After weeks of denial, the European Union has begun grappling with Greece’s debt crisis and the dangers it poses for the 15 other nations using the euro.
Last week, Europe’s political leaders reassured panicky bond markets that they would — in some way — ensure that Greece doesn’t default. This week, finance ministers gave Athens a month to show whether the draconian measures it has announced — increasing taxes, freezing public sector hiring and raising the retirement age — are enough to meet its target of slashing the deficit from 12.7 percent of its gross domestic product to 8.7 percent by the end of this year.
If not, Europe may demand even tougher measures, but it will have to show both vigilance and patience. As long as Athens holds to a credible austerity program, richer members of the euro zone should stand ready to guarantee Greek bonds against default.
Prime Minister George Papandreou’s Socialist government inherited this debt crisis. Over the previous five years, the conservative government recklessly expanded public payrolls. That kept unemployment down but ruined public finances and forced Athens to borrow more and more to pay the rising wage and pension costs.
Deceptive financial reports understated the government’s real deficit by half. (Tricky bookkeeping is a bipartisan Greek tradition. The Times recently reported that an earlier Socialist government had used a derivatives swap arranged by Goldman Sachs to conceal billions of dollars in debt when Greece was trying to qualify for the euro.) These problems can no longer be concealed.
Public opinion has largely rallied behind Mr. Papandreou as he has demanded sacrifices. In return, he must demonstrate that the pain will be fairly shared.
Government payrolls — the biggest drain on public finances — must be the first target. Tax authorities also must crack down on the millions of people who work off the books, depriving the government of billions of dollars in revenues. Labor markets must be liberalized. Pointless regulations that thwart private entrepreneurship need to be hacked away.
Brussels is right to step up its monitoring and insist that Athens meet its pledges. How quickly deficits decline depends not only on the government’s good faith but also on the economy’s performance. If short-term targets are not immediately met next month, Europe should not rush to dictate harsh additional measures.
Squeezing the Greek economy too hard, too fast would be counterproductive, drying up the tax revenues needed to restore fiscal balance. To start paying its own way again, Athens needs sound and sustained economic reforms, not sudden fiscal strangulation.
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