Lighthouse in Crete, Greece, January 29, 2009 (Helen Sotiriadis)

Greece’s debt crisis has brought to the surface a surface a serious question—where actually does Greece belong in financial, geopolitical and social terms?

The modern Greek state was founded on a strange mix of Arab, European, Levantine and Ottoman influences. Two of its greatest leaders of the last century, Eleftherios Venizelos and especially Konstantínos Karamanlís, firmly believed that the nation was an inseparable part of the West.

Before Greece entered the European Union in 1981, Karamanlís, who was serving out his fourth term as prime minister, argued that European culture “is a synthesis of the Hellenistic, Roman and Christian spirit.”

A synthesis to which the Greek spirit introduced the idea of freedom, truth and beauty; the Roman spirit contributed the idea of the state and justice and to which the Christian spirit gave faith and love.

Even Greece’s socialist party, which initially rejected Greece’s European Union membership, came to recognize the political and financial benefits which it offered.

Some thirty years later, Greece’s is at the center of Europe’s sovereign debt crisis and without political leadership. The rise of radical left and right wing parties has shocked European leaders from Berlin to Brussels. The call for Greece to leave the eurozone is heard ever more loudly. It would likely mean Greece’s exodus from the European Union as well.

If that happens, what path should Greece follow?

Ian Bremmer, president of the Eurasia Group, suggests in the Financial Times that Greece could be an integral part of Russian strategy in the Mediterranean.

Russia currently shields Syrian president Bashar al-Assad, who has been internationally condemned for his brutal crackdown of an anti-government uprising in his country, because Moscow needs him right where he is. Syria is its most reliable Middle Eastern commercial partner. Moreover, for Russia, access to a Mediterranean port holds considerable strategic value.

If Assad falls, could Greece be its Middle Eastern proxy? It shares some affinity with at least several of the nations in the Levant, where, controversially stating, the only marker of qualifying is to be in a state of ongoing decline.

Greece meets several of the criteria to be considered part of Middle or Near East.It is heavily in debt, its church is deeply involved in politics and protected by the State. It has a long time sworn enemy—Turkey.

A Greek exit from Europe could actually prompt a series of geopolitical domino effects. As Nick Ottens wrote at the Atlantic Sentinel earlier this week, “If Greece is forced to leave Europe’s single currency union and possibly suffers a bankruptcy, its Cypriot allies would necessarily lean more heavily on their newfound friends in Israel.” He also pointed out that Russia could seek to take advantage of the situation.

The question is now in the hands of Greek voters. Will they choose Europe or Middle East? The euro or the drachma? If the tone of the political debate is any indication, the Greeks are as divided as the rest of Europe is undecided about whether to let them stay in.

A Greek F-4 Phantom plane prepares to leave Aviano Air Base in northeastern Italy, March 19, 2007 (US Air Force/Bethann Caporaletti)

As if to remind the world of the geopolitical implications of a Greek exit from the eurozone, Turkey on Thursday said it had scrambled military jets earlier in the week to intercept an Israeli plane that violated northern Cypriot airspace.

Monday’s reported incursion coincides with mounting tensions on the Mediterranean island over oil and natural gas exploration plans there. Turkey previously condemned the Greek speaking south when it announced plans to drill for natural resources off Cyprus’ coasts but has since endorsed similar plans on the part of the Turkish government in the north which only Turkey recognizes.

Athens naturally supports Greek Cyprus in its energy and political disputes with Turkey and has signed mutual defense guarantees with Israel following the Israeli-Turkish rift.

Relations between Ankara and Jerusalem soured when Israeli commandos raided a Turkish vessel that was bound for Gaza in May 2010 and killed nine Turkish activists on board.

Cyprus has been divided since 1974 when the Turkish military invaded the island after a short lived Greek Cypriot coup engineered by the military junta then in power in Athens.

Turkey still keeps some thirty thousand troops in the north while a buffer zones that separates the two sides is monitored by the United Nations. Greek-Turkish relations have been strained ever since Greece won its independence from the Ottoman Empire in 1821. Maritime border disputes between the two nations in the Aegean Sea are unresolved to this very day.

