Greece: Going from Worse to Just Plain Bad
WASHINGTON -- On Sunday night, as buildings burned in Athens, Greek parliamentarians passed a new budget austerity package, demanded by creditors as a prerequisite for a new €130 bailout package. But eurozone finance ministers are now hesitating to approve their end of the deal in light of lingering questions about a €350 million hole in the Greek austerity plan and inadequate promises by Greek party leaders regarding the implementation of future austerity measures. While the leaders of Greece’s main parties gave written assurances in the end, the level of distrust in Europe is high and rising. Patience is running out on all sides. With public opinion turning ever more sour in creditor countries, appetite for more help is evaporating. This is likely the last aid package for Greece.
If it fails, Europe needs to have a fallback plan on what to do if Greece defaults on its debt, which now seems increasingly likely. And Greece will have even harder choices to make. So, what are the chances of success for the new program? The Greek austerity plan is intended to bring down public debt to 120 percent of the country’s gross domestic product by 2020 — a level comparable to that of Italy today — by, among other measures, reducing pensions and cutting 150,000 public sector jobs in the next three years. Furthermore, structural reforms in labor markets and the tax system, wage cuts, and deregulation of industries are supposed to boost Greece’s competitiveness in order to attract investment and spur business startups. In short, these measures are meant to increase market confidence. But wage and debt levels are not the only factor impacting confidence.
The visible level of suspicion between European and Greek leaders certainly doesn’t help instill faith in a successful outcome to this Greek tragedy. As austerity measures are set in place, further eroding internal demand, the Greek economy continues its downward spiral following an already dramatic drop in GDP of 6.8 percent in 2011. With further cuts on the way and the political landscape in Greece growing increasingly volatile, it is hard to see how market confidence will return anytime soon. On the contrary, as the dramatic late-night vote in Athens demonstrates, the success of the crisis management hinges on the ability of policymakers in Greece and elsewhere to continuously produce the “correct” decisions at the “correct” time. Despite much criticism about muddling through, European policymakers have thus far been successfully navigating such hazards.
But, until permanent safety mechanisms are set in place and endowed with sufficient resources, crisis management remains highly vulnerable to unexpected shocks. These could come from Greece, such as failed parliamentary votes, as well as from other parts of the EU in the form of unsuccessful bond auctions or unforeseen turbulences in the European banking sector. For Greece itself, the outlook even in the medium term is dire. It is true that Greek governments did not utilize the period of cheap capital after the country’s accession to the euro in 2001 to carry through much needed changes to the Greek economy.
However, even if the new Greek program should succeed in decreasing public debt to the levels indicated — a possibility that is considered doubtful by many experts — it would still leave the country with potentially unsustainable liabilities. Structural reforms, while necessary, will not contribute much relief to the economic dilemma of Greek citizens in the short term. Their negative impacts, however, will be felt instantly. Other European countries that have undergone similar reforms did so over the course of many years. Whether democratically elected governments can continue to implement such dramatic reforms in such a short time frame and under the appearance of being pushed from the outside is doubtful.
As long as a positive outlook for Greece is missing — or only visible decades down the road — it is reasonable to assume that Greek noncompliance with creditors’ demands may continue. This, in turn, will increase the reluctance of other countries to help in the future. The situation in Europe remains precarious. Many pitfalls persist. A failure of the Greek bailout package is more than possible, and “good” solutions to the crisis no longer seem possible at all. For Greece, the choice seems to be between bad and worse outcomes. Some observers now seem more confident that the eurozone could withstand even a Greek default.
If the Greek bailout proves ineffectual once again and social and political pressures in Greece continue to rise, this kind of test could befall Europe. To avoid such an impasse, it will take more than just austerity measures. Instead of merely aiming at specific and unrealistic debt targets, a dual approach is needed. The first is smarter and more measured consolidation. For example, use a scalpel instead of a hatchet on education and infrastructure spending. The second is a serious roadmap for growth, including lowering barriers to capital and the utilization of further EU funds to spur investments. That combination, done smartly and swiftly, could help to calm Greece’s lenders and quiet Athens’ streets.
Peter Sparding is a program officer with the Economic Policy Program at the German Marshall Fund in Washington, DC.
The views expressed in GMF publications and commentary are the views of the author alone.