16th Sep 2019

Greek deal rests on appetite for more austerity

  • (Photo: EUobserver)

Eurozone countries have been quick to pat themselves on the back for greenlighting a second bailout for embattled Greece, but the deal is dependent on a wholesale change to Greek society while the rewards in terms of economic growth and employment remain a long way off.

Following a marathon meeting in Brussels ending early Tuesday morning (21 February), finance ministers agreed to give Athens a second €130bn bailout in order to stave off an imminent and disorderly default, prompted by bills it has to pay on 20 March.

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The deal is a complicated mixture of loans from eurozone countries, the International Monetary Fund (whose share still remains unclear) as well as an agreement by the private sector to take a writedown on Greek bonds.

In return, Greece has to accept an "enhanced and permanent" presence of outsiders to monitor its progress and has agreed that paying back its debt is given priority over any other spending.

Shaky foundations

But the agreement rests on rickety and unpredictable legs - the ability of Greek politicians to deliver reforms that they were unable to deliver in return for the first €110bn EU-IMF bailout in 2010 and acceptance by an already austerity-weary Greek public.

The changes - required to cover a fiscal gap of 5 percent in 2013 and 2014 and make the country competitive - imply a thorough change to society, business and administration in Greece.

Specifically, the country still needs to make it easier to hire and fire people, needs to start means-testing family allowances, reduce supplementary pensions, reduce public investment, decrease wages to special sectors such as the police and military, close or merge government ministries, cut electoral spending, clean up the system for health reimbursements, cut the minimum wage and renegotiate collective agreement with unions.

The government also needs tackle what is seen as endemic tax evasion, although officials admit that this is a devil's quest as the more recession bites the less still is incentive to pay state dues.

This comes on top of the measures required for the first bailout which saw major pension reform, opening up of professions, and wage reductions - the combination of which has created a new poor in Greece and driven thousands to the streets in protest.

But the rewards for the current pains remain a long way off. Wages are expected to decrease by a further 15 percent over the coming three years.

Sources close to the negotiations say they expect the country to return to weak growth by 2014. But this assumption rests on the belief that the swathe of austerity measures will not create a self-perpetuating downward spiral.

Figures already show that Greece's economy will have contracted by more than 17 percent between 2009 and the end of 2012.


Meanwhile, unemployment has shot up from 9 percent in 2009 to above 18 percent now. The joblessness rate is expected to start decreasing only in 2014. A year later it is expected to still rest around 15 percent.

Monday's agreement was only reached after weeks of delay as Greek politicians were reluctant to be associated with harsh austerity measures ahead of general elections, due in April. A last stalling point was the requirement to find a further €325bn in savings to bridge a fiscal gap for this year.

It was agreed finally amid high drama on both the streets and in parliament. But the agreement was political. The actual measures - entailing pension and minimum wage cuts as well as chopping 15,000 jobs in the public sector - still have to be enforced.

Greek politicians have also made, under duress, the difficult promise to stick to the programme, whatever the results of the upcoming election.

EU monetary affairs commissioner characterised the deal as "unprecedented solidarity" by Greece's euro partners and called on "Greek political leaders to fully implement the programme."

However, in a sign of the difficulty, a timetable for privatisation of Greek assets - including land, buildings and state companies, meant to deliver €50bn by 2015 is acknowledged as having been far too ambitious. The new short term target is to get €19bn through the firesale of assets by this date.

Beyond Greece there may be other hurdles too. Both the German and the Dutch parliaments are due to debate and vote on the package next week, with the two countries regularly displaying the harshest rhetoric on Greece's reform efforts.

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