Israel’s support of Greek Cypriot exploration efforts complicates the picture. As analysts from the geostrategic consultancy firm Wikistrat pointed out in February, “While Israel views Cyprus as the best and most direct way to transfer gas to Europe, Turkey will view this as a way to undermine Turkish Cypriot interests.”

If Greece is forced to leave Europe’s single currency union and possibly suffers a bankruptcy, its Cypriot allies would necessarily lean more heavily on their newfound friends in Israel. Moreover, there is a good chance that Russia will step in to take advantage of the situation.

As the Financial Times explains, the damage to Cyprus’ financial system, heavily exposed to Greek debt, would be devastating if the nation left the euro.

Cyprus last year received a cheap €2.5 billion loan from Russia in a gesture that reflected the Kremlin’s interest in protecting wealthy Russian depositors with billions parked in Cypriot banks. It may soon need more aid.

The links between Greece and Russia have historically been strong, writes Walter Russell Mead at The American Interest.

In Ottoman times, Orthodox Russia was the protector of Orthodox Christians in the great Islamic empire and frequently used its diplomatic clout to defend the rights of its coreligionists. Greece looked to Russia as a reliable ally during much of the troubled period after modern Greece gained independence from the Turks.

If Greece feels abandoned by its European partners, it may look to Moscow for shelter again. That would leave Europe without a foothold in the eastern Mediterranean.

Turkey is formally still engaged in European Union membership talks but the prospect of it joining the union any time soon is dim indeed.

Cyprus is in the euro but would likely require financial support if Greece collapsed, raising the question of whether it wants to submit to the very austerity measures that doomed Greece or seek its future elsewhere.

Israel has a clear interest in balancing against what it perceives as Turkish hostility and will be quite willing to strengthen ties with both Cyprus and Greece.

Russia could finally attain what Greek and Turkish NATO membership was supposed to deny it—unfettered access to the eastern Mediterranean Sea for its navy.

Athens, Greece, December 10, 2011 (Helen Sotiriadis)

With the collapse of multiparty talks to form a new government in Greece, the country’s future in Europe’s single currency area is seen as highly precarious.

Ordinary Greeks are pulling their deposits out of local banks in anticipation of a eurozone exit which could trigger a currency devaluation. The country’s president said on Tuesday that at least €700 million in savings had been withdrawn before day’s end.

Investment bank JPMorgan Chase raised the odds of Greece leaving the euro to 30 to 50 percent. It predicts a “massive capital flight” to escape capital controls and the printing of IOUs (“I owe you”) debt papers which would temporarily serve as alternative currency while Greece prints new drachmas.

Worse for the rest of Europe, a Greek exit and likely sovereign default—as it would lack the international financial aid necessary to make payments—could trigger a “capital flight from [the] rest of [the] periphery.”

If periphery countries then impose capital controls, the monetary union is effectively dead, as one country’s euros are then not the same as another country’s euros.

The precedent is Argentina which defaulted on its debt obligations in 2001 and simultaneously depegged the peso from the dollar. Dollar deposits became peso deposits and it was illegal to make any more payments in dollars.

As a result of the peso‘s subsequent devaluation relative to the dollar, ordinary Argentinians effectively lost up to 80 percent of the value of their savings.

The policy was designed to prevent a collapse of Argentina’s banks and would likely have to be replicated in Greece if its financial institutions also lose access to European Central Bank funding.

The danger is that savers in other heavily indebted eurozone nations, including Italy, Portugal and Spain, fearing default and devaluation in their own countries, will pull their money out of the banks and drive it to Germany or Switzerland. Such a bank run could herald the collapse of the currency union.

Some are willing to risk it. German weekly Der Spiegel says Greece must leave the euro. “The attempt to retroactively bring the country up to speed through reforms has failed.” If the Greeks have their own currency again and devalue it, exports would be cheaper. “The Greek economy could become competitive again.”

