Eurozone crisis: dispute over job cuts imperils Greece's hopes of more aid

Helena Smith in Athens and Ian Traynor in Brussels The Guardian, Thursday 14 March 2013 20.29 GMT

Troika of international lenders leaves country after failing to agree over future of 25,000 civil servants

A student protester uses a loudspeaker during a demonstration in central Athens on Thursday against austerity in education. Photograph: Marcos Andronicou/Demotix/Corbis

Greece's "troika" of international lenders – the EU, the European Central Bank and the IMF – have left the country amid a dispute over sacking 25,000 civil servants.

After extending their trip by several days, troika inspectors said they would return in April to finish their review.

Insiders confirmed that progress on an agreement to unlock the country's next €2.8bn aid instalment, vital to public coffers, had been impeded by creditors' demands to cut 25,000 civil servants from the state payroll by the end of the year.

Athens's fragile government had hoped to convince lenders of the need to gradually transfer the employees into a special labour reserve by 2014, citing record levels of unemployment, anger with austerity and growing social unease. None of the mission chiefs was persuaded, however, given the reluctance of past administrations to shed staff who under the constitution enjoy jobs for life. Other disagreements included a relief plan for overindebted households and a controversial property tax levied through electricity bills.

Although both sides put on a brave face and played down the postponement - with the Greek finance minister Yannis Stournaras saying "there has been significant progress in the talks with the troika" - well-briefed sources did not share the same view. A member of one of the governing parties said there were "very real concerns" that further aid disbursements to Greece would be stopped. "The government is not going to axe civil servants. Full stop. There are very real concerns that come the summer the next loan disbursement [from the bailout] will not be made. Nothing is certain."

If Athens refuses to press ahead with redundancies, the inevitability of the government having to adopt further cuts and tax rises looms. With revenue shortfalls in January and February described as much worse than expected, there are fears that the country's reform programme will be derailed.

The Greek impasse came as European leaders joined battle in Brussels in an increasingly sterile argument over whether austerity or stimulus was the magic formula for arresting decline and spurring growth in the EU and single currency zone.

But for the first time since the sovereign debt and single currency crises ushered in the age of austerity three years ago, the leaders of the 27 countries or the 17 of the eurozone were unlikely to take any far-reaching decisions.

The summit was the first since the heads of government were stunned by the outcome of the Italian election, which delivered a resounding rejection of the harsh medicine prescribed by Germany and administered by Brussels.

"Italy is the talk of the town," said a senior EU official. "One of the things that has shifted the debate is the Italian election. People are worried," added a senior European diplomat.

But all the signs from Berlin and Brussels indicated that while voters may kick out policymakers, they cannot overturn the policies since the room for manoeuvre in the declining economies of, say, Italy or France, as well as bailout recipients, is too narrow if they want to retain the confidence of the financial markets.

"If you need to get people to lend you money, if you finance yourself in the markets, an economic policy shift is not viable," said the senior diplomat. "It's about credibility."

The Thursday evening summit focused on economic policy options and was to be followed by another meeting of the 17 eurozone leaders at which Mario Draghi, the head of the European Central Bank, was to brief the meeting and was expected to name and blame countries failing to implement adequate structural reform.

While the draft summit communique repeatedly referred to the need to stimulate growth and deplored Europe's record levels of unemployment – more than 26 million – there was little sign of any departure from the "fiscal consolidation" that has been the preeminent response to the crisis over the past three years.

Nor was there any sign that Berlin was shifting its hard line on fiscal and budget discipline. Rather, the Germans stressed that the absolute priority was for Europe to regain competitiveness by reducing unit labour costs and through structural reforms to labour markets, pension and welfare systems.

The likeliest outcome was agreement on a set of policies that may take a little of the rough edges off the austerity packages, by delivering several billion euros to fight youth unemployment in the worst-hit areas or slightly relaxing budget deficit ceilings by allowing big public investment projects deemed eventually to be contributing to growth to be taken out of the calculation. Agreement was also expected on "flexibility" in interpreting the rules for national debt and deficit levels in the eurozone, signalling that countries like France, Spain, and the Netherlands could be given longer to observe the ceilings.

José Manuel Barroso, president of the European commission, admitted that jobless rates were nearing the tipping point of bearability and trade union leaders denounced the austerity policies as a failure.

"We are not dealing with figures, we are dealing with people who have feelings and votes," said Bernadette Ségol, head of the European trade union federation. "The policies put in place have failed."

While Berlin is reluctant to loosen the fiscal rigour, socialist-led France has become the cheerleader for a relaxation of austerity. But President François Hollande is not very persuasively challenging Chancellor Angela Merkel, said insiders at the economic debate.

Following the French, Italian, Dutch, and Maltese elections of the past nine months, all resulting in leftward shifts, there is a sense of greater resistance to German policy prescriptions which, however, has yet to have much impact.

Merkel is keen to avoid any big arguments or policy U-turns before competing for a third term in general elections in September, and little is expected to take place before that contest is settled.

"Before the German election no one will start a real debate," said the senior official.

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