Even though a broadly pro-bailout government is now likely, a renegotiation of the bailout terms is almost inevitable given austerity fatigue. Only 42 per cent of the electorate voted for the two pro-austerity parties – New Democracy and the centre-left Panhellenic Socialist Movement (Pasok). Hardly an endorsement of continued fiscal pain. And recent opinion polls indicate that around two thirds of voters are against the memorandum documents made between the government and the EU/IMF troika. Any new government lacks the democratic legitimacy to impose further fiscal pain at the same pace. If it does, it risks an escalation of social unrest, potentially leading to another destabilising election and a likely victory for left-wing, anti-austerity forces.
The Greek economy has entered the fifth year of economic depression and contracted by 6.5 per cent year-on-year in the first quarter of the year. From its pre-crisis peak in the third quarter of 2008, until its latest trough recorded in the first quarter of 2012, the Greek economy contracted by almost 16 per cent in real, seasonally adjusted terms. Unemployment in March came in at 22.7 per cent, up from 16.2 per cent a year earlier. More than half of all young people are unemployed.
The pursuit of internal devaluation through fiscal cuts and structural reform has helped to bring the budget deficit down to 9.2 per cent of GDP last year, from 15.6 per cent in 2009. However, further progress on deficit reduction is hampered by the weakening economy, which is trapped in a vicious cycle of budget cuts and economic contraction.
As such, a renegotiation of the bailout terms is almost inevitable. Such a renegotiation may not go as far as many Greeks hope, in reversing spending cuts and reducing taxes, but could involve an extension of the deadlines for the country’s fiscal adjustment. Under current plans, the incoming government has to identify further fiscal consolidation measures equivalent to 7 per cent of GDP, around €14.3bn (£11.5bn) – 1.5 percentage points in revenue increases and 5.5 percentage points in spending reductions – to fill a gap looming in targets for 2013-14.
Pasok and New Democracy want the targets to be extended from 2014 to 2016, or 2017, reducing the cuts necessary in 2013 to €2bn-3bn from around €7bn. This may allow the parties to sell this as a political victory. If coupled with a commitment to continue to pursue fiscal austerity, Greece’s international lenders may agree. This would buy more time, but nothing more.
The path of internal devaluation looks too long and painful in the medium term; competitiveness may only be restored by a Greek euro exit, but in the short term the costs for both Greece and the Eurozone would be incredibly high. But not doing so, is just delaying the inevitable.
Martin Koehring is an economist for the Europe team at the Economist Intelligence Unit.