Greece Likely to Push Unemployment to Extraordinary Levels

Recently, each time Greece presents a new budget to the International Monetary Fund, EU and European Central Bank, it misses it target for debt reduction. This happened again yesterday.

The Greek Finance Ministry reported that its 2011 budget results will reduce debt-to-GDP to only 8.5%, which is short of the 7.6% it predicted in May. The results likely will force Greece to offer additional austerity measures beyond the $8.8 billion cut it has just proposed. There are few means to do that, but one is to cut more public sector jobs. Greece’s unemployment rate is already too high for its economy to recover.

Greece’s economy will contract by 5.5% this year and is forecast to drop another 2.5% next year. The figure for 2012 is a stretch. Nothing about the Greek economic situation would indicate that it can arrest its current GDP drop. The government plans to cut 30,000 workers this year. Rumors are that number may have to go as high as 200,000 between now and 2015.

The size of the Greek workforce shows how badly public sector layoffs will damage the chance for any economic recovery. The southern European nation has a workforce of 5 million. More than 15% of those people are unemployed. Among citizens 15 to 24 years old, the situation is more desperate. Joblessness in the demographic group is 25%. Less all of these unemployed, the effective workforce falls to 4.25 million. Government layoffs of 200,000 would push unemployment 2% higher. If the experience of the U.S. and other nations is any indication, that rise could cut another 1% or more from GDP.

Greece’s other employment problem is as bad as the raw unemployment figures. As much as 30% of total GDP is in an underground market that is not taxed. High joblessness is likely to raise that figure as more people out of work turn to a system designed to avoid paying the government. Those with shrinking pay or no pay at all are unlikely to pay taxes in a nation where tax avoidance has become an art mastered by hundreds of thousands of people. Without this tax revenue, the Greek budget almost certainly cannot be improved.

The plans of the Greek government to increase austerity to close its budget gap strike at the heart of any recovery — the ability of the nation to create jobs.

Douglas A. McIntyre