After fraught negotiations that stretched on all summer, the coalition government led by Greek Prime Minister Antonis Samaras appeared last week to have reached agreement on a new package of cuts, which it hopes will satisfy the demands of the troika.
However, Greece’s economy remains in a wrenching recession, and it looks likely they will continue to miss the goals set by international lenders, even if the next 31 billion euro disbursement from its bailout fund is released. Eventually, Greece’s partners may decide to let it go — especially if they believe they have elected a solid firewall that would prevent a “Grexit,” as it is known, creating a devastating chain reaction in financial markets.
And Greece could yet decide to leave of its own accord, if domestic political pressure becomes too intense. With Samaras elected on a promise he would exact concessions from the country’s creditors, the political reaction to a fresh round of cuts from a population already scarred by the downturn is likely to be furious. Protesters threw Molotov cocktails at riot police at a protest during last week’s general strike, the latest of many as the workforce has endured cuts in benefits, wages, pensions and public services to meet the troika’s deficit targets.
In theory, the “internal devaluation” Greece is going through is aimed at making the country’s goods more competitive on world markets by cutting the cost of production. However, there is little sign that growth is about to be restored.
“If you look at what Greece is going through, it’s comparable with the Great Depression,” Lombard Street Research director Dario Perkins says, saying that economic output has already plunged an extraordinary 20 percent since the start of the crisis. “The US Great Depression didn’t end because of austerity, it ended because they left the gold standard and they had a massive devaluation, and because fiscal policy was moving in the right direction.”
LACK OF GROWTH
Even if all the other pieces fall into place — the Spanish bailout, the latest tranche of the Greek rescue, Draghi’s bond-buying splurge — there remains the question of whether the widely diverging fortunes of the eurozone’s economies can be brought closer together.
Europe’s statistical agency, Eurostat, expects the eurozone economy to contract by 0.3 percent this year, and expand by a paltry 1 percent next year.
However, that average disguises a sharp divide: While the powerhouse of Germany continues to expand — though at a less healthy pace than in the past 12 months — much of the rest of the single currency area is trapped in a deep recession, unable to compete with the wealthy economies of the north, where, certainly in Germany’s case, falling real wages over a number of years have created a super-competitive manufacturing sector.
“The bigger issue for us always is: Does any of this address the underlying problems?” Capital Economics Europe economist Jonathan Loynes says. “Even if the ECB comes out with all guns blazing, all it’s doing is dealing with one of the symptoms: It’s not reducing anyone’s debts.”
He fears that while Europe’s politicians may be able to paper over the cracks with emergency bailouts in the short term, voters in Germany and the other “core” economies in the currency bloc may not be willing to countenance the large-scale financial transfers that would be necessary if Greece, Portugal and Spain were to be brought up to speed with the rest of the eurozone.