IMF’s Blanchard Says Greece Probably Needs to Decrease Wages

The International Monetary Fund expects Greece will have to decrease wages to improve its competitiveness even after the country writes down some of its debt in cooperation with private creditors.

“There is no secret here, either you increase productivity growth a lot and quickly and you keep wage growth above it or you decrease wages,” International Monetary Fund chief economist Olivier Blanchard said in Washington today. Because structural reforms take a while, Greece “probably has to do something on the wage side,” Blanchard said.

Prime Minister Lucas Papademos is meeting with officials from the IMF, the European Union and European Central Bank in Athens today in a final push to settle the terms that will allow the debt-strapped country to receive a new 130 billion-euro ($171 billion) rescue package. State spending cuts and labor reforms are the main sticking points holding up an agreement, Finance Minister Evangelos Venizelos said on Feb. 4.

Blanchard said “under the most realistic scenario” Greece won’t be able to seek market funding “for a long time” until structural reforms take root.

Plans to cut about 100 billion euros off Greece’s some 200 billion euros of debt in private-sector hands are “only half of what it needs,” Blanchard said. “The other half is competitiveness.”

French President Nicolas Sarkozy met German Chancellor Angela Merkel in Paris and urged Greek officials to meet the conditions of the bailout today, saying time was running out.

Blanchard said that a firewall to quell the European turmoil has to be large enough and to amount to a combination of interventions by the European Central Bank, Europe’s two bailout funds and the IMF.

The IMF last month cut its global forecast for this year and next. Since then, data in the U.S. and Europe suggest growth there may higher than the IMF estimates, Blanchard said.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net; Maria Petrakis in Athens at mpetrakis@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; Stephen Foxwell at sfoxwell@bloomberg.net;

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