This would be true if Greece were an exporting nation but as Der Spiegel also notes, it has actually a tiny industrial base and is (or was) hugely dependent on public spending. The total value of its imports is twice the size of its exports.

The costs of imports would skyrocket if Greece left the euro, deepening a recession that has already shrunk the country’s economy by nearly a fifth since the beginning of the financial crisis in 2008.

One out of five Greeks is out of work. The youth unemployment rate is over 50 percent. Changing the currency won’t change any of that unless market reforms are simultaneously implemented to make the Greek economy more competitive.

Greece was supposed to implement liberalizations in the last two years as a condition for the financial support it received from its European partners and the International Monetary Fund but progress has been markedly slow. If the government in Athens—possibly a left wing government that doesn’t believe in austerity—is no longer under pressure from the specter of default, there will only be less incentive to rein in public spending and reform.

What is more, if Greece regains its own currency, it also regains the ability to print money to try to inflate its debt away. An expanding money supply would no longer be offset by growth elsewhere as is the case in the eurozone. The value of Greeks’ money would first decrease as a result of switching to the drachma and possibly again as a result of hyperinflation.

So for Greece, there is no easy way out. If it tries nonetheless, the rest of Europe can only hope that investors and savers don’t expect other countries will follow.

Greek leftist leader Alexis Tsipras arrives at the presidential palace in Athens for coalition talks, May 13 (AP/Kostas Tsironis)

Greek left wing parties rejected proposals to support a technocratic government on Tuesday, a last ditch effort by Greece’s president to avert new elections and possibly bankruptcy.

“We don’t want to consent to any kind of bailout policies, even if they are implemented by nonpolitical personalities,” a spokesman for the far left alliance SYRIZA said. Party leader Alexis Tsipras earlier ruled out any coalition that adheres to the conditions of Greece’s two international bailouts.

The southern European country’s traditional ruling parties have supported a technocratic government for the last six months but were punished in last week’s election, falling two seats short of a majority between them.

The conservatives and socialists have since been in talks with parties that campaigned against austerity. If they cannot agree to form a government, there will likely be new elections in June. SYRIZA would come out the strongest, according to opinion polls, and may be able to form a coalition with the communists and other left wing parties.

June is also when the latest tranche in European and international financial support is due. If Greece does not advance its program of fiscal consolidation and market reforms, its European Union and International Monetary Fund paymasters could withhold bailout funds, raising the specter of a Greek sovereign default.

Greece received €110 billion in financial assistance in 2010 and was promised a second bailout worth €130 billion in February. More than half of Greece’s €350 billion debt was subject to “haircuts” at the time. Banks and private investors were forced to write off billions in Greek bonds.

Jean-Claude Juncker, Luxembourg’s prime minister and head of the group of eurozone finance ministers, insisted on Monday that talk of Greece leaving the currency union is “nonsense” and “propaganda” but German finance minister Wolfgang Schäuble told the Welt am Sonntag newspaper that, “We cannot force a country to stay in the euro.” He added, “Questions have to be asked in a European context—what is the best for Europe? As a rule, that is the best for Germany, too.”

Last week, European Commission president José Manuel Barroso suggested in an interview with Italian television that Greece could be made to withdraw from the euro if it rejected the bailout agreement. “Of course, the agreements have to be respected,” he said, “and if they are not respected, it means that the conditions do not exist to continue with a country.”

Greek socialist party leader Evangelos Venizelos when he was defense minister attends a church service in Moscow, Russia, March 30, 2010

Former Greek finance minister and socialist party leader Evangelos Venizelos acknowledged on Friday that his attempts to draw other left wing parties into a ruling coalition had failed.

Venizelos’ was the third effort to form a coalition. Earlier, conservative leader Antonis Samaras, whose party came out the strongest in last week’s parliamentary election, and radical leftist Alexis Tsipras also failed to find a majority.

Tsipras has sworn to tear up Greece’s international bailouts and does well in the polls. In an election rerun, his far left alliance could be the winner, robbing Samaras’ conservatives of the extra fifty seats they gained as a result of their victory on Sunday.

