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“Payback time” for Greece?
As a result of the failure by the political parties in Greece to agree on the setting up of a new
coalition government following the elections held on May 6, the Greek electorate will go
back to the polls on June 17. It is not clear whether any political party or parties will obtain a
clear mandate to steer the troubled country. Conflicting opinion polls predict that the
conservative New Democracy will once again emerge as the largest party with the leftist
SYRIZA in second place although one poll suggested that SYRIZA could double its support
in June and come first. PASOK is predicted to come third. The chief preoccupation is
whether a new government may emerge from the elections that would be in a position to
respect the commitments undertaken by the Papandreou and Papademos administrations since
In an interview with London’s “The Guardian” on May 25, International Monetary Fund
(IMF) managing director Christine Lagarde emphasised that it is “payback time” for Greece
and that the IMF has no intention of softening the terms of the austerity package tied to
financial assistance by the IMF, the European Union (EU) and the European Central Bank
(ECB) to Greece. During an informal European Council dinner on May 23, EU leaders
discussed the political and economic situation in Greece and expressed their desire for Greece
to remain in the euro area while respecting its commitments. Whilst taking note “of the
significant efforts already made by the Greek citizens” EU heads of State or Government
remarked that the euro area Member States have “shown considerable solidarity, having
already disbursed together with the IMF nearly 150 billion euro in support of Greece since
2010.” They added that “We will ensure that European structural funds and instruments are
mobilised to bring Greece on a path towards growth and job creation. Continuing the vital
reforms to restore debt sustainability, foster private investment and reinforce its institutions is
the best guarantee for a more prosperous future in the euro area. We expect that after the
elections, the new Greek Government will make that choice.”
The European Commission recently published its spring economic forecast which takes stock
of a slowly improving situation in the EU economy. However, where Greece is concerned,
“at best, an insignificant improvement in activity in 2013” can be anticipated. This year, a
further contraction of GDP is expected following a contraction of 6.9% in 2011. The reasons
for this are:
a significant fall in internal demand
less dynamism in exports
the disposable income of households being hit by rising unemployment
cuts in private sector wages
a further contraction in domestic demand as a result of the fiscal measures
unfavourable business and consumer sentiment
difficulties in access to credit for firms and households contributing to their
postponing spending decisions.
In 2012, the unemployment rate is projected to stand at 20% with the situation not expected
to stabilise before 2013 when a slow recovery in the number of jobs may be anticipated. Net
exports are expected to rise this year providing a major source of growth. General
government deficit in 2012 is projected to represent 7.3% of GDP. Cuts in expenditure of
1.5% of GDP were adopted in the first quarter in order to achieve this objective. The previous
Government set a target of achieving a primary surplus of 1.8% of GDP in 2013. Basing itself
on current projections, the European Commission states that this would require additional
expenditure savings of 3.8% of GDP which is yet to be identified in the coming months.
Against this backdrop, the Greeks will go back to the polls in a few weeks’ time. It has been
suggested that this election may well turn out to be a referendum on staying within the euro
area. Although one fully respects the free choice of the electorate, when casting their vote, I
hope that the Greeks keep in mind that the situation that their country finds itself in is mostly
“made in Greece”. Moreover, agreements entered into by the Papandreou and Papademos
administrations as a condition for financial assistance must be respected if Greece wishes to
continue to be regarded as a credible partner in the European project.