Two different paths for Greece

Greece’s success in meeting the targets of the economic policy program next year will depend on social tolerance and the ability of the private sector to withstand the recessionary forces unleashed by the public sector and put a brake on the economy’s three-year slide. Optimists believe Greece will pull it off, as they expect the government to stick to the European Commission / International Monetary Fund memorandum and the public not to react differently than in other countries experiencing a protracted recession. On the other hand, pessimists expect social unrest and political developments to challenge the implementation of the program. Both cannot be right. With the financial crisis – which began in Greece last spring – engulfing Ireland and threatening to pull down Portugal and potentially even Spain, thus endangering the euro, the challenges for Greece are even greater than before. It looks increasingly likely that the country will not find enough global investors willing to buy its bonds at reasonable yields at best, if not at all, in the next couple of years as envisaged by the economic policy program agreed with the EC, the ECB and the IMF last May. Nevertheless, the government will have to implement the program in an increasingly difficult domestic environment, as the economy enters its third downward year with rising unemployment and more shops and companies shutting down. It is more difficult, because the only ray of hope is coming from the external sector with slumping imports on the back of depressed consumption and investment, and a modest pick up in exports on improved foreign demand and falling wages. With no concrete plans to prop up the economy during its soft spot, the sense of disappointment by bankers and businessmen appears to be stronger than a month ago. Still, structural reforms may be indeed an effective way to boost the economy’s competitiveness and the potential gross domestic product growth rate in the medium-to-long term but they usually do not help much in the short-term. Conversely, such measures to make the social security system more viable and the labor market more flexible usually entail short-term economic and social costs, exacerbating the negative side effects of the recession. According to pessimists in different industries, the evolving fallout from the restrictive incomes and fiscal policies implemented so far will combine with the costs of the structural measures in the next few months, producing an explosive cocktail. So, they think social unrest and a sharp rise in crime will be the consequences, paving the way for political developments, including a call for general elections. They are almost certain of a new wave of shops and small businesses shutting down after the upcoming holiday season, adding tens of thousands to the ranks of the unemployed. Some think the government may foresee such events and seek a new mandate and a new four-year term before April. On the other hand, optimists take a more positive view of future developments, starting from the thesis that the government has no choice but to implement the fiscal and structural policies spelled out in the EC/IMF/ECB memorandum, as if it doesn’t, Greece will not receive the next tranche of the 110-billion-euro bailout loan and will not be able to pay the salaries of the army of civil servants. Optimists believe the great majority of the Greek public has understood the severity of the situation and will not react in a disorderly way. Moreover, they think trade union leaders are discredited and since many of them belong to the ruling party they will obey party orders. Optimists also point to the lack of social unrest in other countries, such as Latvia and Ireland, which implemented fiscal austerity measures and had their economy contract more and longer than Greece. So, they expect the majority of the population to abstain from unruly demonstrations and other such events, pointing to the way Greeks have accepted the austerity and structural measures taken so far. It is hard to say which side is right. Time will show. One thing is sure though. If the public sector pulls down the private sector, the economy will suffer more than projected and the pendulum will swing to the pessimists’ side.