Venizelos, like Samaras before him, had tried to put together a unity government. The main conservative and socialist parties are just two seats short of a majority but other lawmakers, ranging from the far left to the far right, are united in their opposition to the austerity measures that have been implemented in exchange for two international bailouts.

The otherwise pro-European Democratic Left, which has nineteen seats in the current parliament, was seen as likeliest to join a coalition with the traditional ruling parties but refused to participate unless Tsipras’ radical left, which has fifty-two seats, also took part.

Tsipras brushed aside the notion of forming a unity government, describing it as scheme to salvage the bailouts which most voters rejected.

“It is not the left coalition that has refused this proposal,” the former communist and student leader said after the talks collapsed, “but the Greek people, who did so with their vote on Sunday.”

Despite strong resistance against the austerity measures, the conservatives and Venizelos’ PASOK party are still in favor of adhering to the conditions of their country’s bailouts.

In 2010, Greece received €110 billion in financial assistance from the European Union and the International Monetary Fund to prevent it from defaulting on its debt obligations.

A second package, worth €130 billion, was committed last February. More than half of Greece’s €350 billion debt was also subject to “haircuts” at the time. Banks and private investors were forced to write off billions in Greek bonds.

To qualify for continued financial support, Greece has to demonstrate progress on fiscal consolidation and market reforms. Its deficit this year is still projected to be above 10 percent of gross domestic product while economic liberalizations appears to have stalled.

If Greece fails to meet the conditions of the bailout, it could find itself unable to make good on its debt obligations as early as next month, when new elections will likely take place. A Greek bankruptcy would put its future in the European single currency at risk.

Voters celebrate as François Hollande's election victory is announced in Tulle in the south of France, May 6 (Benjamin Géminel)

Elections are held across Europe on Sunday. From national polls in France and Greece to local elections in Germany and Italy, austerity is on the ballot as voters are expected to vent their frustration with the slow peace of economic recovery in the eurozone.

The marque event is France’s presidential vote. Right wing incumbent Nicolas Sarkozy trailed his socialist opponent François Hollande by just several points in the most recent opinion poll.

An Hollande victory, expected to be followed by a left wing swing in June’s parliamentary election, could dent German chancellor Angela Merkel’s hopes of imposing fiscal austerity across the single currency area.

Hollande has promised to “renegotiate” the fiscal compact that was signed in December which capped government deficits at 3 percent of gross domestic product. He insists that the emphasis should be less on cuts, rather on “growth,” which means: more room for fiscal stimulus and increased European financing for regions that have been hit hardest by the recession.

Merkel’s christian democrats are struggling to hold onto power in Germany’s northernmost and largely rural state of Schleswig-Holstein. The party is in coalition there with the right wing liberal party which is also its partner at the national level. While the chancellor’s conservatives are still the largest in national polls at 36 percent, the liberals wouldn’t even make the 5 percent election threshold if parliamentary elections were held today.

If the conservatives win the election in Schleswig-Holstein, they will likely seek a “grand coalition” with the social democrats. If rather the left secures a majority with the Green party, the christian democrats could be ousted altogether.

There will also elections in the industrial state of North Rhine-Westphalia next week after the ruling left wing coalition failed to pass a budget. Both the conservatives and social democrats lost heavily there two years ago but the Greens nearly doubled their seats in the state parliament. Merkel’s party is not expected to recover. The social democrats are expected to come out stronger, drawing votes from the Green party and the far left.

Local elections in Italy, too, will test the popularity of the government’s austerity agenda. Prime Minister Mario Monti is not on the ballot but the main left and right wing parties that support his technocratic government are.

The center left Democratic Party had a narrow overall lead in preelection polls over former prime minister Silvio Berlusconi’s conservative Il Popolo della Libertà (“The People of Freedom”) with the third biggest share of support going to Beppe Grillo, a blogger and comedian who wants Italy to leave the euro and default on its debt.

