TIMES ONLINE: This week the European Commission begins studying Greece’s latest plan for extracting itself from its financial crisis. But although the deployment of the Brussels machinery has taken the edge off the drama, any sense that the problem is now contained would be an illusion. The possibility that a country within the eurozone will get to the brink of defaulting on its sovereign debt remains real.
The new Greek Government’s plan remains incredible, based on a cut in the budget deficit from nearly 13 per cent to under 3 per cent in three years. That implies that Greece would, in one coherent sweep, push through profound reforms of the public and private sectors that it has not yet been able to tackle.
It remains likely, then, that Greece is headed for a crisis that tests the stability of the eurozone. The burden of Europe’s most difficult decision this year would fall on Angela Merkel, the German Chancellor, who would have to decide whether to rescue Greece to forestall a crisis throughout the currency club. But her Finance Minister openly rejects her declaration of a “common responsibility” for other members, and a rescue would be a hard sell to German taxpayers. Even more difficult, a real repair of the eurozone would require Germany to acknowledge that its financial management during the past decade has not been as virtuous as it likes to maintain.
Since October elections, Greece has been in an on-again, off-again crisis, since the new Government restated the budget deficit to 12.7 per cent of gross domestic product. Greece’s public debt is expected to rise this year from 113 per cent to more than 120 per cent of GDP. Markets have greeted with scepticism the assertion by George Papaconstantinou, the Finance Minister, that the plan is achievable. The costs of insuring against a default on debt have risen to the highest levels in six years since the market was launched — or $340,000 for every $10 million of debt annually over five years.
“I just think they can’t do it, and their growth prospects are worse than the Government is predicting,” Simon Tilford, chief economist at the Centre for European Reform think-tank, said. “They need to make cuts, but the country has shown little or no ability to do it” — either to cut the pension costs and early retirement extracted by the unions, to cut waste in hospitals and defence or to curb rampant tax evasion in the private sector.
Even if Greece made the cuts, that would push it into a slump and deflation; crippling for such a highly indebted country. “Whatever happens, it will be miserable for them,” Mr Tilford concluded. >>> Bronwen Maddox: Economic View | Monday, January 18, 2010
