Friday, 16 November 2012

Greece: Good Marks. Must Try Harder.

This article was published by PBS NewsHour.

A report on Greece’s progress leaked this week by the Financial Times suggests that the country’s bruising struggle to balance its budget is being appreciated, but the road ahead remains strewn with boulders.

The performance review by representatives of the so-called troika of Greece’s creditors - the International Monetary Fund, European Central Bank and European Commission - awards Greece high marks for a “very substantial” fiscal adjustment. Greece has closed a 36 billion euro deficit by 23 billion euro in just three years, leaving just a third of the way to go.

This sentiment was passionately seconded on Wednesday by Charles Dallara, Managing Director of the Institute of International Finance, which represents some 400 banks and private lenders. In a speech delivered in Athens, he called Greece’s course of cost cutting “nothing short of brutal”.

“That reform still marches on, and that Greece clings to the mantle of the euro with tenacity is testimony to the resilience, fortitude and courage of the Greek people,” Dallara said.

According to the original memorandum Greece signed with its lenders in April 2010, it should now be coming to the end of the process. Instead, it has asked for an extension to the end of 2016. A previous two-year extension to 2014 has already doubled the cost of its original bailout loan to 200 billion euro. This extension, the troika believes, will cost another 32 billion euro.

The reason for these setbacks is a slippery recession, which has claimed a fifth of the country’s economy and a quarter of its workforce in just three years. Greece has so far been forced to cut 49 billion euro in spending – more than twice the size of the deficit hole it has managed to plug. New cost cuts voted in last week will over the next two years raise that number to a staggering 62 billion euro, a third of the economy as it now stands. Greece is caught in a vicious cycle. As the economy shrinks its tax revenue falls, meaning that spending has to be reduced even further to achieve targets. That is why austerity policies keep being extended.

The report acknowledges this, calling the recession “deeper” and “longer-than-expected”. It also recognises that the spending cuts have deepened and lengthened it.

So can Greece be saved through fiscal retrenchment? The political opposition in Athens thinks not. At its heart sits the radical left Syriza party, which sees the memoranda of austerity measures as a political dead end that “devour their governments.” Syriza has in the past supported unilaterally defaulting within the eurozone. Recent polls show that it enjoys a slight lead of two to three points above the ruling conservative New Democracy. Embracing austerity as the responsible choice, on the other hand, has punished New Democracy and its main coalition partner, the socialist Pasok. They have fallen from a combined 77 percent of the popular vote in 2009 elections to 42 percent last June.

The four month-old coalition also bears the scars of last week’s legislative battles, where 13.5 billion euro in new cuts were approved. Eight of its members of parliament defected and were permanently expelled, permanently reducing its majority. Its smallest member, the Democratic Left, stepped aside in a crucial vote on the austerity package, showing that it has only one foot in the government. Unsurprisingly, the troika report says that “the political coalition supporting the government appears fragile and some components of the programme face political resistance.”

Prime Minister Antonis Samaras put a brave face on matters after approval of the budget on Sunday night, declaring the week a victory and promising a new focus on growth. But such bravado may not be enough to pull Greece through. Its creditors have stalled 43 billion euro in loan disbursements because they disagree on whether its debt is ultimately sustainable. A seven percent recession this year and 4.5 percent next year will mean that debt is worth 189 percent of GDP.

The troika report believes an additional four or five billion euros’ worth of spending cuts will be needed down the road, something that presently seems politically unlikely to happen. The most recent round of austerity was sold on the basis that it is final. Even what has been legislated won’t work unless “the structural reform agenda is fully and swiftly implemented,” an exercise involving further political bloodspilling. “This will require breaking the resistance of vested interests and the prevailing rent-seeking mentality of powerful pressure groups,” the report says. That is probably an understatement.

Even Charles Dallara, who presided over a 107 billion euro write-down of Greek debt for his members last March, felt that Greece needs more time. “It is time to recognise that austerity alone condemns not just Greece but the whole of Europe to the probability of a painful and protracted era of little or no economic growth.” He suggested more moderate targets, a lowering of interest rates on Greece’s bailout loans and a greater emphasis on pump-priming public projects.  

Greek workers would agree. As Dallara spoke, they took part in a strike along with workers across southern Europe, all hard hit by recession in the eurozone. State workers have long been affected by salary cuts. Now they are worried about layoffs, previously impossible because of union pressure, but now a fact. Two thousand government workers will go this year, starting with those in disciplinary proceedings for not doing their jobs properly. And that is just the start of a net loss of 110,000 public sector jobs over four years. In the private sector it’s the other way around. Workers are used to unemployment, now at 25 percent; but after last week’s austerity measures, their minimum take home pay will be as low as 430 euro a month. These are the ranks from which Syriza is constantly swelling its approval ratings. The markets used to be the main motive for ending the recession. Now it’s the desperate shortness of political time. 

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