Fringe parties are also on the rise in Greece where the traditional conservative and socialists parties are struggling to secure a majority.

PASOK, the former ruling party now led by finance minister Evangelos Venizelos, and the conservative Néa Dimokratía (“New Democracy”), which both supported Prime Minister Lucas Papademos’ caretaker government and its austerity agenda, would together win between 35 and 45 percent of the vote, according to opinion polls conducted last month. Most third parties are opposed to sticking to the conditions of the two European bailouts that Greece has received to prevent a sovereign default.

In an interview with the British newspaper The Guardian this week, Venizelos warned that Greece’s future in the eurozone is at stake in this election. “The Greek people will have to give a clear answer as to whether it wants (to follow) a pro-European course, which is safe and responsible, or something else.”

The German finance minister Wolfgang Schäuble warned that Athens must respect the commitments made or “it will have to bear the consequences.” He told the Reuters press agency that the Greek and French elections “will not have, in essence, any impact on German financial policies.”

French Socialist Party presidential candidate François Hollande, April 22

Shivers are running down the spines of Europe’s champions of austerity. If, as expected, socialist François Hollande wins France’s presidential election on Sunday and the Greeks return a parliament that is hopelessly divided on the same day, the pressure on Germany and its allies to surrender the push for budget restraint and allow for more deficit spending will increase.

Hollande has pledged to renegotiate the European fiscal compact that was signed in December—but has yet to be ratified in all eurozone states. The main conservative and socialists parties in Greece will likely fail to achieve a majority, forcing them to enter a coalition with third parties that mostly hostile to the austerity effort.

The Greeks have had to endure the worst of Europe’s debt crisis. In exchange for two international bailouts, totaling €240 billion, Athens has had to implement spending cuts and enact market reforms. Salaries in the private but especially the public sector were cut. So were pension payments and government subsidies.

Anticipating public resistance to mere budget cuts, Europe’s leaders in January stressed competitiveness in their fiscal treaty besides fiscal consolidation. Deficits had to reduced to under 3 percent of gross domestic product with fines for profligate member states but highly indebted governments in the periphery of the single currency area were also expected to liberalize their economies.

Italy, where former European commissioner Mario Monti became prime minister in November, has led the way. His technocratic government cut spending and raised taxes to balance its budget but also introduced entitlement and labor market reforms, the effect of which will take years to gauge as the country is burdened by excessive regulations, a mammoth bureaucracy and powerful trade unions that resist Monti’s efforts.

The conditions in France are fairly similar except taxes are even higher and the state claims an even larger share of annual economic output. Unlike Monti, Socialist Party presidential candidate François Hollande has displayed no willingness to meet market demand for flexibility and spending restraint. Instead, he promises to hire more civil servants and raise taxes on the rich.

Hollande’s push is one for “growth.” It is the European left’s newest buzzword for more government spending, implying that a recovery can only came about as a result of public “investments”—financed by borrowing.

When the British complained in January that the fiscal compact, heralded by German chancellor Angela Merkel, “essentially makes Keynesianism illegal,” they were isolated. Prime Minister David Cameron was one of two European leaders who opposed the treaty. The Czechs also vetoed. Neither country is in the eurozone so the fiscal compact could go ahead regardless.

Now, the call to end austerity is heard louder across the continent. Rallying against supposed “cuts” in government programs and spending—which is usually a euphemism for reductions in planned increases in spending; in few countries have outlays actually come down—left wing political parties and labor unions are forcing even right wing leaders to make concessions.

In the Netherlands, liberal prime minister Mark Rutte’s minority government, otherwise a stalwart German ally, had to forego some planned spending cuts and raise taxes instead to appease a centrist coalition that was willing to support a budget that will reduce the country’s shortfall to under 3 percent of GDP next year.

In Italy and Spain, conservative prime ministers are urging further flexibility on the part of the European Central Bank to finance their deficit spending. The central bank in Frankfurt purchased billions worth of peripheral bonds late last year when interest rates on Italian and Spanish debt rose over 7 percent, deemed unsustainable. This temporarily calmed markets but is far from a permanent fix. France’s Hollande also likes to see a more activist central bank.

