As the huffing, puffing and wheezing brought on by the divorce dilemma subsides, the country may now wish to turn its attention to more pressing matters that surround us. Although the riotous assemblies in Syntagma Square seem a million miles away for most of us, the Greek economic tragi-comedy continues to threaten the stability not only of the eurozone but the economic well being of the globalised economy.
Economic pundits are describing the Lehman Brothers’ bust up three years ago a ‘tea party’ compared to the Greek financial meltdown. Although the Greek economy is a relatively small economy (only two per cent of the eurozone), its probable default due to its inability to service its debts (let alone pay them) will create a domino effect that will sink the European economies into another bout of recession.
The bubble burst over a year ago when, faced with impossible debts, Greece had to resort to draconian measures to sustain its teetering economy. Decades of mismanagement, allegations of institutionalised corruption and fiscal disarray left Greece saddled with a debt of more than €350 billion. It has notched up debts across the board, especially with French and German banks together with hundreds of thousands of private investors worldwide.
Last year, the International Monetary Fund (IMF) and European governments unveiled a €110 billion rescue plan for Greece. Many promises on the Greek part for reforms did very little to stop the rot and a further package has been agreed only last week. A new bailout costing a probable €120 billion has been thrashed out, much to the disapproval of many who believe Greece is far from getting its act together in these financially constrained times.
The crux lies in the financial experts’ forecasts. The latter persistently believe that these bailouts are not going to resolve the issue and that Greece will ultimately have to default whether it likes it or not. On the other hand, European leaders believe that a rescue package and a fresh round of austerity measures will ring fence the Greek problem and hence avoid a meltdown in the euro area with its attendant unsavoury consequences. Greece will hopefully do its best this time around, yet it is clear that the man in the street feels he cannot bear more austerity measures in an already extremely constrained economic environment.
One could well ask how Greece has ended up in such a dire situation. The answer is cheap credit. For years Greece availed itself of cheap credit generously doled out by the banks. Instead of spending the money on relevant projects that stimulate the economy, the money was squandered to sustain a lavish welfare system and keeping the unions happy.
Some facts beg incredulity. For example, the party financing system receives €10 for every vote gained. In Germany, political parties receive 70 centimes. This measure alone has cost the country hundreds of millions of euros in the last decade or so. Civil servants receive a bonus for washing their hands and a 25,000 pension plan for parastatal workers has cost €8 billion in 12 years. Many still claim pensions for dead relatives, some even for decades... and the list goes on.
The Papandreou administration has shaved 20 per cent of pensions. Pay in the public sector has been contained. Taxes have risen sharply and the cost of fuel has risen a staggering 60 per cent in a year. This year alone, there have been three national strikes so far.
The Greek government struggles to get austerity measures through Parliament while the general sentiment is to defy Northern Europe. The reasoning behind this dangerous reasoning is that like the banks, Greece is too big to fail. Greeks want to believe that this is purely a politician’s problem, ingeniously forgetting that the unbridled fiscal immorality that reigns in Greece is part of the bigger problem. An inefficient and sluggish public sector coupled with tax evasion and dodgy statistics were the prime ingredients for this Greek tragedy.
To boot, the Greek economy contracted 4.5 per cent last year and is expected to contract a further 3.5 per cent this year. Unemployment is officially 16 per cent but is estimated to run as high as 40 per cent among those under 25. Public debt is 160 per cent of gross domestic product. In comparison, Malta has a 70 per cent debt relative to its GDP − this is less than half that of Greece.
Some believe that Greece should not have been admitted into the eurozone before it had shored up its financial and fiscal system. There is much anger especially among the Germans who are once again a major player in this bailout, and many vehemently oppose handing more money to the perceived feckless Greeks. The quandary is both economic and political and unravelling this situation remains an unknown quantity.
In the meantime, things have temporarily calmed down. Clearly, the austerity measures are unlikely to resolve this crisis and there are a number of scenarios that are being contemplated. It seems probable that for Greece to restore its fortunes it will have to eventually leave the euro. This must be done in a disciplined manner, as any haste will bring the country and its neighbours more grief. Furthermore, it is imperative that fiscal discipline is maintained between the member states unless we wish the euro experiment to fail. This is a clear lesson to our political class that upholding financial discipline is the only way forward for a successful economy.
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