Greece

How the Greeks Accepted New Austerity


Spectators wait outside the Greek parliament on Syntagma square during the second day of a 48-hour general strike in Athens, Greece, on Wednesday, Nov. 7, 2012

Photograph by Kostas Tsironis/Bloomberg

Spectators wait outside the Greek parliament on Syntagma square during the second day of a 48-hour general strike in Athens, Greece, on Wednesday, Nov. 7, 2012

Greece’s coalition government, formed five months ago, never expected a honeymoon period. After a fractious vote on a new round of austerity measures in Parliament on Wednesday, it knows it is involved in a grim battle for survival. The three-party administration narrowly won the ballot, collecting just 153 of the 300 votes despite having 177 MPs ahead of the vote.

The result means that the structural reforms and spending cuts the European Union and International Monetary Fund asked to be implemented over the next two years have passed into law. This should persuade Greece’s lenders to release more bailout funding, but that will not be the end of this government’s troubles.

Prime Minster Antonis Samaras has one more immediate hurdle to clear on Sunday, when lawmakers vote on the 2013 budget. The ballot will take place just a few hours before euro zone finance ministers meet on Monday. The government had been hoping the Eurogroup would agree to release the €31.5 billion ($40.2 billion) in loans Greece has been expecting for several months. But it seems this decision will be put off until the country’s lenders decide how to tackle its financing gap and make its debt sustainable.

Samaras is pinning his short-term hopes on the release of this money. He told MPs ahead of Wednesday’s vote that the injection of cash would help revive the Greek economy, which is expected to shrink by 6.5 percent this year.

Most of the money will go toward completing the €48 billion recapitalization of Greek banks. Samaras stressed that for the first time since the country’s bailout was launched in May 2010, only a small proportion of the loan, €3.2 billion, would be used to service debt. Until now, about three-quarters of the money Greece has received has gone toward meeting bond and loan maturities.

“The most significant contribution from the loan tranche will be the bank recapitalization, which should allow Greek banks to access the European Central bank lending mechanism,” says George Pagoulatos, an economics professor at the Athens University of Economics & Business. “The money will also help pay some arrears and cover the small primary deficit. More importantly, it signifies the closure of a process that has been dragging on since April.”

The need to alleviate some of the pressure on the Greek economy was emphasized by August unemployment figures, which were published a few hours after the vote in Parliament. They put the jobless rate at 25.4 percent. It was the 39th consecutive month that unemployment rose and means that Greeks are losing their jobs at a rate of more than 1,000 a day.

Beyond waiting for the euro zone and the International Monetary Fund to make up their mind, the government can do little but focus on implementing some of the structural reforms that could help stimulate economic activity.

“Some of the measures need on-the-ground implementation and will help growth, such as the reduction of bureaucratic costs: The government needs to move fast on these,” says Pagoulatos, who was an economic adviser to interim Prime Minister Lucas Papademos from November 2011 to April this year. “It has to do the groundwork so the Greek economy can take off once we exit this consolidation period.”

Reaching the point of recovery, however, seems a long way off following the vote on Wednesday, when the withering of the coalition presented Samaras with a political problem to add to his economic concerns.

Democratic Left, the coalition’s junior partner, had made clear its 17 lawmakers would not vote for the measures due to objections over labor reforms. This left Samaras relying on his own conservative party and center-left Pasok, but one of his deputies and six from the Socialists failed to support the package. Samaras and Pasok leader Evangelos Venizelos ousted the rebel MPs. On Thursday, another Pasok MP quit. This means New Democracy is down to 126 MPs, and once-mighty Pasok, which had 160 seats in Parliament less than three years ago, is left with just 26 deputies. To compound matters, Venizelos may be about to face a leadership challenge.

These developments do not pose an immediate threat to the survival of the three-party government as Democratic Left has said it will vote for the budget on Sunday. It does raise questions about its medium-term stability. An implosion of Pasok, for instance, could seriously undermine the coalition, especially as opposition parties, such as anti-austerity Syriza and neofascist Golden Dawn, are gathering support fast.

Samaras admitted in Parliament that some of the measures Greece is being asked to implement to save €18 billion (almost 10 percent of GDP) over the next four years are “painful and unfair.” More than €6.5 billion will be cut from public sector wages, pensions, and benefits next year, when the economy is expected to shrink by at least 4.5 percent of GDP. Trying to convince people that this pain will eventually lead to gain while they stare down the barrel of a five-year recession is an immense challenge. Ultimately, though, finding a way to balance the growing domestic disquiet caused by recession and austerity with the demands made by Greece’s lenders will determine the coalition’s survival, and perhaps the country’s, too.

 

Malkoutzis is a Bloomberg Businessweek contributor.

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