On Thursday, February 9th, 2012, the Greek political leaders supporting the Prime Minister Lucas Papademos’s government of national unity agreed a new 3.3 billion euro programme of spending cuts. On Friday, February 10th, the Greek unions launched a 48-hour strike. Protesters clashed with the police on the streets of central Athens. Scores of youth in hoods used sledge hammers to smash up paving stones, before hurling them at the riot police.
A new package of austerity measures would probably go before the Greek parliament for a crucial vote on Sunday, February 12th, 2012. Among the agreed measures are a 20% reduction in the minimum wage as part of an effort to increase competitiveness of the Greek economy and cuts in the public sector workforce. According to the programme, 15 000 public sector workers will be laid off by the end of 2012 and the total number of public sector jobs will be reduced by 150 000 by the end of 2015. There will be further cuts in pensions as well. Wages are to be frozen until a soaring unemployment rate will come down to 10%.
The Greece’s international creditors (the troika of international lenders, the EU/IMF/ECB) have said that all the mentioned above measures must be approved, before Greece receives a new 130 billion euro bail-out loan/package, promised in October 2011 (see globalopinion.pl ‘A new package to save Greece, but the Euro zone debt crisis remains unresolved’ 05/11/2011).
The Prime Minister Lucas Papademos told the Greek lawmakers that they must approve the latest programme of austerity measures or the country would suffer a disorderly default and an eventual exit from the Euro zone. On March 20th, 2012, Greece faces a 14.4 billion euro bond redemption. If Athens doesn’t obtain a new bail out aid/loan package, then it will default.
If Mr Papademos fails to win a vote in the Greek parliament, then he might quit his post and return to an academic post at Harvard University, leaving Greece bust and with an election campaign under way. At the moment, the conservative New Democracy party, led by Antonis Samaras leads in the opinion polls. After the election, which is widely expected to take place in April of this year, Mr Samaras may create a coalition government together with the right-wing Laos (People’s Orthodox Rally) party, which is led by Georgios Karatzaferis. The Laos party is currently a junior partner in Mr Papademos’s government of national unity.
Other condition that has to be met by Athens, before the second bail out aid/loan package receives a final approval from the EU partners is a voluntary debt swap scheme, in which private owners of the Greek bonds will swap the old Greek bonds for the new ones, writing off up to 70% of their value. Applying this scheme, the Greece’s debt burden of 350 billion euro (160% of GDP) will be reduced by 100 billion euro. However, the debt will be a massive 120% of GDP in 2020.
The austerity measures, which have been endlessly demanded by the troika of international creditors, drive Greece into a complete ruin (see globalopinion.pl ‘EU efforts to save Greece. A history of failure’ 06/11/2011). Tax increases, spending cuts and wage cuts have pushed Greece into a deep recession.
Greece’s economy is in its fifth year of contraction. Last year the Greek economy shrank by 6%, this year may shrink by a further 3%. Current account deficit stands at nearly 10% of GDP. Data from the Hellenic Statistical Authority shows that in the third quarter of 2011, the unemployment rate was at the level of 17.7%. The highest unemployment rate was recorded among the young people in the age group of 15-29 years – 35.3%.
What Greece needs is a growth promoting economic policy, not a new programme of austerity measures. It’s impossible to reduce a ratio of national debt to GDP, when a real GDP is declining and a current account deficit and an unemployment rate is rising.
Greece’s current account deficit of nearly 10% of GDP means that the country has to borrow an amount equal to nearly 10% of its GDP to pay for its current level of imports. The Greek goods and services are not competitive. Therefore, Greece has to continue borrowing to finance its current account imbalance.
What Greece can do, when the austerity requirements imposed by the troika are deemed too painful? Let’s consider this kind of scenario. The Greek government introduces a new drachma currency and declares that under a new law all goods, services, bank deposits and bank loans will be payable in the new currency.
After an introduction of the new drachma, the value of the Greece’s new currency would fall relative to the euro currency. Real wages of the Greek people would be reduced and the Greek competitiveness would be increased significantly. The low value of the drachma would boost exports and reduce the value of imports. The Greek economy would start to growth and the unemployment rate would be reduced.
The Maastricht Treaty provides no way for a member state to leave the Euro zone, therefore, Greece might be punished and forced to leave the European Union as well. However, it seems that Germany is prepared to financially assist Greece in order to keep the euro project still in place.
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