In November 2009 in Dublin, demonstrators protested against severe cutbacks proposed by the Irish government. (AFP)

Farewell to fixed incomes

Battered by the economic crisis and drowning in deficits, several EU states have opted to cut public sector pay rather than devalue their currency. The choice is unpopular but not unprecedented, reports Il Sole 24 Ore.

Published on 12 March 2010 at 16:31
In November 2009 in Dublin, demonstrators protested against severe cutbacks proposed by the Irish government. (AFP)

State salaries are no longer sacrosanct. Greece’s recent decision to cut civil service pay by about seven percent is but one in a long line of similar measures adopted a little over a year ago both inside and outside the eurozone.

The story starts not on the shores of the Mediterranean, however, but on the east coast of the Baltic. According to a recent study by Swedbank in Stockholm, in October 2009 public salaries in Latvia – the little Baltic country that led the pack in the downward wage spiral – dropped back to 2006 levels. The cutbacks, which were up to 20 percent for teachers and some other branches of the public sector, were fiercely contested last winter and spring but accepted in the end.

All the forecasts of imminent devaluation were proved wrong. The country weathered last year’s drop in GDP of over 17 percent. Now its balance of payments is back in the black. And its sovereign debt is no longer rated high-risk by the agencies.

What Latvia did – and other Baltic states more or less followed suit – amounted to a domestic devaluation. They maintained the exchange rates but trimmed wages. Real wages would have suffered the same setback in any case with a devaluation, as that would have triggered inflation. The pay cuts took a heavy toll on the standard of living in a place where average monthly wages come to about €500. But the national accounts held up.

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Staying in the eurozone is the name of the game

In Ireland, public pay cuts announced by the government in December are part of the overall rude awakening from the dream of turning the small nation into a financial empire. But the mood only turned ugly when, a few weeks later, the pay cuts for top-tier officials were softened up. The parliamentary battle was rough and the vote close but the cuts remain in place.

For Ireland and Greece, the name of the game is to remain in the eurozone. While it has brought bountiful benefits to both, to be sure, it now obliges them to adopt policies they could otherwise have bypassed by devaluing their national currency. That's something which is obviously not an option any more.

Fixed income, whether public or private sector, would have been penalised anyway, probably even more heavily, albeit in a seemingly less painful way. The case of Greece, which has been in the glare of the spotlight for months and raised so many questions about the staying power of the European single currency, has drawn attention to a phenomenon that already existed. It's one which could afflict other shaky economies in southeast Europe, such as Portugal and Spain, and graze Italy, which is not all that shaky, but should keep a watchful eye on events as they unfold.

A precedent exists for public pay cuts

Even Great Britain, which spent more to save its banks than the United States, should probably think things over before jeopardising the pound, which is already bruised. But to date the chancellor of the exchequer Alistair Darling has only requested a reduction in severance pay. As a result, the British Public and Commercial Services Union has already announced a three-day strike.

Public sector salary cuts have also been decided or announced in some central European countries such as Hungary and the Czech Republic. Like the Baltic states, they wish to join the eurozone and know that devaluating their currency will significantly delay their entry.

Another factor militating against devaluation is that many people in those countries have contracted debts in a foreign currency – euros, Swedish crowns or Swiss francs – and would be hard hit by any devaluation. So the governments prefer to slash salaries, starting with the civil service.

Public pay cuts have been unknown for two generations but older people may remember them all too well from the 1930s in much of Europe – starting with Italy and the UK.

Rescue plans

Civil Servants say no to self-sacrifice

On Friday 5 March, Greece was brought to a standstill by a public transport and air controllers’ strike. Portugal had been paralysed the day before by a strike staged by the civil servants’ union. The public sector is up in arms about the pay cuts prescribed in the rescue plans for these struggling nations. Greece has announced 30 percent and 60 percent cuts, respectively, in so-called “13th-month” and “14th-month” annual bonuses for state employees, while the Portuguese government has frozen civil service salaries. The belt-tightening measures also target pensions. These austerity plans will inevitably slow down the economy and will cause layoffs in the private sector as well, where the rise in unemployment is bound to drag down wages. The measures seem all the more unbearable to the workers concerned. They were not conscious of living above their means but only of catching up with their European neighbours’ standard of living. Alain Faujas, Le Monde (excerpts).

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