And then comes the mandated deeper round of austerity measures, which will slash the wages of police officers, firefighters and other state workers who are protesting in Athens, and raise the taxes of citizens already inflamed by a recession-plagued economy and soaring joblessness.
After winning a pivotal confidence vote on his new cabinet last week, prime minister George Papandreou now has an even tougher task: to carry out a radical remedy of forced auctions and fiscal austerity for a sickened economy already in a deep slump.
The EU, the European Central Bank and the International Monetary Fund, known as the ‘troika,’ say that is the only way out for a heavily indebted Greece, while some economists say the programme resembles medieval bloodletting – a dose of pain highly unlikely to revive the patient.
Papandreou’s first task is to persuade his governing Socialist Party to pass a bill that would save or raise about $40 billion by 2015, equivalent to 12 per cent of Greece’s gross domestic product, through wage cuts and tax increases, at a time when the economy is shrinking.
To put that in perspective, spending cuts and tax increases of a similar scale in the United States would amount to $1.75 trillion, considerably more sweeping than even the most far-reaching proposals for reducing the US federal budget deficit. And Greece has promised to generate another $72 billion by selling off prime state assets, which many Greeks consider a fire sale of national patrimony.
While the commitment to austerity will allow Greece access to a fresh infusion of international aid, a growing chorus of economists say that the government’s new programme will at best delay default and a restructuring of its debt, which is already more than 150 per cent of the country’s gross domestic product. Steeper budget cuts and tax increases, they say, are the enemy of economic growth, which Greece desperately needs to make its debt burden lighter.
“You cannot keep on milking the cow without feeding it,” said Konstantinos Mihalos, the president of the Hellenic Chamber of Commerce in Athens. In fact many economists fear Greece has already entered a ‘debt trap,’ where paying the interest on its mound of debt requires more and more loans. “The Greeks have been told to accept more of the medicine that has already failed to treat the disease,” said Simon Tilford, chief economist at the Centre for European Reform in London.
The Greeks have already reduced their deficit by five percentage points of the gross domestic product, “unprecedented cuts in a modern economy,” Tilford said. “But the cuts have had a much stronger negative impact on the economy than the troika imagined, and fiscal austerity has pushed the economy deep into recession. Debt can only be paid out of income, and that means growth.”
Greece does not have access to many tools to fight recession, like devaluing its currency or cutting interest rates, at least as long as it remains a member of the euro zone. Its monetary policy is controlled by the European Central Bank.
No choice
Some independent economists accept that Greece has no choice but to try a fresh round of cuts. Edwin M Truman of the Peterson Institute for International Economics in Washington said Greece had to go through more pain because it had run a budget deficit even before making payments on its debt, meaning it needed loans to pay off its loans.
“As long as they’re running a primary deficit, they need to keep tightening the belt,” Truman said. “Rescheduling now doesn’t relieve Greece of the burden of fixing the economy to create a surplus.”
Only after Greece reorganises its budget, tax collection and labour market and is running a surplus – not including interest payments on the debt – can economists begin to calculate how much in debt payments Greece is actually able to afford, and then figure out how big a debt restructuring it needs.
It is not getting any easier. In the year since its first bailout, Greece has cut $17 billion through across-the-board wage cuts, layoffs and attrition in its bloated state sector, which employs 800,000 people, a quarter of the Greek workforce. But given its recession, the economy shrank and tax revenues fell, meaning that Greece did not meet the original target of a government deficit of 9.1 per cent of GDP as agreed with its foreign lenders, prompting them to demand more cuts.
European demands have placed Papandreou in an increasingly untenable position. He must sell the increasingly restive Greek people on more austerity with no clear signs of recovery. And he has to persuade his Socialist Party on reforms that undo almost everything the party has stood for in the past.
At least one Socialist member of Parliament, Alexandros Athanasiadis, has already announced that he will not vote for the new austerity measures, citing his opposition to selling part of the state’s stake in the electricity utility whose power plants dominate his district in northeastern Greece.
Last Wednesday, members of the public power company union, Genop, occupied the Transport Ministry and orchestrated some power failures to protest the sale, which seeks to reduce the state’s stake to 34 per cent from 51 per cent in the profitable company.
To many Greeks, selling that and many other state-owned companies and assets, even those that currently lose money, is tantamount to a loss of sovereignty – especially if wealthy investors from Germany and the other big European powers pushing austerity of Greece end up purchasing the assets for a hefty discount.
“We’ve always been advocates of privatisation because the national state cannot play the role of the entrepreneur and has in fact proven to be a complete disaster every time they attempt to do so,” said Mihalos of the Athens Chamber of Commerce.
“But at these extremely low levels, especially for those companies quoted on the stock exchange, we have to be very wary,” he added. “If we go by today’s values, as a result of the recession and the crisis the country finds itself in, it will be really selling the crown jewels at a pittance of their cost.”
Papandreou’s government has not managed to make a convincing case for the sell-off to many Greeks, where the idea of a fire sale has taken hold, setting off a wave of national indignation. “Imagine if you asked me for my apartment, and I gave you the whole building,” said Dorothea Ekonomopoulou, a public school teacher in Athens, as she stood among demonstrators in Syntagma Square.