The Germans, for their part, remain skeptical. “It’s important that we get away from the idea that it always costs money to get economic growth,” Merkel told the Hamburger Abendblatt on Tuesday.

Greek prime minister Lucas Papademos and his finance minister Evangelos Venizelos in Brussels, February 20

Last Friday saw the culmination of efforts that had started their official trajectory in the last days of July of last year when it was made official that Greece would be allowed to write off part of its sovereign debt.

Controversial at the time was the insistence on private bondholder participation, a demand that many felt increased the volatility in the sovereign debt market for all the countries that were vulnerable—Italy, Portugal, Spain.

Beyond this, the insistence by the European Central Bank that this would not trigger a credit event, effectively a way of claiming that Greek had defaulted, would not be allowed to happen. The rationale was that this would impede the ability of the bank to legally provide Greece with funds.

Following negotiations between the “troika” of the European Commission, the ECB and the International Monetary Fund, as well as various representatives of the stakeholders of Greek sovereign debt, a harrowing back and forth which often teetered on the brink of ruin, a settlement was finally reached with 85.8 percent of the bondholder value.

Beyond that, two out of three foreign Greek creditors agreed to debt swap. The new debt has potentially a very long maturity rate, up to thirty years, and the minimum loss on the original bonds will probably be more than 50 percent.

The Greek Government forced remaining bondholders into a Collective Action Clause which can retroactively force them to settle because the majority of creditors had agreed to the writeoffs and swaps.

After many months of waiting and the big credit rating agencies downgrading Greek debt to junk status, the International Swaps and Derivatives Association, the authority in determining if a credit event has taken place which would trigger credit default swaps, ruled that a credit event had indeed occurred here.

The outcome of this ruling seems to have been more optimistic than expected. The ISDA stated that the credit event was triggered specifically for Greece imposing its Credit Action Clause but the value of net CDSs this triggered is a relatively small sum, reaching $3.2 billion. This is less than 1 percent of the total bond value under consideration.

The ISDA also gave a clear ruling on what are the conditions for a credit event to take place. This may reduce uncertainty in the market and reassure CDS holders that their rights under contract are respected.

In the larger context of the European sovereign debt crisis, the swap as well as the second European Union bailout package coming into place and funds from the IMF being opened up, this could be the first good news in a very long time.

The Fitch agency even rated the new government bonds of Greece B-. Although weak by any standard, this is far from completely hopeless.

Also as a consequence of Frankfurt’s refinancing of European banks, the sovereign bond spreads for Greece and similar countries have gone down considerably, although recently the spread of Portugal went up.

Despite these relatively positive developments, the Greek people, suffering tough austerity measures, will continue to face reductions in pay, increased public sector job losses and a deterioration in living standards on top of high unemployment and underemployment.

According to the analysis conducted by the troika, with the debt swap, Greece may reach a gross domestic product to debt ration of 116 percent by 2020 and 88 percent in 2030.

These numbers go under the assumption that the last year of recession for Greece will be 2014 after which it could slowly recover and grow annually by 2.5 percent.

Given the extremely fragile nature of the situation in Greece, this is probably not the last time European countries will need to provide funds however. As public opposition to bailouts also grows, loans would probably be tied to increasingly stringent reform demands—the very sort of reforms that Greece has so far struggled to implement convincingly.

Athens, Greece, December 10, 2011 (Helen Sotiriadis)

The eurozone’s finance ministers early Tuesday morning approved a second bailout for Greece worth €130 billion after the highly indebted southern European country had agreed to implement deeper austerity measures that should reduce its deficit by €3.3 billion this year.

Athens also said it had agreement with private creditors on a bond swap which allows it to write off up to 70 percent of the value of its debt obligations. This should cut Greece’s €350 billion debt burden, which is roughly 50 percent larger than the nation’s annual economic output, by some €100 billion. By 2020, the public debt should amount to just over 120 percent of gross domestic production but this assumes a successful privatization program and a growth rate that is unlikely to be achieved.

