Is the Economic Crisis In Greece Really Over?
A growing chorus of senior European policymakers, including ECB President Mario Draghi and European Commission President Jose Barroso, keep reassuring us that the worst phase of the Euro crisis is over. They also keep telling us that there is now no risk of any country leaving the Euro. Evidently they are not paying much attention to the recent worsening in political and economic developments in Greece. For those developments are now very much heightening the risk that we will again be talking about Greece leaving the Euro before the year is out.
Among the more disturbing developments is the country's apparent loss of political willingness to comply with the terms of its IMF-EU financial support program after four painful years of budget austerity. Negotiations with the IMF and EU on that program's review, which should have been completed last September, show no signs of being concluded anytime soon. This could cause real difficulties for Greece by May 2014 when large loan repayments to the European Central bank come due.
Holding up the IMF-EU negotiations is the Greek government's insistence that, with unemployment having risen to over 28 percent and with the Greek economy having shrunk by a quarter since the onset of the crisis, it simply does not have the political support to take the further budget measure or to implement the additional economic structural reforms being demanded of it. And with the country now enjoying a small budget surplus, excluding interest payments, the government believes that it has the luxury to hang tough in its IMF-EU negotiations.
For their part, the IMF and EU are insisting that, after many years of policy disappointment, Greece must make good on its un-kept promises to downsize its public sector and to accelerate its privatization program. They are also insisting that Greece must take additional budget measures to close an unfunded budget gap estimated at around EUR 1 ½ billion for 2014. Complicating matters has been a recent ruling by Greece's highest court that earlier wage cuts for the military and security forces were unconstitutional and have to be rolled back. This will only add to Greece's unfunded budget gap in 2014.
The loss of political willingness to implement further painful reform measures is hardly surprising given the deterioration of Greece's political climate. Due to defections, the coalition government's majority in the 300 member Greek parliament has now been whittled down to only three members. At the same time, the clearest of divisions are now apparent in PASOK, the government's junior coalition partner. This has to raise questions about the long-run survivability of the government, especially if the government is required by the IMF-EU to obtain parliamentary approval for further unpopular budget austerity and reform measures.
Not helping matters is the rise in the polls of Syriza, Greece's political party on the far left, which is now comfortably leading New Democracy in the polls. Nor does it help matters that Syriza is making the forthcoming May 2014 European parliamentary elections and the May 2014 Greek local elections into a referendum on the government.
Should the government lose those elections, as appears all too likely, it is difficult to see how the Greek government can avoid having to call early general elections. And were Syriza to win those general elections, it is difficult to see how Greece can remain in the Euro. This would particularly appear to be the case if Syriza were to stick to its plan of tearing up the IMF-EU memorandum of understanding if it were to assume government.
The apparent unraveling of Greece's politics is hardly surprising given how very deep and long its economic recession has been and given how high its unemployment rate has risen. Considering that, with still strong fiscal headwinds, there is very little prospect that Greece will have a meaningful economic recovery this year, one must expect that a continued very poor economic environment will contribute further to Greece's political fragmentation in 2014. This would appear to be particularly the case now that the Greek economy is succumbing to outright price deflation, which would constitute a further headwind to economic recovery and which would only add to Greece's already very high public sector debt burden.
With patience with Greece running out, absent real progress in reforming the Greek economy, European policymakers might balk at providing the country with further financial assistance that would be highly unpopular with their domestic electorates. In that context, European policymakers are likely to be right in thinking that Europe is in a very much better position now to weather another major Greek crisis than it was in 2010. However, given the still very real risks of contagion to the rest of the European economic periphery, it would be a grave mistake for European policymakers to believe that a Greek event would not have major reverberations through the rest of the Euro area.