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The unpredictable political process - the Greeks endanger the stability in Europe

02-11-2011 16:58

The news that Greek Prime Minister Papandreou decided to hold a referendum to examine the support among the population for the rescue package, budget cuts, and ultimately also for EMU membership, came as a surprise.

Although there had previously been talk of a referendum, the intention at that time was to examine the support for the constitution. The link to the euro and the aid package was not an issue.

To make this decision only a few days after the EU agreement regarding the Greek debt reduction, bank recapitalisation and expansion of the EFSF rescue fund, came as a cold shower - not least for the European leaders who had spent many hours negotiating the package. Anger and irritation now radiates from Berlin, Paris, and Brussels.

The latest bailout is by no means the solution - many details remain to be worked out - but it was still an indication that further steps had been taken to reduce the Greek debt burden. At first, it was stated that the country's debt ratio would fall down to 120 per cent of GDP by the end of the decade, but new estimates show that this may be too optimistic, and that the actual figure is closer to around 145 per cent. This will require larger write-offs, which also include the entire debt, i.e. the part which is owned by the public creditors such as the ECB, and not only the private creditors as is the case now.

The questions for the Greeks are however quite different from what the exact debt ratio will be by the end of the decade. It is about being betrayed by politicians for years, with a dishonest picture of Greece, erroneous investments, corruption, and favors directed toward a minority of the population who could enrich themselves – with tax and capital flight as a result. It is all about the fact that the majority of the population – i.e. the rest – has to make great sacrifices in the form of lower standard of living in order for the country to get access to the negotiated rescue package.

The effects will now be reduced wages, pensions, and many lay-offs due to the fiscal consolidation and the goal to strengthen competitiveness in the absence of the usual devaluation of the currency. The unemployment rate – according to official statistics – is approaching 18 per cent for adults, and for young people the number is more than twice as high.

On the other hand, it is now or never that Greece has the opportunity to implement reforms that will help the country achieve sustainable growth. The reason for Papandreou to choose this moment to test the support, and thereby strengthen his position for the rest of the term, suggests that he is under very heavy pressure from both the political opposition and his own party, PASOK. The problem is that many new risks will be introduced into the process, which affects not only Greece, but the whole of Europe.

Firstly, there is uncertainty about how Greece will now get the money which is to be paid in November. The entire agreement finalised last week might also be re-negotiated. Will the euro leaders now lose their patience and prepare for Greece suspending their payments? Can the banking system manage in the current situation without recapitalisation? Is the referendum the first step for Greece to leave the EMU, or it is possible to find a solution where the Greek budget cuts are negotiated and where new forms of support will be found? Is there really enough patience among the German population and German politicians to give Greece another chance? And what happens if Greece decides to leave the EMU - what will happen in Greece, how will the euro collaboration with the other crisis countries be affected, and how big will the turmoil be in the financial markets?

The questions outnumber the answers. The uncertainty has increased. It has always been possible to solve the crisis in the euro zone, but only if politicians make decisions that enable solutions. Papandreou's decision may be correct from a democratic point of view, but jeopardises the development of his own country, the euro zone, and ultimately the global economy. The timing of elections is remarkable now that the aid package had been negotiated and crisis management had taken a step further. The question is whether Greece really will get more chances. Will people choose stability instead of chaos, short-term sacrifices to achieve a more sustainable growth in the longer term, and how easy is it to take such a decision?


Cecilia Hermansson
Cecilia Hermansson
Group Chief Economist, Economic Research Department, Sweden


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