In a two part article this week my colleague Lisa Reisman posted an analysis of the Greek debt crisis and the risks for global markets in rising uncertainty. As Lisa said, a Greek sovereign debt default risked such a panic in the financial system that we could have faced another Lehman style melt down as in 2008/9. So taking the current situation forward what are some of the likely outcomes of the Eurozone’s decision to bail out Greece?
Well the Greeks have committed to making unprecedented budget cuts in return for the US$145bn bailout. In an attempt to reduce the public deficit to less than 3% by 2014 (from 13.6% today according to Guardian Newspaper article) which will require cuts to the budget by US$ 50bn per year. The Telegraph says the cuts will come in the form of sales tax increases from 21 to 23%, a rise in the retirement age for women from 60 to 65 in line with men and a scrapping of public sector workers automatic 13th and 14th month bonus salary packages (yes you read that right) and a re-structuring of the public service which has become bloated after the last 30 years of short term political patronage.
Greek standards of living have risen dramatically since membership in the EU, funded in large part by the state’s ability to borrow money at the same rate as fiscally responsible neighbors like Germany. During that time, government has spent the largess on short term political gain, creating a massive public sector with an unsupportable pay structure. Poor tax collection regimes and under reporting of borrowing levels by previous governments have only exacerbated the current problem.
Greek unions have vowed to fight the cuts saying the country is already in a deep recession and with unemployment expected to soar to over 18% this year how can this do anything other than plunge the country into an even bigger recession than it has just come out of.
Meanwhile German tax payers are furious at the prospect of sacrificing their country’s hard-won reputation for fiscal and monetary credibility, which keeps borrowing costs low. By bailing out Greece, the rules that are supposed to underpin the stability of the whole Eurozone are shown to be a farce. Once Greece is bailed out, why should Portugal or Spain suffer with 20%+ unemployment and zero growth, why they will say, can’t we have a bailout too? The truth is the only long-term solution for a disparity in the growth and relative earning power of countries like Greece, and Portugal, and probably Spain, is devaluation. The Irish bit the bullet early, implemented austerity measures and have regained a level of credibility. History may show the southern Mediterranean states are too far gone and although further bailouts will keep the creaky ship afloat for a few more years, German, Benelux and French tax payers are going to lose their appetite for the Euro if they have to bail out more states and have to pay higher borrowing costs themselves as a result.
The Euro zone sovereign debt crisis is unlikely to go away, all the current bailout has done is buy time.