Greek crisis is no side-show

While much of the news in the second half of September has been bad news involving Spain, where the prime minister, Mariano Rajoy, has floundered despite the strong political position given him by a decisive victory in the late 2011 election, there is reason for even more concern over what happens in October over Greece. The decline in the standard of living of huge sections of the population in this country over the last five years is an order of magnitude worse than in any other country in the euro zone, or than the experience of any other OECD country since the Second World War, and is comparable with the effect of the economic depression which hit Europe and the US in the 1920s and early 1930s. Real take-home earnings in the public sector and of pensioners have declined by nearly a half, taking into account both pay cuts and tax increases on the pay itself on the sale of goods and on property. A walk through Athens will show that much of the private retail sector has closed down, with an inevitable impact on other private sector companies further down the supply chain. The only obvious growth sectors are soup kitchens and similar charitable or voluntary activities such as improvised health centres to relieve the suffering. Although the economies of the more popular tourist areas remain in tolerable shape and greater social and economic cohesion in smaller towns has in many  cases kept their economies going, the economic and social situation of Athens-Piraeus and Thessaloniki, where more than half the population live, is dire.

Following the political instability of the first half of 2012, the June election—the second in three months—just produced a majority for the three “pro-Memorandum” parties which were willing to accept the need for the continuation of the swingeing austerity necessary to prevent financial chaos and keep Greece in the euro. These parties have accepted further expenditure cuts and tax increases of €13.5bn, about 6% of GDP, on top of the unprecedented austerity already in place but are asking for a spreading out of the timing for some of the measures to 2016 instead of 2014. As tense negotiations with the troika (European Commission, European Central Bank and IMF) take place, it looks as though the governing parties find themselves in a position where their remaining domestic political credibility could be broken by giving in to the rigidly hard line which the troika are taking. If this were to happen, the withholding of the next tranche of lending and consequent inability of the Greek state to service its debt might cause Greece to be the first country to exit the euro.

Earlier this year, the euro zone institutions and the other member countries, in effect told the Greek population that a vote for the anti-Memorandum political parties would lead to the withdrawal of the financial support necessary for the Greek economy to function within the euro zone, and that the rest of the euro zone was ready to withstand the shock waves that would result. However, if Greece were to be forced out of the euro now, the shock waves would be even greater because it would be unexpected and because it would have happened despite a hard-won parliamentary majority in favour of the Memorandum, the document committing Greece to continued austerity. A country, where a majority wanted to stay in the euro, despite having suffered the most severe economic pain of any developed country in recent times, would have been broken by the ever harsher conditions being imposed. The message to other troubled euro zone countries would be that even political support for harsh austerity is not sufficient to keep a country in the euro, with the result that the existing reluctance of financial markets to provide support for these countries would intensify and public scepticism over the ability of apparently moderate and responsible political leaders to keep these countries in the euro would weaken, and support for other parties, including those supporting leaving the euro, would  rise.

The negotiators of the troika in Athens are international civil servants, technocrats with a low public profile, but what they are willing to agree is likely to be influenced by the politics of the euro zone and in the creditors countries, of which Germany is the most important, though not necessarily the most hardline. The newly chosen German chancellor-candidate in the scheduled September 2013 general election for the main opposition party the SPD, Peer Steinbruck, has called for a degree of flexibility to be allowed to Greece. This shows political courage given the still prevailing stereotype in Germany of the Greeks as lazy, feckless and pampered, but it remains to be seen whether it will lead to any change on the part of the government of Angela Merkel, which has hitherto taken a hard line with Greece, and even if it does it would remain to be seen whether such a change will be sufficient to prevent a potentially catastrophic breakdown in the negotiations between the troika representative in Athens and the Greek coalition.

2 thoughts on “Greek crisis is no side-show

  1. Interesting, measured piece … Muddling through with the occasional big decision (eg on ECB bond buying) seems to be working, as evidenced by the continuing relative strength of the Euro.

    I suppose it will all depend on whether the crisis is finally and truly put to bed in several years time, or whether dealing with the underlying problem (the Euro) has just been postponed – at EU level as well as at national levels (notably Greece).

    I find it hard to see how the crisis will be resolved permanently since the two economic blocks in the Euro-zone are diverging and not converging … and political sentiment is consequently moving against premature union, though the elites are (slowly) pressing ahead …

    The glacial car-crash continues?

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