IT FEELS – and on the riot-torn streets of Athens increasingly looks – like a fast-fizzing fuse. Today, with the country locked down in a two-day national strike and the government shaken by the resignation of five Cabinet ministers, the Greek parliament holds a critical vote on the latest austerity package to save the country from default.
Without agreement, Greece will not receive a crucial ¤130 billion (£110bn) bail-out in time to meet a ¤14.5bn government bond maturity demand due on 20 March.
Lucas Papademos, the prime minister, warned his Cabinet on Friday that it would be “a catastrophe” if the package was not approved. “Greece’s bankruptcy is not an option we can allow”, he declared.
Greece has the highest debt ratio in the euro bloc, owing more than ¤350bn (£293bn), equivalent to 145 per cent of GDP, far exceeding the Eurozone limit of 60 per cent of GDP.
But these numbers barely begin to describe the state that Greece is now in and the bigger question that looms even if the parliament approves the latest austerity terms: what can today’s parliamentary approval really signify when the government lacks the means to enforce another raft of deeply unpopular measures?
The economy is already in meltdown. State revenues are falling far short of the amount needed to bear down on its debt. The economy shrank by 5.5 per cent last year and unemployment is now reckoned to be at 21 per cent. Poverty and hardship is increasingly evident in the streets. Tens of thousands of young people have no prospect of a job, and pensioners have been unable to afford heating this winter.
The latest austerity package includes a further 15,000 public sector job cuts, a lowering of the minimum wage by 20 per cent, a reduction in pensions, the loss of employee protection in changes to labour laws, and agreement on a debt write-off with bank lenders.
To this grim package Eurozone finance ministers added late on Thursday a further three demands: additional spending cuts of ¤325 million to this year’s budget, full agreement by the Greek parliament and commitments in writing by the country’s political leaders to see through the reform programme even after elections in April.
Without full compliance on this, Greece faces a disorderly default. Yet many fear that ever more severe austerity is destroying the country’s economy and making it impossible for any sustainable recovery to take place. So Draconian are the terms that some now suspect there are elements within the group of EU finance ministers – Germany in particular – who do not believe Greece can possibly comply and that a debt default and exit from the Eurozone would be the preferable solution.
Traumatic though such an exit will certainly be for those holding financial assets in Greece, it may on a medium-term view be preferable to that offered by the enforced austerity route: the Greek economy and its government on a knife edge for years.
Certainly, the mood in Germany, after weeks of nailbiting negotiations between the troika (the European Commission, the European Central Bank and the IMF) and the Greek government is one of deep frustration – and distrust over the willingness, still less the ability, of Athens to comply.
In recent months, to help staunch the crisis, the ECB has bought Greek government bonds, and is now on the hook to the tune of ¤40bn. A writedown of these would further shorten that other fizzing fuse: Germany’s patience with the entire Greek debacle.