Greek prime minister George Papandreou’s cabinet barely survived a confidence vote in parliament late Tuesday after a reshuffle last week that saw the dismissal of several unpopular government officials. The vote followed a eurozone ultimatum that forces Greece to implement a five year economic reform plan or miss out on a €12 billion aid tranche that it needs to avert bankruptcy.
European Commission President José Manuel Barroso urged Greece to show that it was genuinely committed to reform ahead of the vote, arguing that the nation faces a “moment of truth.”
“No one can be helped against their will,” Barroso said in Brussels, adding that support from the conservative opposition, which has largely rejected spending cuts and proposed tax relief instead, would be helpful. Only the socialist majority voted for the new government though.
Papandreou, who has led Greece’s socialist party since 2004, was confronted with an unexpectedly huge budget deficit when he was elected prime minister in 2009. With unemployment already at 10 percent, Greece’s credit rating was downgraded, necessitating public spending cuts and tax hikes. The Greek austerity program, however unpopular at home, has been criticized by other European nations as falling short of its stated goals.
Some form of debt restructuring is increasingly likely. Eurozone finance ministers on Monday agreed to ask for “voluntary” participation from private lenders in the form of delayed repayments of sovereign loans but analysts are skeptical. Greece is probably too heavily indebted for banks, insurance companies and pension funds to lend it more money.
The Greek state is more than €340 billion in debt. With a population of more than eleven million, that amounts to over €30,000 per person or 150 percent of annual economic output. €110 billion worth of financial aid from fellow European nations and the International Monetary Fund last year has proven insufficient so a second package worth up to €120 billion is now under discussion.
As Greece continues to test European solidarity, its people are protesting public-sector salary and pension cuts. Unaffordable pension commitments, equaling nearly 12 percent of GDP, were slashed by the government while some labor market reforms have been enacted. Papandreou also attempted to tackle entrenched monopolies such as the trucking industry but heavy labor regulations and widespread corruption continue to impede job creation.
Privatizations, in return for which Greece was allowed to borrow at a discount rate from the temporary rescue mechanism set up by its fellow eurozone member states in the wake of its fiscal crisis last year, are coming about slowly. Although public expenditures increased to almost 47 percent of GDP last year, the government remains heavily involved in energy, health care and public transportation. The country’s railway system alone needs €1 billion in yearly subsidies to keep afloat. Pharmacists have retained their monopoly and continue to enjoy fat profit margins. Olive farmers are unable to sell their goods on a free market. Law firms still cannot open branches in different cities.
In the short run, public-sector salary freezes, layoffs and attempts to crack down on tax evasion are dampening Greece’s growth forecasts. The economy is expected to contract by up to 3 percent this year while unemployment is rising to 15 percent, up from 9 percent mid 2009.