Dr. Constantin Gurdgiev is adjunct professor of finance at Trinity College, Dublin.
Navigating the latest bend of the downward economic spiral, Greece has just announced a set of fresh targets for the new bout of fiscal austerity.
Tasked with finding some €11.5-billion ($13.8-billion U.S.) of additional savings for 2013-14, on top of already adopted pledges, the Greek government – elected on a platform to seek renegotiation of the Greek bailout terms – confirmed this week that it has identified potential savings to meet this target.
Alas, both the news about this latest move and the ultimate outcome of the announcement contain no surprises.
Back on Feb. 15, I warned that Greece would remain the core driver of bad news for the euro area and that by mid-year it would be back occupying the doom and gloom pages of the European and international press. Only the unexpected second round of elections pushed the time-line out by one month – a rate of time-buying that the European Central Bank can envy.
On the surface, the latest round of budget cuts appears to be not only savage but also broad, bringing into line with previous cutbacks previously exempt groups of public servants and the disabled, as well as pensioners. The exempted public employees, including judges, academics and security forces staff, had been protected from the 12 per cent salary cut imposed on the rest of the public sector. But they will now face reductions applied retroactively. Disability benefits will also be lowered and pensions will decline from 2 per cent (for pensions of €600 per month) to 20 per cent (for those in excess of €2,500 per month).
But beyond that, the program offers no hope of a departure from failed Greek policies of the past. In reality, Athens cannot be expected to deliver on the latest planned austerity package any more than it could be expected to meet its previous commitments. Take a look at the numbers published by the IMF in the latest Global Fiscal Monitor, released July 16. Greece was expected to cut its fiscal deficit to 9.2 per cent of GDP in 2011 from 15.6 per cent in 2009. And under the troika arrangement, the deficit is supposed to fall below 3 per cent by fiscal 2013-14.
Over the same period, the most successful bailout country, Ireland, has cut its deficit (excluding one-off banking measures) from 14 per cent in 2009 to just over 10 per cent in 2011 and is expected to reach 7.5 per cent in 2013. In other words, Ireland’s current account surplus economy is expected to deliver budgetary savings at just about half the rate of Greece, a country with current account deficits.
Even if Greek authorities had the political will and capacity to implement troika programs, their task would have been made impossible by the sheer magnitude of Greek government debt. Post-restructuring, and assuming the austerity program were to be implemented, gross public debt is now forecast by the IMF to reach 171 per cent of GDP in 2013, compared to an Irish ratio of 121.2 per cent. The Greek debt pile implies an annual interest bill that is higher than Ireland’s by about 1.7 per cent of GDP using troika financing costs, and a whopping 8.5 per cent of GDP more if calculated using market rates.
The charts, above at left, illustrate Greece’s travails, even assuming it meets the troika conditions.
Meanwhile, with all the austerity and budgetary cuts, Greek government spending as a share of GDP will barely budge, declining from roughly 46.7 per cent in the pre-crisis period to 46.3 per cent in 2013. In other words, even the IMF is not expecting much of a structural change in the economy in exchange for all the austerity pledges and deficit reductions.
With or without troika assistance, the Greek economy is now at that stage of the Titanic saga where the boat hits the bottom. Not the proverbial bottom of a depression, from which the only way is up, but the ocean bottom, where it becomes a focal point of voyeuristic fascination by detached observers and a relic of history.
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