Daily Archives: June 16, 2011

George Papandreou, the Greek prime minister, is out of ammunition. The embattled leader has been gradually losing control of his socialist party for some time, but the trend has sharply accelerated this week, as larger and angrier crowds take to the streets. He now plans to form a new government, but hopes that he can win passage in coming weeks for a new fiscal plan — needed to ensure the next European Union/International Monetary Fund loan tranche and any future bail-out package — are all but dashed. European leaders need to think about what to do next, and quickly.

To pass the plan, Mr Papandreou needs support from 151 lawmakers. With the loss of a deputy who quit on Tuesday, in protest at the prospect of further austerity measures, Pasok, Mr Papandreou’s party, now controls just 155 seats in parliament. Other party members are rumoured to be preparing to vote No, and the prime minister has already failed to win support for the plan from leaders of other parties, some of whom demand early elections.

Worse, a number of Greek politicians say they will join a unity government only if Mr Papandreou resigns. Antonis Samaras, leader of the main opposition New Democracy party, warns that the new government’s first task should be to renegotiate the current bail-out agreements with EU officials. That is not the outcome for which the rest of Europe has been hoping.

Aware that his country has run out of patience with austerity plans, Mr Papandreou has already offered to step aside once, and may have to do so again. He can make offers to bring Pasok and the centre-right ND party under a single political roof — but they are unlikely to work.

Attempts to create a new administration could generate positive headlines, if respected technocrats take up key posts and changes are made, for example, to the current agreement on corporate taxes. But even if Mr Papandreou manages to bring his country together, it won’t last; primarily because the current government has yet to persuade enough of its constituents that more belt-tightening is absolutely necessary if the country is to find its fiscal footing.

There is some good news here: it’s just not in Greece. Portugal and Spain are unlikely to follow Greece’s lead. The Portuguese aren’t as angry as the Greeks. Portugal has low trade union membership and loses fewer workdays to strikes than most other EU members. And that is in part because there is broad recognition in the country that reform is necessary.

The country’s main political parties also see the EU-IMF bailout as an opportunity to get on with much-needed structural reforms that can create new opportunities — by downsizing the state, freeing up labour markets and taking on a dysfunctional justice system. Over the medium term, if reforms in Portugal don’t yield visible results, the crowd may become restless. But the Greeks have already passed judgment on this question.

One of the primary problems facing Spain, meanwhile, involves the inability of the central government to force local lawmakers to rein in spending. But regional governments there are likely to adopt new austerity measures on their own as mandatory quarterly reports reveal that they are not meeting deficit targets and autonomous communities experience ratings agency downgrades and rising costs for funding. As in Portugal, there’s still hope that a sense of crisis can add momentum behind reforms and austerity measures that will strengthen the core of Spain’s economy.

The headlines today speak of chaos in the Greek political system and riots on the streets. Unfortunately, the reality is just as bad as they suggest. European leaders must prepare for the worst, as Greece barrels down the road to nowhere. They can only be thankful that Portugal and Spain aren’t yet following.

Ian Bremmer is the president of Eurasia Group, a political risk consultancy, and author of ‘The End of the Free Market’

Response by John Sfakianakis

Europe doesn’t have an alternative but to help Greece

Greece is in a perfect storm. On the one hand the political system is disintegrating ever faster and on the other hand the economy is falling into a recessionary tailspin. Society is losing confidence in its politicians by the day as the austerity measures hit the salaried workers and the pensioners. The majority of Greeks feel the wealthy, the journalists and the politicians have protected each other. A sense of injustice continues.

The vested interests, including the labour unions and the public sector, have remained untouched by the spending cuts as they are an important base of support for all political parties. While I was in Greece recently, several people shared in private their expectation that the country’s politicians would be further besmirched and its democratic principles endangered in the coming weeks.

Greece’s political system suffers from a credibility deficit which is multiples higher even than the country’s ballooning government debt. The infighting within the government is not new, but is exacerbated by its misguided policies. Society views the recent reshuffle as new wine in old bottles. George Papandreou could be searching for an honorable exit from the premiership.

Furthermore, the two main parties are perceived as collusive, especially as Mr Papandreou and Antonis Samaras, the leader of the conservatives, were roommates at college.

The problems are all the worse because the population that remains largely self-centred. Sacrifices have to be made – the public sector has to be reduced by around 80 per cent. But nobody wants to take the necessary steps. Politicians consider the political cost and Greeks are unwilling to pay the price. They have been given morphine shots since the early 1980s by their politicians and have turned into an unruly bunch that is now ungovernable.

While Europe doesn’t have an alternative but to help Greece, the situation in the country will get far worse before it gets better. Public spending has to fall fast and this can only happen by cutting the size of the state. A new tax collection agency is desperately needed. Endemic corruption needs to be tackled. The indictment of some politicians on corruption charges will certainly help boost public support for the spending cuts. New elections seem unavoidable and constitutional reform necessary.

Greece has to regain its sense of direction but that seems unlikely under the current political dispensation.

The writer is chief economist of Banque Saudi Fransi. The views expressed are his own.

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