Has Greece – finally – done enough? First impressions suggest today’s latest austerity measures, equivalent to €4.8bn, or about 2 per cent of gross domestic product, will help restore Athens’ credibility in financial markets. More importantly, they should rebuild faith in the European Union’s ability to put its own house in order.
Greece’s agony has been drawn out. Faced with a massive deterioration in public finances, largely hidden by the previous government, the Socialist administration of George Papandreou, prime minister, has gone through phases of denial and anger since being elected last October. Now, apparently, it has moved into acceptance. That probably has a lot to do with the presence of high-level European Commission and European Central Bank delegations in Athens this week – including Jürgen Stark, the German ECB executive board member known for his hard-line defence of EU fiscal rules.
Luigi Speranza, economist at BNP Paribas, argues that today’s announcement “dramatically enhances the credibility of the Greek commitment to comply with the announced fiscal targets”. Athens’ submission to Brussels and Frankfurt, he adds, “reinforces the credibility of the whole EU framework, for which the Greek case is probably the first significant test”.
No doubt Mr Papandreou will now receive a warmer reception when he arrives in Berlin on Friday, and then Paris at the weekend. He might leave with more concrete reassurances that help from other eurozone countries will be forthcoming if Greece runs into refinancing problems. But financial markets should still not assume that a rescue package is inevitable: Athens new-found determination to tackle its difficulties will, in many people’s eyes, make outside assistance less necessary.
But Greece is still far from receiving the all-clear. Ironically, global concerns could now shift into worries that Athens has gone too far in slashing budgets and raising taxes. Fiscal measures announced so far will act as a massive brake on economic activity.
Even before today’s announcement, the government’s forecast that gross domestic produce would contract by just 0.3 per cent this year looked hopelessly optimistic. The risk is that Greece is now in a vicious circle in which fiscal austerity sends the country ever deeper into recession – and Athens has to react even more aggressively to bring down the public sector deficit as a share of GDP. At some point the cutbacks will have to stop. Maybe that point has now been reached.
