THE LATEST package of austerity measures announced by Greece’s finance minister on Sunday will condemn the country to at least two more years of recession and many more years of high unemployment. And this is the optimistic forecast which sees Greece returning to a positive growth path again in 2012. This is assuming the Greek government does not default on its loan repayments in the meantime, which remains a distinct possibility given the scale of its debt.
There is also the possibility that growing social unrest and general strikes – a nationwide strike is scheduled for tomorrow – could eventually bring down the Papandreou government as the situation is bound to worsen. In effect, the proposed measures would not only reduce the monthly income of a large section of the population through pay and pension cuts but also increase prices across the board – the rate of VAT would go up on all products and an additional tax would be imposed on petrol, tobacco and alcohol.
As things get worse, the calls in favour of defaulting are bound to get louder and there will be political forces eager to exploit mass opposition to the austerity regime. Some people are already wondering whether Greece should quit the euro-zone, bring back the drachma and default, though this is not considered an option by its European partners. European banks are owed some $190 billion by Greece and if it defaulted they would only recover about 30 per cent of this amount, which would jeopardise their own future in these recessionary times.
The tragedy is that there is no easy way out of this mess. If Greece tried to leave the euro-zone, other countries with big debts would try to follow suit, destroying the currency and causing chaos in the markets. There is too much at stake now for Europeans to abandon European Monetary Union, which has proved a folly on a grand scale and a major contributing factor to Greece’s current woes. But only now has it become obvious that the single currency adventure has failed, as it deprives national governments of an important tool of economic policy: control of their currencies.
There is little doubt that Greece would have been in a much better position today had it not adopted the euro 11 years ago, but this is an academic point now. Greece is stuck with the euro and the painful austerity measures that have been imposed on the country by its European partners, who have to protect their own economies as well as the EMU and the IMF. But there is a sneaking suspicion that the bail-out will not be the final episode of this economic disaster.
