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IMF’s Blanchard Says Greece Probably Needs to Decrease Wages

Feb. 6 (Bloomberg) -- The International Monetary Fund expects Greece will have to reduce 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 to increase productivity 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.

The lack of competitiveness in Europe “is sufficiently bad in a number of countries that it can only be solved by some kind of social pact in which there is an agreement on nominal wage cuts” 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, he said.

Private Creditors

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.” Still, he said he expects the writedown on private creditors’ holdings to be “very large.”

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.

The only way out for Greece is “a reduction in debt, progress on wages, on labor costs and the commitment by the Europeans to extend funds for as long as it’s needed,” Blanchard said. “Under these three conditions it’s still a terribly ugly and unpleasant path but it is at least one which can be tried.”

He contrasted the situation of Greece with Italy, where the fiscal efforts required are much smaller. He said he was optimistic the government would manage to do the adjustment needed.

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 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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