Economic reform in Greece may require weakening of labor unions

Greece’s credit rating was reduced two levels to BB- by Standard & Poor’s this week, which said further reductions are possible as the risk of the country’s default increases. How can a nation facing its most severe economic crisis since the restoration of democracy in 1974 climb out of this deep recession?

Reform may require a substantial weakening of labor unions in Greece, as it did in pre-Thatcher Britain, says an economist at Washington University in St. Louis who has studied the Greek economy.

“Corruption, bureaucracy and a wasteful public sector stand in the way of pro-growth policies,” says Costas Azariadis, PhD, the Edward Mallinckrodt Distinguised University Professor in Arts & Sciences and co-author of a 2010 study on Greek economics published on the website Greek Economists for Reform.

“The main barrier to reform seems to lie in the enormous power vested in public-sector labor unions and professional associations, which exert considerable influence over the main political parties,” he says.

Azariadis says Greece is caught in a vicious cycle of austerity and deep recession. The country’s GDP fell 2 percent in 2009 and 4.5 percent in 2010. It is expected to drop another 3 percent this year.

“This recession makes it harder for the government to meet its revenue targets, forcing spending cuts that deepen the recession,” he says. “The only way out is to attract enough investment from domestic and foreign sources to grow the economy rapidly.”

Last year, in a paper on the website Greek Economists for Reform, co-written with Christopher Pissarides, winner of the 2010 Nobel Memorial Prize in Economic Sciences, Azariadis predicted that “market reforms (in Greece) will not succeed unless they are supplemented by powerful pro-growth policies.”

The two economists recommend massive changes to the Greek national economy and investment to reverse years of corruption and mismanagement.