The Eurozone nations and IMF have bailed out Greece to the tune of more than $146 billion dollars, and Greece faces budget cuts of $40 billion over the next three years as it attempts to bring its deficit as a portion of GDP from nearly 14% to 3% by 2014. At an emergency meeting in Brussels, the Eurozone finance ministers blessed the arrangement. “The choice was one between seeing the nation crumble or moving to save it,” Greek Finance Minister George Papaconstantinou said. “We chose the latter.” The choice really was not his at all.
The obstacle now is whether Prime Minister George Papandreou will remain in office long enough to see the program through. He has appealed to the Greek public to make “sacrifices” which will include a sales tax increase from 21% to 23%.
Greece’s public workers will have to take pay cuts of nearly 15% per year, much of it as their two-month “annual bonuses” disappear. About 20% of Greek workers are employed in the public sector. Taxes on fuel, tobacco, and alcohol will also rise.
Even with all of these to raise tax revenue and cut public spending work, a shrinking Greek GDP could undermine any effort bring down its deficit. Gross domestic product in the southern European country is expected to drop 4% this year and over 1% next year. Those figures could be made worse if workers stage large and regular strikes which shut down the government and the transportation sector which is essential to keeping Greece’s tourism income high.
The Conservative opposition party New Democracy and the right-wing populist LAOS are the two major political forces which will oppose Papandreou in upcoming national and regional elections. New Democracy party leader Antonis Samaras will probably attempt to gain the Prime Minister’s office. And, his most likely path to that goal is to criticize the bailout as overly onerous. Samaras will get tremendous public support for an anti-austerity campaign. According to Bloomberg, “Sixty-five percent of those polled by researcher Alco for the Proto Thema newspaper said the government should reject any measures that lead to more reductions in wages and pensions.”
Papandreou was elected last October, and whatever promises he made then about a strong and independent Greece will be used against him. If a majority of the 300 member Parliament withdraws support, Papandreou will find it difficult to stay in office.
Papandreou austerity pledges to the IMF and Eurozone are the glue for the financial support that Greece has been given. Those pledges could be destroyed by his succesor. The real power in the Eurozone, Germany, has already been wary of the bailout and German Chancellor Merkel has used a great deal of her political capital in a push to get national to support the rescue. Should Greece renege, Eurozone support would almost certainly be withdrawn and the probability of a Greek default would be close to 100%.
Any bailouts of Spain or Portugal, which are still possible if their deficits and cost to borrow worsen would be tainted by suspicion of motives if Greece walks away from its promises. Negotiations among Eurozone nations will become a game of cloak and dagger.
Douglas A. McIntyre