Will the bailout be enough to stabilize the eurozone before the money runs out?
Greek Prime Minister George Papandreou has agreed to step down and help form a coalition government that would be charged with implementing the draconian austerity measures agreed to between Greece and the EU in exchange for default-preventing bailouts. But will the bailouts work to stave off default and stabilize the precarious eurozone? Just as importantly, how much pain is yet in store for the Greeks and will these measures enable the country to overcome its economic morass?
The news of Papandreou's departure broke late Sunday evening as talks between Papandreou's socialist PASOK party and New Democracy leader Antonis Samaras, brokered by the country's President Karolos Papoulias, achieved success in two main areas: Papandreou stepping down and an agreement to call for early elections. February 19, 2012 is the preferred date, but that detail, and other matters including who succeeds Papandreou, as well as the actual makeup of the new cabinet, remain to be decided.
Papandreou's decision comes after his survival of a no confidence vote in parliament on Friday. But the writing was on the wall regarding his demise when several socialist deputies came out in favor of the prime minister's resignation and the formation of a "government of national salvation" that would include members of Mr. Samaras's New Democratic party, and other minor parties.
The major purpose of the coalition government will be to implement a series of tax increases, budget cuts, and drastic reductions in the government workforce passed last month that has infuriated Greek unions and ordinary citizens alike. It is the 5th time in a little more than two years that the Greek government has instituted austerity measures, all designed to get a handle on Greece's out of control public spending.
In return for the cuts in spending and tax increases, the European Union and the International Monetary Fund, along with the European Central Bank, have agreed to implement the $178 billion dollar bailout package negotiated last month in Brussels. The package includes a deal with private holders of Greek government bonds that would give them 50 cents on the dollar for their holdings. The austerity measures and bondholder "haircut" is designed to bring Greece's national debt from its current 180% of Gross Domestic Product down to 120% by 2020 while balancing the budget by 2015.
Papandreou almost blew the entire deal last Monday when, unexpectedly, he called for a nationwide referendum on the budget package. It proved to be a gigantic miscalculation and his eventual undoing. Not only was the plan for a vote on the austerity measures met with almost universal scorn in Greece and panic on European stock exchanges, it enraged German Chancellor Angela Merkel and French President Nicolas Sarkozy who had labored long and hard to seal the bailout deal with all parties involved. A "no" vote on the referendum would have led to Greece being denied the bailout funds, which would have resulted in an uncontrolled default and Greece leaving the euro for the drachma. Many analysts believe that a Greek default would start the dominoes falling of other nations experiencing debt crisis, including Portugal and Ireland. And it would threaten Italy, whose costs to borrow money has skyrocketed this past week with the political crisis in Greece.
By Thursday, with Papandreou facing a revolt of his own socialist deputies over the plan for a referendum, the prime minister withdrew it. After surviving the confidence vote on Friday and calls for his resignation coming from all quarters, Papandreou determined it was time to go. However, his ploy achieved something he may not have intended. In the end, it forced the opposition -- including the New Democracy party -- to also take responsibility for the austerity measures and see them through.
Now that Mr. Samaras's party has bought in, the political pain will be shared across the board. Where before the previous bailout package and accompanying austerity measures became easy targets for the opposition to criticize Papandreou and PASOK, now his political opponents will actually be charged with helping to run the government, and will be forced to act more responsibly.
Samaras acknowledged as much, saying, "I can sense the agony of the Greek people," adding, "Everybody has to act responsibly now and send a message of stability abroad to the people of Europe and the people of our country too."
To describe the set of austerity measures that Greece is to implement as "draconian" is not an exaggeration. A few examples:
- Monthly pensions above 1,000 euros to be cut by 20 percent; monthly pensions at the same level for existing retirees under 55 to be cut by 40 percent.
- Health spending to be cut by 310 million euros ($432.2 million Cdn) in 2011 and a further 1.8 billion euros between 2012 and 2015.
- Education spending to be trimmed through merging or closing of 1,976 schools.
- The tax-free income threshold to be lowered from 12,000 to 5,000 euros.
- In an effort to raise money for the growing number of unemployed, the country is to introduce a "solidarity levy” of between one and five percent per household, which will be raised twice in 2012.
- Taxes on gas, cigarettes and alcohol to increase by one third; luxury taxes to be levied on items like pools and yachts.
Also, the government is to sell off and privatize several state concerns including telecommunications giant Hellenic Telecom and sell stakes in various banks, utilities, ports, airports and land holdings in 2011/2012.
One prominent European think tank, the Organization for Economic Co-operation and Development (OECD) says the bailout and austerity measures will work as long as they are fully implemented. But initially, there is little doubt that there will be real pain and more contraction in the Greek economy, which has shrunk by an astonishing 15% since 2008. The budget cuts and layoffs will only lead to a more severe recession in the short run, which will add to Greece's budget deficit. The question facing European leaders is: will the bailout be enough to cauterize the wounded euro and get Greece back on its feet before the money runs out?
In the end, it will be up to the new prime minister and his coalition partners to try and make the plan work. Just who might take Papandreou's place is the subject of intense speculation. One name prominently mentioned in Greek media is Lucas Papademos, a former deputy president of the European Central Bank. A world-renowned economist, Papademos is a non-partisan technocrat who would head what is being described as a government of technical experts to act as a caretaker for the next few months until elections are held. The Wall Street Journal reports that Mr. Samaras would have no objection to Papdemos as caretaker, which could mean he might be named to the position as early as Monday.
The EU has made it clear that it wants to hear positive developments at a meeting of finance ministers on Monday, including a guarantee of Greek political stability for the near future. Greek Finance Minister Evangelos Venizelos is set to address the group and try to reassure them about the negotiations for a new government. But the political wrangling for advantage is far from over and Venizelos will have a difficult job convincing the ministers, unless the president and parties, set to meet on Monday, can hash out an agreement.
Papandreou, son and grandson of former prime ministers and scion to one of the most beloved political families in Greece, was simply used up at the end. His tumultuous term in office began with a landslide socialist victory in 2009. Early on, during the initial stages of the economic crisis, he was shocked to discover that previous governments had been cooking the books on the budget deficit. He also took a beating during a series of austerity measures that only seemed to increase the pain. Yet the prime minister remained surprisingly resilient. In the process, however, he alienated friend and foe alike, leading to his current predicament where he has few allies in government, and no confidence in his leadership by the Greek people.
His exit settles nothing, nor solves anything. The Greek tragedy will continue and European nations will continue to scramble in order to avoid the the prospect that the tiny nation's economic woes will lead to the break-up of the EU and the death of the euro.
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