Europe is nervous. The July 15 deadline for Greece to pay off a chunk of its debt is looming, and between strikes, protests in the streets, and political infighting, there’s plenty of reason for concern that it will miss the boat, bringing down other struggling economies with it.
For Greece to receive the $17 billion in loans from the European Union and International Monetary Fund (IMF) that it needs to pay that July debt – a portion of the $142 billion bailout that it has been receiving in increments since last year – it has to pass a slew of unpopular austerity measures, many of which will be voted on during Wednesday’s parliamentary session.
Watching the scores of protesters in the streets of Athens demanding an end to cuts in government jobs and pensions, some Greek politicians are saying it’s not possible to cut any further.
But Greece has no choice but to pass austerity measures, regardless of how fervent the opposition, two economists say.
“Clearly there is growing unhappiness among the Greek people about this new round of sacrifices. It is difficult for the government to enact a further round [of austerity measures] … against this backdrop of people protesting in the streets,” says Domenico Lombardi, a senior fellow with the Brookings Institution. But “they have no other choice … Greece would really fall out of control.”
The alternative – a default that could prompt domino defaults in other struggling countries and a credit freeze among European banks – is far too costly both to Greece and the eurozone, says Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics. European finance ministers will meet next week to decide whether to release that money.How will Greece secure another loan?
Greece has to pass $40 billion worth of austerity measures, including further cuts to public programs and jobs and tax increases, and it has to jump start a stalled process of privatizing state assets if it is to receive the loan. It also has to rein in rampant tax evasion that has robbed the government of much-needed revenue.
The details of the newest round of cuts and taxes are not yet public, although Mr. Kirkegaard says one possibility he’s heard circulating is shrinking the number of public employees by only hiring one person for every 10 people who retire from a public sector job. The government has already cut pensions by as much as 30 percent and raised the retirement age by as much as 10 years, among other things.
Government cutbacks and increased taxes aren’t pain-free for the economy either, which shrank by 4.5 percent last year and will contract further as a result of austerity measures. But the cuts will benefit the “wasteful and inefficient” Greek government in the long run, Kirkegaard says.
Claims by the political opposition that further austerity measures are impossible and that they will renegotiate the IMF and EU loans if they are elected is “just a cynical political calculation,” he says. “Austerity cannot be the only way to balance the books … (but) additional austerity can and has to happen.”Privatizing Europe’s least private state
The less-talked-about requirement from international lenders is privatization of state assets, companies, and real estate – crucial if Greece is to avoid slipping back into economic doldrums years down the line. It has more government assets than any other country in the Organization for Economic Cooperation and Development (OECD) and it has never privatized state holdings on a large scale, Kirkegaard says.
But just because privatization is uncharted territory, doesn’t mean it can’t happen.
“The Greek government, in the last one and a half years, has done many things not done before,” he says, citing major cuts to its social welfare system. “There’s a first time for a lot of necessary new policies … in the new political environment and crisis environment.”
The political will is there now because the government knows it has no other choice, he says. It helps that while the political opposition has vocally opposed austerity measures, it’s on board with privatization.
It will take years for the process to generate much-needed revenue, Lombardi says, but it is the most important thing to European finance ministers who make the call on the country’s loans.
At this point, all Greece needs to do to receive its July loan is prove that it has made a commitment to privatization by passing laws that put the process in motion.‘The nuclear bomb’
The consequences if Greece defaulted on its bonds are so severe that the country is unlikely to let it happen, both Lombardi and Kirkegaard say.
“There will be far reaching consequences that no one dares to explore in full,” Lombardi says. “It is the nuclear bomb that everyone is trying to avoid.”
Greece is much further from this outcome than the bickering among Greek politicians and European finance ministers makes it appear.
“There is a lot of brinkmanship and political posturing involved here,” says Kirkegaard. “It is only when you go right down to the wire … that the political will to make these tough decisions is there.”