Economic realities push Europe closer to a Greek decision
9 November 2012 12:26am
ONE down, one to go. The Greek government has got through one crucial vote this week, and looks likely to ride out its budget vote on Sunday. Although markets and Eurozone leaders will breathe a sigh of relief, as Greece makes it through another crucial week in its economic crisis, the government has not been left unscathed.
Pushing through this latest, and supposedly last, package of stringent economic reforms and budget cuts has exposed deep cracks within the governing coalition. The Democratic Left and Pasok parties put up a fight to slow the process of public sector cuts, led by Prime Minister Antonis Samaras’ New Democracy party. It took two days to push the package through parliament, while a reported 100,000 Greeks took to the streets in Athens to protest against austerity.
However, a bigger problem for the government is the flurry of economic figures. They have again exposed deeper flaws in the Greek economy, propelling talk of a Greek exit from the Eurozone back into the headlines. The new budget projects Greek debt peaking at 192 per cent of GDP, rather than the 167 per cent estimated previously. But even this revision seems to be built on optimistic assumptions. These projections anticipate unemployment, investment and exports to stabilise, despite most indicators predicting the opposite. In fact, it is abundantly clear that Greece will need an extension to its current bailout.
The questions to ask therefore are: how much would such an extension cost and how could it be funded? We estimate that slowing the Greek fiscal consolidation programme by two years could cost an extra €28.5bn (£22.7bn), rising to €39bn if Greece fails to borrow from the markets – which looks increasingly likely. The main options being proposed include: reducing the interest rates which Greece pays on its current bailout loans (which could raise around €3bn over two years), or putting a hold on interest payments for a few years (which could raise more than €10bn, but would be much trickier legally). These options would likely be combined with some further austerity and increased short term debt issuance by Greece – both of which could actually increase Greek debt levels. This is not exactly what is needed. The kicker is that even this is unlikely to be enough.
The question of an extension drives home that a larger decision on Greece’s position in the Eurozone is closing in on EU leaders. Even talk of using bailout loans to buy back Greek debt at a discount and then retiring it – to provide extra funding – would require a big political decision on further loans to Greece. However the funding is found, it will likely involve breaking a taboo – either by the European Central Bank helping to fund states, or more likely by Eurozone countries allowing permanent transfers to a country whose future funding is far from assured.
The Greek government and the Eurozone will make it through this week but this short-term success is likely to belie the massive decisions ahead.
Raoul Ruparel is head of economic research at Open Europe.
In other news
The outbreak of bird flu in the US is leading to an unprecedented situation for companies reliant on eggs – [Read more]
Germany's finance ministry has denied reports it was considering offering Greece its own parallel currency. [Read more]
Chancellor George Osborne was given a boost today, as higher tax receipts helped shrink the deficit by more than [Read more]
Beleaguered spread-betting firm Plus500 today suspended trading in its shares on London's junior market, following [Read more]
The news that card and electronic transactions have overtaken cash as the UK’s preferred method of payment is [Read more]
Former secretary of state for communities and local government Eric Pickles is to be knighted, 10 Downing Street [Read more]
Network Rail engineers have destroyed the Abbey Wood station as part of the Crossrail development that is expected [Read more]
The Championship looks set to once again be named the fourth most-watched league in Europe, following a seven [Read more]
The Costa Coffee owner said Brittain was "the standout candidate from a very strong field". [Read more]
Sugary foods may be taxed to cover the costs of treating obesity, a government minister has said.
European governments must increase efforts to adopt structural reform if “lasting stability and prosperity” [Read more]
Accounting, finance and economics - choose to study any of these subjects anywhere and you'll be likely to land [Read more]
Badly-behaved bosses are a nightmare if you're the unfortunate employee who has to work for them - but they're [Read more]
Last night hundreds of people in Kent were woken by a 4.2 magnitude earthquake, which occurred just before 3am. [Read more]
Are the UK's new crop of MPs actually any good at social media? [Read more]
The retail industry is in a state of flux. Consumers and technology are driving fundamental changes. And now, [Read more]