Tuesday, 4 September 2012

Resistance to change: 3 reasons Unions and the Public are unreasonable

One of the usual pieces of news in the EU (especially in the South) is that spokesmen from various trade unions declare that they will not accept/negotiate/give in to the reforms that the Troikans or the nations' governments (or both) are proposing. It is my opinion that in order for the spokesmen/leaders of several organizations to appear powerful, they indulge in a game of what in economics is called an "incredible threats" (an incredible threat is a situation where somebody would threaten to do something that would harm himself as well as the other. Rational people would never choose to propose nor do any of those threats. An example is: a person enters your car and threatens that if you do not give him money he would blow your car with him inside it.) These are the reasons why I consider the aforementioned threats are incredible (or irrational):

1. Neither the Unions nor the Member-States requesting bail-outs are in a proper position to negotiate, since they are not considered credible any more. The lack of credibility derives from the fact that during the crisis their actions had been close to none. The only countries which are currently trying to restore market confidence are Italy and Greece. Only after their creditors are convinced that much has been done by their respective leaders will Italy and Greece (especially the latter) be able to negotiate. That is exactly what the Greek Prime Minister is trying to accomplish at the moment with harsh austerity measures which will allow him to expand the austerity horizon by 1-2 years. One may easily realize that if a national leader is not able to negotiate, the Union leaders or spokesmen have even less ability to do so. (In a similar note, the Cypriot GDP contraction is expected to be 1.5% in 2012 rather than 0.5% as it was originally estimated, another incredible estimate from Cyprus)

2. Not imposing any reforms or other austerity measures is even more irrational than imposing a lot rapidly (e.g. Greece). Blame for the current situation in Greece can only be assigned to the Greek politicians who had been overspending over the last 10-20 years. The political system in Greece was correctly defined as Kleptocracy rather than democracy. Both Italy and Greece are considered more corrupt than all of the other EU nations, where Cyprus, Portugal and Spain are just above average. In order for the crisis-ridden states to move forward and hope for a better future many necessary reforms should take place, notably concerning the public sector size and pay-scale. Reforms should also promote more transparency, so that nations may regain their lost credibility and their people will start believing in them again. (A major issue both in Italy and Greece)

3. Union leaders and others believe that when salaries, wages or benefits decrease, their lives will be more difficult. Although this may be partially true in the short run, (up to 6 months) in the long run, prices will adjust to the lack of liquidity (i.e. money) in the economy and they will subsequently fall. Let's use Greece as an example here: the proposed austerity measures state that the cuts will be 2% for pensions of up to 1,000 euro, 3% for pensions from 1,000 to 1,300 euro, 5% for pensions from 1,300 to 1,600 euro, 10% for pensions from 1,600 to 2,000 euro and 15% for pensions of 2,000 euro and more.  This would mean that all prices in the Greek economy would drop (though not from one moment to another, although much faster than any other other nation), which may even raise the standard of living for the Greeks.

People cannot distinguish between nominal and real income. Neither can economists in their real life. Obviously people would like to see their salaries and benefits rise in perpetuity regardless of prices. However, this is not rational thinking as with a 3% inflation and a 2% rise in wages people would be worst off. This was exactly what had happened over the last few years after the introduction of the Euro in the Southern EU nations. (for more details see here)

Although it may appear to be unthinkable to many, especially those who are -erroneously- relying on the state to cover their expenses, accepting the reforms and  austerity measures will be the only way forward.

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