The austerity versus stimulus battle flamed up again as the Greek parliament approved massive layoffs of public workers. Now, the proponents of cost cuts in financially weakened nations will get up-close evidence about whether their philosophy will bring down deficits. They are unlikely to be pleased with the results.
Political leaders in Greece created a clever mechanism to move toward mass job cuts. First, more than 12,000 workers will be put into a special “reserve” before the end of the year. Most of these people will suffer pay cuts of as much as a quarter. Then, those for which new positions cannot be found will be fired. Since the government job pool in Greece already is dropping, most of these people will not be employed next year.
The International Monetary Fund and EU countries, particularly Germany, have threatened Greece with a withdrawal of financial support if austerity plans are not accelerated. The IMF has gone along reluctantly. Its chief, Christine Lagarde, is among prominent voices that have spoken against austerity. She has decided that it is better to have her views rejected than to see aid to nations like Greece compromised.
The pro-austerity argument does not need the IMF’s reservations to indicate whether austerity can further ruin Greece’s economy. Unemployment is already 25%. Among the young, that number is double. Some of those who have jobs are on strike enough that their contribution to gross domestic product (GDP) has been blunted. Without some significant means to add jobs, Greece’s GDP will plunge, and with it the ability to close deficits and slow a burgeoning national debt. Greece’s economy should contract about 5% next year, according to many economists. At this point, that number is optimistic.
Germany, first among supporters of austerity, believes and wants to see how well austerity works. As thousands or tens of thousands are added to the rolls of the unemployed, it will get its answer. It needs to be careful what it wishes for.