Thu, May 24, 2012 page9

• Greece and the euro — a quick and essential guide to the crisis

  • By Luke Harding / The Guardian
  • • 
    • 
    • 

  1)THE ISSUE AT A GLANCE

  Successive Greek governments have failed to carry out badly needed reforms. The problem isn’t new: It goes back decades. As a result, the Greek economy is in dire condition. The global financial crisis has exacerbated these problems. The steps needed to remedy the situation are politically difficult, as the recent Greek election result — or lack of one — shows. At the same time, Athens is under immense pressure from its EU partners, especially Germany, to implement reforms. Greece’s fiscal tragedy is hurtling toward its denouement — the country’s bloody exit from the eurozone.

  2)WHY IS IT BEING TALKED ABOUT NOW?

  On May 6, Greek voters rejected the two big parties that supported EU-imposed austerity measures. The center-right New Democracy and center-left PASOK parties had held power for four decades. Both were trounced, with voters instead flocking to radical anti-austerity parties on the left and right.

  On Tuesday last week, attempts by Greece’s president to cobble together a national unity government collapsed. Greece now faces a new election on June 17. The likely winner is SYRIZA, a collection of leftists, who reject austerity. On Wednesday last week, Greek caretaker Prime Minister Panagiotis Pikramenos took charge. If the Greeks catapult out of the eurozone, the contagion could spread to Spain and Italy. The entire European monetary project appears on the brink.

  3) A BRIEF HISTORY

  Greece’s structural problems go back a long way. We are talking about chronic deficits, declining competitiveness and poor public sector performance. Foreign investment has been static for a decade. The tax code is opaque and regulations for business are notoriously complex. The country has been on the EU’s naughty step for a long time, certainly since 2004 when Athens sensationally announced its previous government “misreported” expenditures. It “discovered” Greece had exceeded the 3 percent deficit threshold for the eurozone.

  The conservative government of former Greek prime minister Kostas Karamanlis — and its successor led by George Papandreou — took measures to restore economic credibility. They raised taxes to plug the massive deficit, reformed the tax system and slashed expenditure. However, Brussels and the markets have called for deeper and additional budget cuts.

  For ordinary Greeks, life has gotten worse. Tens of thousands of companies have been forced to close; countless shops in downtown Athens have shut; once-crowded cafes and restaurants are half-empty. Greece’s famous nightlife now only exists on weekends. Banks have tightened lending. Greeks have scaled back on spending. Unemployment has gone up: It is at record levels with 21.7 percent out of work (of which more than 50 percent are aged between 18 and 35). So has the retirement age, to 63 by 2015.

  At the beginning of the crisis, most voters tolerated the government’s austerity program. They did not back strikes by farmers and civil servants. Recently, however, it appears that most Greeks have grown fed up with the politics of austerity. Gloom and pessimism are now universal, according to surveys, with Greece officially Europe’s most displeased nation. The political beneficiaries have been the far-left and right, with the country now practically ungovernable.

  4) WHAT HAPPENS NEXT?

  No one knows. However, the most compelling scenario is that SYRIZA will emerge from next month’s elections on a platform to “tear up the barbaric accord.” Amid political chaos and despite EU partners releasing a further 18 billion euro (US$22.8 billion) cash injection, Greece will exit the eurozone. IMF Managing Director Christine Lagarde has talked of an “orderly exit” if Athens’ “budgetary commitments are not met.”

  However, it may not happen like that. If Greece withdraws from the euro, it will go back to the drachma. This will have catastrophic consequences: significant devaluation, the collapse of the banking system, a massive rise in unemployment above already high levels and the collapse of the Greek economy. Greece would struggle to pay its civil servants or pensions and be unable even to run public transport. In other words, chaos.

  5) THE OPTIONS — AND KEY ARGUMENTS

  There are two options left for Greece: to fight to stay in the eurozone or to accept the inevitable and plan for an orderly exit. Whatever government emerges next month will have to confront this crisis. Staying in would involve firefighting on three fronts: reviewing/renewing the budget to bring the deficit down; going to EU partners for political support; and talking down market concerns.

  As one adviser to a former Greek former prime minister put it: “We created this mess and we will solve it — in the Greek way.”

  The other option would be to prepare for meltdown that would accompany “Grexit.” A necessary first step would be to print some new banknotes. However, the drachma would not solve any of Greece’s structural problems: the mismanagement of public finances, low competitiveness and tax evasion. And, the skeptics say, nobody would want to buy it. The country would be unable to import oil, gas, food and medicines and chaos would ensue.

  6) WHAT DOES IT MEAN FOR OTHER EUROPEANS?

  Nothing good. A Greek exit would damage Europe’s faltering growth prospects. Not only would Athens leave the eurozone, it would also renege on its debt commitments. Banks that have lent money to Greece would suffer catastrophic losses with the risk of another credit crunch. The money markets, meanwhile, would turn their attention to the next country with major deficit problems, Portugal, making it prohibitively expensive for Lisbon to borrow. This is already happening in Spain. This piles further pressure on other euro states, according to City of London Corp economist Vicky Pryce. The UK would obviously suffer too: The EU is its biggest export market.

