Greece's road to reform is painful
ATHENS, Greece — Inspectors overseeing Greece's faltering financial recovery have returned to Athens to push the country back on the road to painful reform. But as Greece's economic problems pile higher, the task appears insurmountable.
Months of political uncertainty and the spread of the eurozone's crisis to major economies such as Spain and Italy are stacking pressure on Greece's new coalition government to slash spending or face the threat of an exit from the 17-country group that uses the euro.
Greece needs to cut an additional (euro) 11.5 billion ($1.25 trillion) in spending over the next two years to meet deficit targets and is likely to impose more pay cuts through pension and benefit caps. If it doesn't meet the deficit targets, its eurozone partners could decide to stop giving it financial aid, potentially forcing it to drop out of the eurozone.
The heads of an inspection team from the European Union, European Central Bank and International Monetary Fund — collectively known as the "troika" — arrived this week in Athens to pick apart Greece's deficit-cutting proposals. They will return in September before making their final assessment.
Conservative Prime Minister Antonis Samaras, meanwhile, met Thursday with EU Commission President Jose Manuel Barroso.
Greeks had been promised some relief from the severe recession after the country won major debt restructuring and rescue loan deals this year, following another round of salary and benefit cuts. But that prospect has already faded.
Here are some reasons Greece is finding it increasingly difficult to meet its deficit targets.
Greece's economy is in its fifth year of recession, during which its economic output has dropped by about a 20 percent. Samaras has likened the period to the Great Depression in the United States in the 1930s.
On Tuesday, he delivered more bad news: The economy would contract a further seven per cent in 2012, far more than the 2.8 per cent predicted last year. Unemployment, originally forecast to settle around 18 percent, has reached 24 per cent.
A national association representing small businesses said it expects 67,000 more companies to go bankrupt in the next 12 months.
The economic downturn is depriving the government of much-needed revenue with which to lower its deficits.
Some blame the severity of the recession on the bailout creditors' insistence on government spending cuts as a way to lower the deficit.
In the past two years, eurozone members and the IMF have granted Greece two successive rescue loan packages worth (euro) 100 billion and (euro) 130 billion — a higher combined amount than the country's gross domestic product — but tied it to draconian demands for fiscal reforms to cut overspending.
The main targets include cutting the budget deficit from a runaway 15.8 per cent of GDP in 2009 to around 2 percent over five years, while overhauling the public sector and services and market rules, and cutting 150,000 government jobs.
Samaras has promised to halt the recession next year and gradually bring the jobless rate to 10 percent by the end of his four-year term in 2016.
Samaras may be lucky to still be in power in 2016, however, as political instability keeps undermining efforts to reform the economy and steer it back to health. Samaras' government is the country's fourth in eight months.
The previous three governments achieved little in terms of reform as infighting forced two national elections in May and June.
In a letter of resignation last week, the former head of Greece's key privatization agency said the time spent changing governments meant privatization revenues this year would reach (euro) 300 million — a tenth of the (euro) 3 billion target.
Cutbacks agreed on under former prime minister Lucas Papademos, a former ECB vice-president who served as Greece's leader for six months until May, have yet to be implemented. Plans to lighten government payrolls by firing some civil servants have stalled.
Samaras managed to eventually form a government after his conservatives sided with the traditional rival Socialists and a small left-wing party.
The power-sharing deal was struck on a pledge to renegotiate the terms of the bailout, arguing that the economy is now too weak to impose any more austerity. Greece wants another two years to meet its targets.
But Greece's rescue creditors are hesitant to give the country more time, saying it has only itself to blame for missing most of its reform targets over the past two years.
"The difficulties that Greece is currently experiencing do not stem from the (EU-IMF) program," senior ECB official Joerg Asmussen said bluntly on a visit to Athens this month. "They stem from many years of unsustainable economic policies and a reluctance to implement the necessary reforms."
EU officials believe that giving Greece the extra time to meet its deficit targets could undermined the overall rescue deal because it would require giving Greece new financial support. Many eurozone nations are increasingly reluctant to hand over more rescue money.
Greece's long list of unfulfilled commitments includes overhauling the tax system, ending delays in privatization and public land usage, scrapping dozens of state agencies, and reforming the health system and backlogged judiciary.
Samaras conceded this week that a renegotiation of Greece's bailout terms was unlikely in the short term, because the country is still in a "weak position" and because of the financial turmoil elsewhere in Europe.
Some investors worry that eurozone countries could give up on Greece and stop giving it rescue loans. Facing default, the country could potentially have to drop out of the euro bloc.
The eurozone has no provisions for a member being expelled, but the threat hangs over the country. That creates uncertainty for businesses and scares away foreign investment.
If Greece were to quit the common currency, its new currency would rapidly lose value against the euro. That would cause savings — converted from euros — to shrink. The cost of consumer goods — from food to fuel — would skyrocket as the country imports most of it.
Greek savers would rush to pull their euros out of banks before the money gets converted into the new, less valuable currency. That could cause bank runs, bringing down the financial system.
It would also deliver a severe blow to the property market, state benefits and salaries, according to predictions by bank researchers and parties backing the government coalition.
The financial catastrophe, they argue, would trigger widespread social unrest, in a country already seething with anger.
Public discontent with the government's policies is one key reason why the country is struggling to recover its financial health.
It triggered Greece's political crisis last year after defections from the then-Socialist government forced it to seek partners in a six-month coalition.
Strikes and protests have died down since the start of the crisis, but the political atmosphere has become increasingly hostile.
The impact of the public anger was also evident in the latest general elections. The two parties that dominated politics for four decades, the conservative New Democracy and Socialist PASOK lost more half their support as voters fled to anti-bailout parties that accuse the political establishment of massive corruption and of allowing the country to be humiliated.
Alexis Tsipras, the left-wing opposition leader, has refused to meet with the debt inspectors, arguing their policies are leading the country to ruin.
"Very simply, this program will not work," he told parliament this week. "New cuts will cause an even worse recession in an economy already destroyed."