They’re calling it a “government of national salvation” and we can only hope so. Late word has it that world renowned economist Lucas Papademos will take the reins of government from outgoing prime minister George Papandreou. A technocrat, not a party man, Papdemos will have his hands full trying to implement the draconian austerity measures demanded by the EU in exchange for a $178 billion bailout.
I wrote about the changeover for FPM:
Papandreou almost blew the entire deal last Monday when, unexpectedly, he called for a nationwide referendum on the budget package. It proved to be a gigantic miscalculation and his eventual undoing. Not only was the plan for a vote on the austerity measures met with almost universal scorn in Greece and panic on European stock exchanges, it enraged German Chancellor Angela Merkel and French President Nicolas Sarkozy who had labored long and hard to seal the bailout deal with all parties involved. A “no” vote on the referendum would have led to Greece being denied the bailout funds, which would have resulted in an uncontrolled default and Greece leaving the euro for the drachma. Many analysts believe that a Greek default would start the dominoes falling of other nations experiencing debt crisis, including Portugal and Ireland. And it would threaten Italy, whose costs to borrow money has skyrocketed this past week with the political crisis in Greece.
By Thursday, with Papandreou facing a revolt of his own socialist deputies over the plan for a referendum, the prime minister withdrew it. After surviving the confidence vote on Friday and calls for his resignation coming from all quarters, Papandreou determined it was time to go. However, his ploy achieved something he may not have intended. In the end, it forced the opposition - including the New Democracy party - to also take responsibility for the austerity measures and see them through.
Now that Mr. Samaras’s party has bought in, the political pain will be shared across the board. Where before the previous bailout package and accompanying austerity measures became easy targets for the opposition to criticize Papandreou and PASOK, now his political opponents will actually be charged with helping to run the government, and will be forced to act more responsibly.
Samaras acknowledged as much, saying, “I can sense the agony of the Greek people,” adding, “Everybody has to act responsibly now and send a message of stability abroad to the people of Europe and the people of our country too.”
To describe the set of austerity measures that Greece is to implement as “draconian” is not an exaggeration. A few examples:
- Monthly pensions above 1,000 euros to be cut by 20 percent; monthly pensions at the same level for existing retirees under 55 to be cut by 40 percent.
- Health spending to be cut by 310 million euros ($432.2 million Cdn) in 2011 and a further 1.8 billion euros between 2012 and 2015.
- Education spending to be trimmed through merging or closing of 1,976 schools.
- The tax-free income threshold to be lowered from 12,000 to 5,000 euros.
- In an effort to raise money for the growing number of unemployed, the country is to introduce a “solidarity levy” of between one and five percent per household, which will be raised twice in 2012.
- Taxes on gas, cigarettes and alcohol to increase by one third; luxury taxes to be levied on items like pools and yachts.
Also, the government is to sell off and privatize several state concerns including telecommunications giant Hellenic Telecom and sell stakes in various banks, utilities, ports, airports and land holdings in 2011/2012.
One prominent European think tank, the Organization for Economic Co-operation and Development (OECD) says the bailout and austerity measures will work as long as they are fully implemented. But initially, there is little doubt that there will be real pain and more contraction in the Greek economy, which has shrunk by an astonishing 15% since 2008. The budget cuts and layoffs will only lead to a more severe recession in the short run, which will add to Greece’s budget deficit. The question facing European leaders is: will the bailout be enough to cauterize the wounded euro and get Greece back on its feet before the money runs out?
Good question, but I tend to think not. What the Greek government is trying to do is have a bloodless revolution, totally overturning not just the economy but Greek society and many cherished values and beliefs held by its citizens. This is not a recipe for success. It is a near guarantee of disaster.