Greek Leaders Clinch Austerity Deal for Bailout

Greece’s political leaders agreed to implement further budget cuts in order to qualify for another European rescue package.

Prime Minister Lucas Papademos of Greece addresses parliament, November 16, 2011
Prime Minister Lucas Papademos of Greece addresses parliament, November 16, 2011 (Greek Prime Minister’s Office)

Greece’s political leaders on Thursday agreed to implement further austerity measures in order to qualify for a second European bailout worth €130 billion.

Without financial support from its neighbors, Greece expects it would be unable to pay back loans due March 20.

The latest effort involves a reduction of the minimum wage by some 20 percent besides deeper budget and public-sector personnel cuts but conservative and socialist party leaders failed to agree on a plan for pension reform.

According to Eurostat, among the three Southern European countries that have received bailouts to avert sovereign default, Greece’s monthly minimum wage of €876 is the highest compared to €565 in Portugal and €748 in Spain. Workers in these countries also enjoy a thirteenth and a fourteenth month of pay. Yet Greek workers are less productive than their Spanish counterparts although, at least before their country was engulfed in debt crisis, they outperform the Portuguese.

As Greece’s finance mister hurried to Brussels today to confer with his eurozone counterparts and extract another bailout, trade unions in his country announced a two day strike for Friday and Saturday to protest the planned reductions. “There will be a social uprising,” the secretary general of the nation’s civil servants’ union told Reuters.

Athens also reached an agreement with private creditors on a bond swap in which up to 70 percent of the value of Greek debt would not be repaid. This would reduce the country’s gargantuan €350 billion debt pile, which is roughly 50 percent larger than Greece’s annual economic output, by some €100 billion.

Other European countries are demanding that the Greek party leaders commit themselves in writing to the latest round of cuts. They fear that after parliamentary elections later this year, the conservatives, who rallied against the cuts while the socialists were in power, will renege on the terms of the latest rescue plan and forestall the entitlement and labor market reforms that Greece has to enact if it is to regain competitiveness relative to other countries in the euro area.

The Greek economy, which shrank about 6 percent last year, is projected to contact by another 4 percent in 2012. As tax revenues drop, the negative growth makes the process of fiscal consolidation all the more difficult. Both in 2010 and last year, the government’s shortfall exceeded 10 percent of gross domestic product.

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