Recently, Greece decided to cut pensions for its public workers as part of the austerity program developed to bring its deficit from 13% of GDP to 3% in three years – an almost impossible task. The Greek parliament has also agreed to cut 30 million euros in spending over that same time period.
Greek unions have now called a nationwide strike for May 20.
Riots have become a normal part of the Greek landscape during the last month, since it became clear that the new austerity plans would be implemented. Three people were killed in riots a week ago.
Spain has decided to follow Greece down the path of budget cuts, which will almost certainly expose it to similar labor unrest.
Prime Minister Jose Luis Rodriguez Zapatero said Spain “would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs,” according to Reuters. It appears that the nation would like to address its deficit problem before it has to beg its fellow Eurozone members and the IMF for capital.
It is not clear, however, that even budget cuts will pull Spain back from the brink. Unemployment in the country is 20%. That places an enormous burden on social services and necessarily reduces the national tax base
And like Greece, Spain has a severe tax collection problem. About one-fifth of its GDP is in the “shadow economy.” That figure is not likely to change unless the government almost completely changes the way that it assesses taxes and enforces payment.
There is no reason to believe that citizenry of Spain will react any differently to compensation and job cuts than the Greeks have. This presents an insoluble problem for both countries. Their governments are prepared to show the Eurozone alliance and global capital markets that they have a plan to improve their financial situation, but without the support of their citizens, they do not have the means to do so.
The EU $1 trillion fund, set up to stabilize the region and its finances, will likely be undone by negative public reaction. The alliance will then have to decide whether to expel some of its members or continue a process that looks much like the Fannie Mae and Freddie Mac problems in the US–pouring money into a sinkhole to shore up a financial infrastructure that must eventually collapse.
Douglas A. McIntyre