Rating agencies will consider Greece in “selective default” because of the deal. Greek bonds will therefore no longer be eligible as collateral to loans from the European Central Bank. The nation’s banks, many of which are completely dependent on ECB funding, could be stripped of their assets, necessitating further central bank intervention to prop up Greece’s financial industry.

Given Greece’s worsening economic outlook, additional budget cuts are needed to stabilize its finances. The government faced a shortfall that was equivalent to more than 10 percent of GDP in 2010 and last year.

The political leaders of a Greek interim government were under pressure from their peers in the rest of Europe to enact a comprehensive austerity package. The Dutch prime minister Mark Rutte and European Commissioner Neelie Kroes both said that they could live without Greece in the eurozone two weeks ago. German finance minister Wolfgang Schäuble lamented Greece’s broken promises in an interview last week when he characterized Greece as a “bottomless pit.”

The latest round of austerity includes a lowering of pharmaceutical prices which is supposed to achieve €1.1 billion in short term savings.

Reforms were enacted last year to centralize and streamline pharmaceutical purchases but savings from rebates, according to a review study by the Directorate General for Economic and Financial Affairs, were well below target in the middle of last year. The use of generic medicine in government hospitals stood at 12 percent at the time despite a 50 percent target rate.

Laws were also enacted twelve months ago that permitted the incorporation of pharmacies, reduced minimum population criteria and increased operating hours though pharmacies still shut during the middle of the day.

Defense spending will be cut by an additional €300 million. Cuts worth €400 million were previously planned for 2013-2015 along with a reduction in procurement worth €830 million.

Pensions will be cut by another €300 million. Talks between the conservative and socialist members of the Greek interim government stalled last week on pension reform. Base pensions have already been frozen but it remains unclear whether all pension payments are actually made to living retirees instead of relatives of a deceased. Pensions for high income earners have been reduced and disability pensions as a share of total pension spending are supposed to come down.

Labor market reforms are another condition of the second round of European financial support. Employers will be able to pull out of collective bargaining agreements temporarily in order to adapt to “changing economic conditions,” automatic pay increases based on seniority are scrapped and the minimum wage is cut by 22 percent.

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.

Numerous professions, in accountancy, health care, real estate and tourism, have yet to be opened up to competition.

Wolfgang Schäuble, the German finance minister, during a conservative party event in Bensheim, Hessen, March 27, 2011

Greek promises on austerity are no longer enough for Germany to continue to pour money into the “bottomless pit” that is Greece, said the country’s finance minister on Sunday.

In an interview with the Welt am Sonntag, Wolfgang Schäuble said Greece could remain in the eurozone if it enacted the reform measures that are necessary to boost the nation’s competitiveness. “At least people are now starting to realize that it won’t work with a bottomless pit,” he said.

Greek political leaders last week agreed to a package of deeper budget and public sector pay cuts as well as a reduction in the minimum wage to qualify for a second European bailout worth €130 billion. Athens has yet to reform its pension system which currently enables government workers to retire in their fifties, much to the chagrin of paymaster Germany where the pension age was raised to sixty-seven several years ago.

“With a new austerity programme they are going to first have to implement parts of the old programme and save,” according to Schäuble. Despite planned spending cuts, the Greek economy remains mired in recession. Tax revenues have dropped as a result so there has been little progress in the way of fiscal consolidation. Privatizations, which were a condition of the first European bailout committed in 2010, have stalled.

In Greece, popular opposition to the second round of austerity is formidable. According to opinion polls, the current coalition government, which is composed of the country’s main conservative and socialist parties, might not even secure a majority of the seats in parliament if there were elections today.

“The realization that there is a need for change,” said Schäuble, “still needs to develop further with a lot of people in Greece.”

European leaders have repeatedly insisted that Greece is a special case and that other highly indebted economies in the periphery of the single currency union are doing far better. Schäuble specifically praised the Portuguese Government on Sunday for “doing a decent job.”