Deal too tough to help growth

A parliamentary majority was expected to approve an austerity package on Sunday night to secure the second international bailout for the debt-ridden country in the last two years. However, this is unlikely to signal the end of the debt crisis if Greece and the troika — the representatives of the country?s lenders, the European Union, European Central Bank and International Monetary Fund — do not learn from their mistakes.

The vote in Parliament yesterday was described by many politicians, businessmen and others as a critical one because it could have led the country to a disorderly default and exit from the eurozone as soon as next month when a bond issue of around 14.5 billion euros expires.

In this regard, the dilemma for lawmakers was clear: Endorse the bill so the country secures necessary financing through 2014 and slash its public debt to stay in the eurozone, or vote against and have the country return to the drachma and face chaos.

The answer to this dilemma was easy. However, the process was bound to have some drama, with predictable tactics adopted by certain deputies in the two main parties, New Democracy and PASOK, who have been keeping an eye on the polls, which point to a high disapproval rate for the new memorandum among ordinary Greeks.

The latter should have caused more concern to Greek and foreign policymakers than the vote of some lawmakers pursuing their own personal agendas. This is because it is more difficult for any economic adjustment program to succeed when it loses the support of a large portion of the public in a country such as Greece.

This is exactly what is happening in Greece, where more than two-thirds of the population support the country?s euro membership but some 90 percent or more disapprove of the economic program.

We have argued that the first memorandum failed to meet its targets both because of flaws in its design and insufficient or lack of implementation of structural reforms. The troika tackled the Greek problem as if the country were facing a liquidity crisis rather than one of solvency, which was in fact the case.

The second economic program recognizes this reality. However, it again fails to take into account the need to stabilize the economy and do more than count on the automatic pilot of cuts in labor costs to reduce unemployment and improve cost competitiveness and other structural reforms to bring about growth.

Only a utopian would have thought that such a large fiscal consolidation would not be recessionary in a country which cannot devalue its own currency to absorb part of the shock in economic activity.

Of course, structural reforms, such as lifting entry barriers to a number of restricted professions, are of utmost importance in such circumstances but usually bear fruit in the medium term.

However, Greece is facing a protracted recession, with unemployment hitting 20 percent last November. There is also growing disenchantment with the program, which is seen by many Greeks as imposed by the international lenders merely to secure the repayment of their loans.

In this regard, the lack of explicit growth initiatives in the new economic program and increasing signs EU countries are hesitant about disbursing the big chunk of funds from the 130-billion-euro financing package upfront should be a cause of concern.

This is because they are likely to further undermine popular support of the program and may contribute to Greece missing its fiscal targets in the next few months, necessitating more corrective austerity measures based on conditionality. In so doing, they will also undermine the sustainability of the country?s public debt.

The need to do more on the economic growth was illustrated recently by former Finance Minister and economics professor Nikos Christodoulakis, who argues that if the Greek economy had not grown or shrunk from 2009 through 2011, the public debt would have ended at 139 percent of gross domestic product at the end of 2011 instead of the actual 159 percent last year.

He calculates that the public debt would have been lower by 50 billion euros than it is now, comparing favorably to the estimated net debt reduction attained under PSI+.

Christodoulakis, who was a member of successive PASOK governments under the leadership of Costas Simitis, estimates the likely reduction in Greece?s debt burden following a successful implementation of the private sector involvement plan (PSI+) at 58 billion euros.

This is after taking into account a 100-billion-euro debt cut from the bond exchange as well as the cost of beefing up the reserves of social security funds by 14 billion euros, the debt assumed in recapitalizating Greek banks that has been put at 20 billion euros, and interest costs equal to 8 billion euros.

It is noted Greek state bonds worth more than 23 billion euros held by pension funds will receive a 50 percent haircut but the government has vowed to make up for the loss.

All in all, yesterday?s vote in Parliament was an important one but may not look so significant a few months from now if the Greeks fail to implement a good deal of a long list of structural reforms, the fiscal target is missed again, the EU fails to spur the Greek economy by disbursing the expected large amount of funds upfront and no growth initiatives are taken to slow down and finally halt the slide.