  7) KEY PLAYERS

  German Chancellor Angela Merkel:

  With her uncompromising insistence that Athens pursue severe austerity measures, Merkel may inadvertently have contributed to Greece’s ultimate euro exit. She has recently moderated her hardline rhetoric on Greece, but whatever happens next is likely to be seen by history as her responsibility.

  SYRIZA leader Alexis Tsipras:

  The radical left Greek leader has surged in polls after defying Brussels and EU-imposed austerity. His rise could serve as a model for other populist anti-austerity European leaders, while his party is now poised according to opinion polls to win next month’s general election.

  Golden Dawn leader Nikolaos Michaloliakos:

  The leader of the far-right, ultra-nationalist party won 7 percent in the Greek elections and will soon be making its debut in parliament. His victory has made rights groups uneasy because of its overt racist stance and has raised questions about the durability of Greece’s democracy.

  Greek Prime Minister Panagiotis Pikramenos:

  The 66-year-old former Supreme Court judge became caretaker prime minister on Wednesday last week, replacing Lucas Papademos, the former central banker and head of Greece’s emergency left-right coalition. Pikramenos is heading Greece’s caretaker administration until the country’s next election on June 17. His interim government will not have the power to make any new laws.

  Former European Central Bank president Jean-Claude Trichet:

  Trichet is unhappy that the IMF has been involved with the Greek bailout. Trichet is also against offering cheap loans to Greece, arguing: “There shouldn’t be any subsidy element, no concessionary element.”

  PASOK leader Evangelos Venizelos:

  The former Greek finance minister and socialist leader took over PASOK, the party created by Papandreou’s father, Andreas, out of the 1970s anti-junta resistance movement. Venizelos has charged Brussels with coming up with new terms and conditions for a bailout because it wants to kick Greece out of the single currency.

  8) GLOSSARY

  Austerity:

  A Greek word that means severe. Also a policy to reduce the size of a government’s deficit. There are two ways of achieving this: by increasing government revenues through tax rises and/or by cutting current and future government spending.

  Bailout:

  The rescue of a borrower unable to pay back debts. This can be done by lending the borrower money, guaranteeing their debts or guaranteeing the value of their dubious assets.

  Default:

  When a borrower fails to repay a loan or debt on schedule or when the borrower is unable to pay any of its debt obligations and is bankrupt.

  Deficit:

  The difference between how much a government borrows to fund spending and its income from tax revenues over the course of a year.

  Grexit:

  A new term coined to refer to the possibility of Greece leaving the eurozone.

  Citigroup’s Ebrahim Rahbari is credited with inventing the word, which is catching on fast.

  Stability pact:

  A set of rules devised by Germany in the 1990s when the euro was created. It states that governments inside the eurozone can only borrow up to 3 percent of their GDP, with fines for those who disobey. Greece fiddled its books to “stay” within the limits and has repeatedly breached the target.

  9) FAQ

  How much money does Greece owe?

  Loads. In 2010, Greece’s national debt was about 300 billion euros, larger than the country’s entire economy.

  How have Greece’s neighbors tried to help?

  All 16 of Greece’s eurozone neighbors led by Germany have put together a rescue package. This includes bilateral loans from countries inside the common currency area as well as money and technical advice from the IMF. Germany has been the main contributor followed by France.

  In May 2010, the EU and IMF provided 110 billion euros in bailout loans to help Greece pay its creditors.

  This was not enough; a second 130 billion euro bailout was agreed early this year.

  How long has Greece been in recession?

  Four years. Its economy shrank by a whopping 6.2 percent in the first three months of this year.

  What has Greece done to get itself out of the mess?

  Raised taxes on fuel, cigarettes and alcohol, hiked the retirement age by two years (to 63), imposed public sector pay cuts and brought in tough new anti-tax evasion laws.

  Which other nations could be victims of a Greek-style meltdown?

  Portugal and Ireland. Spain and Italy are also massively indebted and in poor economic shape.

  10) SOME KEY STATISTICS

  Unemployment

  ‧ 21.7 percent, of which more than 50 percent are aged between 18 and 35.

  Debt to GDP ratio

  ‧ 160 percent.

  Debt amount

  ‧ About 360 billion euros.

  11) THE ONE-SENTENCE KILLER DINNER PARTY LINE ON GREECE’S EXIT FROM THE EUROZONE:

  “It’s no longer a matter of if, but when.”
• Most Popular

  • 1

    F-16 Block 70 jets to arrive this month, official says

  • 2

    Taiwan-Tokyo travel pass launched

  • 3

    Chinese man captured on a rubber boat

  • 4

    Starlux Airlines to apply to join Oneworld alliance

  • 5

    Manila pulls ship from Sabina Shoal