Is there hope for Greece

23rd February 2012

This piece from Associated Press shows the budget cuts demanded in full.

The big numbers are the €537 million cut to health and pension funds, €200 million cut to operating costs for ministries, €400 million cut in defence spending, €386 million cut in main and supplementary pensions, €576 million cut in pharmaceutical spending, €205 million cut to state salary costs and €400 million cut to public investment budget.

In practice, there is no one issue that has proved particularly thorny for policymakers. The protestors that took to the streets of Athens in mid-February were focused more on a dislike of austerity measures as a whole; they were anti-business, anti-banks and anti-Eurozone. "Bosses are killers of the people" reads the graffiti.

Mindful Money economist Shaun Richards believes that this is Greece's central problem: "There is an immediate glaring flaw which has run right through the whole Greek "rescue" episode and it is highlighted by the fact that wages will be cut but banks will be recapitalized! Sound familiar? It should as this drumbeat has been going all the way through and is a major reason contributing to the failures so far. Karl Marx would have had some thoughts on the relative treatment of labour and capital that is happening here. Also exactly how do you "promote public interest and business autonomy?" Aren't they contradictory aims?"

No-one really seems to believe that Greece will succeed in implementing these measures. For example, Azad Zangana, European economist at Schroders, says: "According to the Greek Statistics Office, the primary deficit stood at €5.3bn, or 2.4% of GDP. While that sounds achievable over a two-year period, the problem is the ongoing recession in Greece. The economy contracted by 5.3% in nominal terms last year (7% in real terms), which means if the same decline were to happen again this year, then achieving that target by the end of 2014 will be even more painful.

"In our view, the level of austerity required by the plan would plunge Greece into an economic depression. Another risk will be the upcoming elections currently scheduled for April. The incumbent centre-left PASOK party and the centre-right New Democracy party now receive less than 50% of the popular votes in Greek media polls. The move away from the centre and towards extreme left and right wing parties is a concern. Given the awful implementation record of the current government, who enjoys a solid majority, what hope does Greece have if a grand coalition takes over?"

It seems that even Eurozone policymakers are not convinced. A document leaked to the Financial Times, contained a ‘tailored downside scenario', which appeared to recognise that the Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned in the baseline. It warned: "Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalisation may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays."

And the price for failing to meet these targets? Clive Crook at Bloomberg suggests that there is, in fact, little pressure on Greece to hit these targets. He says: "In this projection, Greece postpones the structural changes — such as a lowering of wages — needed to make its economy competitive. Fiscal adjustment and privatization are delayed. The government's dependence on official loans grows, and its debt burden surges higher. The debt trajectory would be "extremely sensitive to program delays," the officials conclude, "suggesting that the program could be accident prone, and calling into question sustainability." Sounds like business as usual."

He adds: "If there is some intelligent principle behind this approach, rather than mere flailing incompetence, it would sound like this: "Let's build this manageable problem up into a crisis capable of vast destruction that we might be unable to control. That will create the fear needed to force some real improvements in economic policy." He concludes that Greek's debts – public and private should be written off.

There seems little chance that Greece will meet its austerity targets. Countries have dealt with debt burdens as big as this in the past, but they have generally been isolated cases. Greece's position as part of a wider debt crisis stalls its recovery further. Eurozone policymakers may believe that £130bn is a price worth paying for pushing an ultimate resolution out further down the road.

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