Greece Risks Euro Exit if Reforms Stall
Posted by hkarner - 25. April 2012
Source: The Wall Street Journal
ATHENS—Greece’s central bank governor Tuesday warned the country’s politicians that any deviation from strict austerity targets after May 6 general elections would risk forcing the country out of the 17-member euro currency bloc, even as the central bank signaled that the economy would contract by a worse-than-expected 5% this year.
In an unusually blunt warning that cut through much of the lofty rhetoric coming from candidates, George Provopoulos said Greece faced a stark and historic choice between overhauling its economy as a member of the currency bloc, or turning back the clock on decades of economic progress and eventual exit from the euro.
“There is no easy way out of the crisis. The adjustment must be pursued with determination,” Mr. Provopoulos said in a speech. “If, after the elections, there is any question about the will of the new government and society to implement the program..the country will then be at risk of finding itself very quickly in a particularly adverse situation.”
“What is at stake is the choice between an orderly, albeit painstaking, effort to reconstruct the economy within the euro area, with the support of our partners; or a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union,” he said.
In its annual report released Tuesday, the central bank revised down its original forecast for the Greek economy, forecasting a contraction of 5.0% for 2012, compared with a previous estimate of 4.5%, and compared with a 6.9% decline last year. Greece is now struggling through a fifth straight year of recession, made worse by waves of austerity imposed on the country by its international lenders in exchange for two successive bailouts aimed at helping Athens emerge from its sovereign debt crisis.
Greece’s elections next month, which look set to produce an inconclusive outcome, will return to the focus of investor concerns in Europe after political uncertainty in France and the Netherlands added to the growing list of potential trouble spots inside the currency union. In just the past few days, French Socialist François Hollande, who favors economic growth policies, edged out President Nicolas Sarkozy in the first round of the French presidential elections. And the Dutch government collapsed when a junior party in the ruling coalition pulled out after refusing to back new austerity measures.
The warning from Mr. Provopoulos, who also sits on the governing council of the European Central Bank, brought into the open a rare reference to the possibility that Greece may have to leave the euro-zone after all and revert to a national currency. Senior European Union officials tend to studiously avoid raising the possibility of any country leaving the euro bloc, fearing the precedent that could spook investor confidence in the currency and possibly trigger bank runs in other vulnerable euro-zone countries, for example in Spain or Portugal.
In March, Greece’s European partners and the International Monetary Fund agreed to a new €130 billion ($171 billion) bailout to help the country meet its financing needs to about 2014-15. But the conditions set under the loan have left deep scars in Greece’s social landscape, making the austerity debate central to the election rhetoric ahead of the upcoming polls.
Pensioners, public-sector workers and countless households have suffered deep cuts in disposable income as the government cut spending and raised taxes. More than one in five Greek workers is unemployed, including half of those under the age of 25. Homelessness, personal bankruptcies, crime, suicide and mortality from ill health are rising. Young, educated people are leaving the country for opportunities abroad.
Greek voters are being asked to pick a successor to the outgoing interim government of Prime Minister Lucas Papademos. The latest public opinion polls show that Greece will likely have a highly fragmented parliament with as much as half of the vote going to parties who oppose the reform program.
This has raised fears that the next government will struggle to find the consensus needed to push through the next set of highly unpopular reforms, a program that so far this year have triggered a series of strikes and violent street protests.
Greece’s conservative New Democracy is leading opinion polls and its leader, Antonis Samaras, is seen as most likely to be the country’s next prime minister. But with anger at the incumbent parties running high, Mr. Samaras is unlikely to win enough seats in parliament to govern with an absolute majority and may be forced to renew his existing, but fractious, alliance with the socialist Pasok party. On Sunday, Mr. Samaras presented New Democracy’s economic platform, emphasizing privatizations, a crack-down on tax evasion, and measures to jump-start the moribund economy.
But he gave few details of the €11 billion in spending cuts the country must take by June and exhorted voters to give him a solid mandate—and free his hands—”to change everything, the growth model, the way of government; not just one or the other, both.”
Splinter parties on the more extreme ends of the political spectrum have demanded a repeal of austerity programs, while Greece’s Soviet-style Communist Party has advocated abandoning the euro altogether. But most opponents of austerity, who reject the terms attached to the recent bailouts, have struggled to articulate a clear alternative to those measures, at least not one that is likely to convince Greece’s lenders and the German government, Europe’s ultimate paymaster.
Still, the mood in Athens is shifting with more and more Greeks saying that the current austerity program isn’t working and needs to be rethought. According to recent polls, two-thirds of Greeks now say the mixture of harsh spending cuts, higher taxes and lower wages that have defined the austerity packages must be renegotiated by the next government. Less than a year ago, a majority of Greeks thought the measures unjust, but also largely unavoidable no matter who was in power.
The latest economic forecast by the Bank of Greece stands in contrast to the 4.7% decline seen by Greece’s troika of international lenders from the IMF, the European Commission and the ECB. It predicts that recovery—in line with international estimates—will come only by the end of 2013, and only if the country proceeds with its adjustment program.
“The Bank of Greece forecasts an average annual rate of decline in GDP of close to 5%; implying that the recession will be less pronounced than in 2011,” Mr. Provopoulos said, adding: “this forecast assumes that the necessary structural reforms will be implemented without delay.”