BackIs Greece’s huge debt trashing the euro?
Is Greece’s huge debt trashing the euro?
PremiumCrucial times:In Spain, investors showed the fear of a contagion if nations such as Greece need a bailout or default on their debt. Denis Doyle/Bloomberg
Athens: Dimitris Damianidis is a teacher at a high school and strong supporter of Greece’s socialist government. But that won’t deter him from going on strike with hundreds of thousands of other public sector workers next week to fight for the €28,000 (around Rs1.5 lakh) pension that he expects to receive annually after he turns 60 next year.
“Why should I as a worker pay for the errors in policies?" he asked, in response to reports that the embattled Greek state will cut his pay and, by extension, retirement benefits. “The worker can’t be the scapegoat. So we have to defend ourselves."
As Damianidis and others on the state payroll prepare to stop work on Wednesday, fear is building that the country’s new government may lack the nerve to cut public wages and pension payments, which make up 51% of its budget.
Over the past decade, Greece took full advantage of a strong euro and rock-bottom interest rates to fuel a debt binge by the country’s consumers and its government. This year, if Greece can’t persuade investors to buy €53 billion of its government debt, it may have to seek a bailout from its European Union (EU) brethren or the International Monetary Fund—or, worse, default.
The stakes are high, not just for Greece but for the entire euro zone, where efforts to forge a common economic identity are threatened by the financial crisis. Last week, the panic spread to Portugal and Spain, and the cost of insuring their debt against a default soared to record levels as investors bet that, like Greece, governments in those countries won’t be able to rein in bloated budgets.
“The risk of contagion is a real one," said Scott Thiel, head of European fixed income at the asset management firm BlackRock in London. “Investor sentiment is now focused on countries like Spain and Portugal, where fundamentals are weakest." He said that for now, he saw little risk for Italy, given the relative stability of its economy.
Greece’s problems, and those looming over its neighbours, have laid bare the dangers of divergent fiscal and political policies in the euro zone, calling into question the grand European experiment of squeezing 16 disparate countries into a monetary union.
As core economies like those of France and Germany show signs of economic recovery, Greece, Portugal, Ireland and Spain are just entering savage recessions. Spain, the largest of the peripheral economies, announced last week that the number of its unemployed had reached four million—the highest in its history—and warned that the country’s deficit might be worse than previously thought.
As growth slows and debt rises in these countries, government largess for university fees, secure government jobs and lifetime pensions will come under increasing pressure.
So, on a continent where the culture and legitimacy of the mother state are so deeply ingrained—and now in some cases unaffordable—a question remains: Can the European Commission say “no more" to prodigal nations such as Greece and, to a lesser extent, Spain and Portugal? And how will the countries themselves confront the political fallout of economic distress?
“People view these welfare policies as acquired rights," said Jordi Galí, an economist who leads the Center for Research in International Economics in Barcelona. “If the Spanish government were to stop paying the fees for students at universities or any move in that direction, there would be a major social uprising."
To avoid such a possibility—and to calm the panic in the markets—the European Commission may decide to rescue one or more of the governments. But a bailout of Greece, Spain or Portugal would not be as easy as the United Arab Emirates writing a check to Dubai: The European charter includes a no-bailout clause. Even if such a clause were to be overridden, much of the financial burden—and it would be huge—would fall upon Germany, the richest member of the union, said Daniel Gros, who leads the Center for European Policy Studies in Brussels.
For decades, both conservative and socialist governments in Greece have rewarded the demands of public sector unions with higher pay and more jobs. In 2009, striking farmers were paid €400 million by the government—and this year they are back again, having briefly closed Greece’s border with Bulgaria. Protesting dockworkers extracted big payouts from the government in November. And the tax collectors went on strike on Thursday even though their services are needed more than ever.
The pressing question now is whether the new prime minister, the lifelong Socialist George Papandreou, can break this cycle of appeasing various constituencies. This will determine his success as a reformer, to say nothing of Greece’s ability to rein in public expenditures and meet its target of a budget deficit of less than 3% of gross domestic product by 2012.
Papandreou, a political scion whose father and grandfather were also prime ministers, took office late last year. Since then, he has been sending mixed signals about his commitment to budget austerity. He and his finance minister, George Papaconstantinou, have called for unpopular sacrifices like a public sector wage freeze, an increase in the price of petrol, smaller bonuses for workers like Damianidis and a crackdown on tax evaders.
But other moves have demonstrated less fiscal restraint. Soon after the election last year, he signed off on a €1.6 billion “solidarity handout" to low-income Greek families. He has also said he will hire 2,000 new workers in the country’s energy department. His government also approved a measure giving borrowers a 12-month grace period to pay overdue debts and mortgages.
©2010/The New York Times
Niki Kitsantonis contributed to this story.
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