Dark side of Austerity

We have almost forgotten about the Greek Dilemma. With all focus on LTROs, Spanish and Italian bond auctions, Greece has certainly lost focus. Today the Troika & Co are back in Athens in order to try fixing the Greek mess. With all the political interest, sometimes we tend to forget what austerity means for the average Joe. Austerity sucks. From Ekathimerini;

So this is what it’s come down to. The negotiations over wages in Greece due to take place over the next few days will be a defining moment of this crisis, not because a reduction in the minimum wage or cuts to private sector salaries will make a huge difference to the economy but because it is a test of whether those involved in the process – labor unions, employers, the government and the troika – are prepared to face the truth. It is test of whether someone is willing or able to step forward with some kind of coherent plan.

It doesn’t take long to think of several good reasons why reducing private sector wages during a deep recession seems a suicidal idea. They include the fact that it would further undermine withering domestic demand and likely precipitate the closure of more businesses on top of the 38,000 that have shut down over the last two years. The more fiscally minded might point out that lower wages means lower tax revenues, which has a heightened relevance at the moment given that recent figures showed Greece raised 50 billion euros in revenues in 2011 compared to 50.8 in 2010 despite imposing a raft of new taxes.

Also, the troika-inspired austerity measures and Greece’s ham-fisted handling of the crisis have done a good job of shrinking the Greek economy over the last couple of years, making the country’s external debt grow in comparison. A wage reduction would perpetuate this cycle.

However, proponents of wage cuts argue that a reduction in labor costs would help make Greek exports more attractive and profitable while helping draw investment to Greece. Through this prism, revenues would flow into the country, production would take off, jobs would be created and the state of public finances would improve.

Full article here.