The year-and-a-half-old Greek debt crisis is roiling the international markets and threatening to take down the entire Greek government, with public workers striking and rioting in the streets over austerity measures that would dramatically curtail social benefits that, for years, have been among the most generous in Europe.
George Papandreou, the country’s socialist prime minister, has desperately offered to resign, reorganize his cabinet, and negotiate a new power-sharing agreement with the opposition conservative government – anything that would quiet the demonstrations and help his government find its way out of the mess. But the $39.5 billion of spending cuts and tax increases demanded by the European Union, the International Monetary Fund and the European Central Bank in return for another bailout payment have sparked street violence and criticism from Papandreou’s own Socialist lawmakers.
The chaos in Athens has spread around the world, prompting fears that a Greek default could undermine the global economy’s fragile recovery. World markets have traded lower in recent weeks as uncertainty about the fallout has soiled investor confidence.
“We will prevail and we will hold on. We have as a country in the past successfully faced major crises. As hard at this struggle is, we cannot run away from our fight,” Papandreou told party lawmakers in an emergency meeting Thursday. “We will fight and we will win, for Greece, its people and the future of the new generations.”
Erik Jones, professor of European studies at the John Hopkins School of Advanced International Studies’ Bologna Center, said that without quick action, disorder and uncertainty would continue to weigh down world markets. “We’ve kicked the can about as far down the road as we can,” Jones told The Fiscal Times. “The prospect of Greece not being able to form a government is a huge risk. We run the very real risk of a disorderly default.”
EU officials on Thursday tried to quell fears over financial collapse in Greece. Olli Rehn, the European Union’s economic commissioner, said $17 billion of the $161 billion bailout package would arrive in Athens in early July, in time for Greece to pay off creditors. The funding has been held up because of political infighting in Brussels. “We will avoid the default scenario and pave the way for an agreement,” Rehn said today.
Adam Lerrick, a visiting scholar at the American Enterprise Institute in Washington, said the riots in Greece are a culmination of Greek anger about more than 18 months of austerity imposed by outside powers and demands that Greek lifestyles change.
“The population is tired of the austerity measures necessary to correct the Greek economy's unsustainable spending patterns. Avoiding taxes is an endemic national problem,” Lerrick told The Fiscal Times. “The government borrowed money to maintain unsustainable spending. That has created a large debt and an economy where the productivity cannot support the standard of living of the population.”
Greece cannot devalue its currency, as it is part of the EU monetary union. “The only alternative is nominal price and wage deflation and increasing productivity,” Lerrick said. “This is a 7- to 10-year painful process.”
Adding to the economic uncertainty is disagreement among EU members about how to proceed. With Greece’s bills due soon, EU members such as France are pushing for a European Central Bank-funded bailout. This would allow private investors to be paid in full, while shifting the risk of default to European taxpayers.
Germany, on the other hand, does not accept a bailout that shifts the financial burden to EU taxpayers. The majority of the taxpayer burden would almost certainly fall on the citizens of Germany, which has the largest and most fiscally responsible economy in Europe. In recent elections, Germans have made clear their displeasure with Berlin’s outsized role in the bailout, ousting Chancellor Angela Merkel’s Christian Democratic Union in a series of recent regional elections.
“The Germans want the private sector to share the burden of Greece's adjustment. The European Central Bank doesn’t want the private sector to take losses,” said Lerrick.
Lerrick cautioned that nothing should be done that would cause the interest rates for Ireland, Portugal or Spain to rise. “Their rates are being held down by the belief that there’s a good chance bondholders will be paid in full with EU money,” he said. “Once the first country is allowed to impose losses on bondholders, the private sector knows this may not be the last time.”