Has Greece Been Prescribed Bad Medicine For Crisis?

Jun 25, 2011
Originally published on June 25, 2011 5:55 pm

Next week, the Greek government will reveal a five-year austerity plan drafted by the European Union, International Monetary Fund and European Central Bank.

Parliament's approval is required if Greece is to receive an installment of $17 billion as part of last year's international bailout. But the new measures include even deeper spending cuts and tax hikes than those that have triggered weeks of massive street demonstrations.

Many economists believe Greece's international lenders are prescribing a harmful and inefficient medicine.

Apostolos Vranas, who gives English lessons, has seen his earnings slashed by some 40 percent in the year since the government introduced austerity measures.

Like many other angry Greek demonstrators, Vranas now considers himself a budding economist.

He says Greece's international lenders have pushed the country into a debt trap — with no way out. He calls it extortion.

"So next time they will loan us more money to save us from the previous debts and make sure that we accumulate even more debt," says Vranas.

Greece has already achieved a 5-percent reduction of its deficit through massive cuts in wages and pensions of public sector workers and steep tax hikes.

Now, the EU, IMF and European Central Bank — known as the troika — have demanded even tougher measures for further funds.

In addition to more wage cuts, the tax-exempt ceiling will drop from an annual income of $17,000 to $11,000, and there will be a tax increase on heating oil.

The government will have to privatize state assets — including the telephone and postal companies, the ports of Piraeus and Thessaloniki, the national railway system, vast real estate holdings and the national lottery.

The protesters in the streets accuse the government of selling the country off.

Aware of such intense popular resistance, international financial institutions had hoped the opposition party would show bipartisan support.

"If this is a rescue plan, I don't want to be rescued. But I want to be rescued with a different plan," says Chrysanthos Lazaridis, an adviser to the leader of the opposition party, New Democracy. He says New Democracy wants to renegotiate the terms imposed by the troika. "We should not implement heavy taxes on an economy that's been already in deep recession. That is exactly what happened and it didn't work."

But Spyros Kouvelis — a leading member of the ruling socialist Pasok party — says the prime minister's task is extremely difficult.

"It's a give and take, and at this stage you do not have much room to maneuver," he says. "I wouldn't want to be in the position of [Prime Minister] George Papandreou. It's a very difficult case, because he has to do a thing which is almost a one-way street to avoid bigger damage."

Several analysts, however, are questioning the wisdom of lending money at high interest rates to a bankrupt country reeling from deep recession.

"The crisis is getting worse. It deepened in Greece; it spread its wings to the rest of the eurozone. It's doing this as we speak," says economist Yanis Varoufakis.

He says with the economy shrinking by 4 percent this year, sovereign debt is spiraling by the day. International lenders, Varoufakis adds, should realize that Greece's default is inevitable.

"What are they going to do about it? They have no clue. And this is why they keep giving Greece and Spain and Ireland and Portugal these astonishingly mindless ... expensive loans to the bankrupt just to buy time," he says.

The troika, Varoufakis says, is prescribing new doses of a failed policy.

"Europe has to realize that this is simply a symptom, just like Lehman Brothers [the U.S. financial institution that collapsed in 2008 with the costliest bankruptcy filing in American history] was a symptom, it was not a cause of the problem," he says. "This is a systemic crisis, and Greece is simply the canary in the mine."

The Greek crisis has revealed the shortcomings of the single currency — a "one size fits all" euro for 17 sharply different countries, without common fiscal and economic guidance.

The outcome of the crippling debt crisis in Athens could determine how and whether the entire eurozone can survive.

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SCOTT SIMON, Host:

NPR's Sylvia Poggioli reports that a number of economists believe Greece's international lenders maybe on a harmful and inefficient course.

SYLVIA POGGIOLI: Apostolos Vranas gives English lessons and in the year since the government introduced austerity measures, he's seen his earnings slashed by some 40 percent. Like many other angry Greek demonstrators, Vranas now considers himself a budding economist. He says Greece's international lenders have pushed the country into a debt trap - with no way out. He calls it extortion.

APOSTOLOS VRANAS: So next time they will loan us more money to save us from the previous debts and make sure that we accumulate more debt.

POGGIOLI: Greece has already achieved a remarkable five percent reduction of its deficit through massive cuts in wages and pensions of public sector workers and steep tax hikes. Now, the EU, IMF and European Central Bank - known as the troika - have demanded even tougher measures for further funds. In addition to more wage cuts, the tax exempt ceiling will drop from an annual income of $17,000 to $11,000, and there will be a tax increase on heating oil. The government will have to privatize state assets - including the telephone and postal companies, the ports of Piraeus and Thessaloniki, the national railway system, vast real estate holdings and the national lottery. The protestors in the streets accuse the government of selling the country off. Aware of such intense popular resistance, the troika had hoped the opposition party would show bipartisan support.

CHRYSANTHOS LAZARIDIS: If this is a rescue plan, I don't want to be rescued but I want to be rescued with a different plan.

POGGIOLI: Chrysanthos Lazaridis is an adviser to the leader of the opposition party. He says New Democracy wants to re-negotiate the terms imposed by the troika.

LAZARIDIS: You should not implement heavy taxes upon an economy that's been already in deep recession. This is exactly what has happened and it didn't work.

POGGIOLI: But, Spiros Kouvelis, a leading member of the ruling socialist Pasok Party says the prime minister's task is extremely difficult.

SPIROS KOUVELIS: It is a give and take and at this stage you do not have much room to maneuver. Frankly, I wouldn't want to be in the position of George Papandreou, it's a very difficult case, because he has to do a thing which is almost a one way street to avoid bigger damage.

POGGIOLI: Several analysts, however, are questioning the wisdom of lending money at high interest rates to a bankrupt country reeling from deep recession.

KOUVELIS: The crisis is getting worse, it deepened in Greece, it spread its wings to the rest of the Eurozone, it's doing this as we speak.

POGGIOLI: Economist Yanis Varoufakis says with the economy shrinking by four percent this year, the sovereign debt is spiraling by the day. International lenders, he says, should realize that Greece's default is inevitable.

YANIS VAROUFAKIS: What are they going to do about it? They have no clue. And this is why they keep giving Greece, and Spain and Ireland and Portugal these astonishingly mindless, expensive loans to the bankrupt just to buy time.

POGGIOLI: The troika, Varoufakis says, is prescribing new doses of a failed policy.

VAROUFAKIS: Europe has to realize that this is simply a symptom, just like Lehman Brothers was a symptom, it was not the cause of the problem. This is a systemic crisis, and Greece is simply the canary in the mine.

POGGIOLI: Sylvia Poggioli, NPR News, Athens. Transcript provided by NPR, Copyright NPR.