7 per cent, eight deputies of his own People of Liberty Party supported the opposition in a vote of no confidence by abstaining, after which Berlusconi pledged to resign. President Giorgio Napolitano intervened to make way for a technocratic caretaker government led by former EU Commissioner Mario Monti. Next, in early December, premier Monti presented his €20 billion austerity package to parliament, including pension reform, together with tax increases and the reimposition of property tax, in an attempt to make necessary 'sacrifices' socially 'equitable' for the Italian people.