ECONOMY | 11.01.2012

Experts: Greek reforms are hard pills to swallow

Have the IMF and EU prescribed Greece the right medicine?

The International Monetary Fund is losing patience with Greece as it struggles to cut spending and tackle its mountain of debt. But some experts say cuts prescribed by foreign donors are doing more harm than good.

Highly indebted Greece is sometimes referred to as the "sick man of Europe". The nation has been in intensive care for the past 20 months, relying on bailout packages to keep its financial heart beating.

Four times a year, specialists from the International Monetary Fund (IMF), the European Commission and the European Central Bank - the so-called troika - visit to check their patient's vital signs and prescribe new medicine.

The next such check-up, due on January 16, is expected to deliver a gloomy prognosis. Efforts to clot Greece's fiscal hemorrhage have not been as effective as the troika had hoped.

Greek Development Minister Michalis Chryssochoidis announced Wednesday that the budget deficit for 2011 was likely to be 9.6 percent of economic output. Although that result is an improvement on the 10.6 percent gap observed in 2010, it still falls disappointingly short of the 9 percent Athens promised the international community last year.

The IMF, the EU and the European Central Bank are tracking Greece's progress closely

'Greece is broke'

The vice-president of the Kiel Institute for the World Economy, Rolf Langhammer, says Greece is suffering from insolvency, something much more serious than a temporary bout of illiquidity.

"The country is not in a position to meet its obligations in the long term without outside assistance," Langhammer told Deutsche Welle, adding that Athens risked sinking in a quagmire of debt if creditors do not accept a haircut.

Langhammer says Greece is on the brink of bankruptcyNegotiations are proving difficult, however. While Greece pushes for its debts to be cut by more than 50 percent, banks and insurers are demanding more protection whenever new bonds are issued.

The Greek government is counting on a second aid package assembled at the last EU summit. Its conditions require Athens to pursue increasingly harsh austerity measures that could include pension cuts, mass layoffs and the abolition of the minimum wage.

Greek leaders know another round of belt-tightening will be difficult to sell to the public given that an average of 20,000 people are already losing their jobs each month. Young people are being hit particularly hard. The unemployment rate among Greeks below the age of 24 is running close to 50 percent.

Wrong medicine

The chief economist of Berenberg Bank, Holger Schmieding, believes the deteriorating condition of the Greek economy suggests the initial round of austerity "treatment" has been counterproductive.

Schmieding says deep cuts have choked Greece's growth prospects"The cuts were too draconian," he said. "The country has saved itself to the brink of death."

Schmieding told Deutsche Welle that what Greece really needed was time to introduce reforms aimed at promoting growth. Measures that open up the labor market and improve administrative efficiency should be made priorities, he added.

Economist Rolf Langhammer agreed that Greece's bloated bureaucracy and restrictive labor rules prevented the nation from attracting the foreign investment it so badly needs to fuel its recovery.

The latest Ease of Doing Business Index published by the World Bank ranked Greece 100th in a field of 183 – lower than Yemen, Guatemala and Albania.

"That is simply unacceptable for a eurozone member," Langhammer said.

Greek citizens are becoming increasingly unhappy with the government's reform course

Patience running out

The International Monetary Fund is disappointed that Greece has made little progress on tax reform and privatization, casting doubts on the government's ability to introduce meaningful economic change.

EU nations are also running out of patience. German Finance minister Wolfgang Schäuble, for example, recently urged Greece to fast-track its budget consolidation program. The head of the Czech Republic's central bank went further by publicly raising the prospect of a Greek exit from the eurozone.

German Chancellor Angela Merkel wants to avoid that scenario, and has appealed for EU members to give Greece another chance and another aid package.

To stay afloat, Athens needs to raise 89 billion euros by mid-March. A single bond auction scheduled for March 20 aims to raise 14.5 billion euros in a single day. If investors stay away, it could mark the beginning of a new Greek tragedy: national bankruptcy.

Author: Zhang Danhong / sje
Editor: Michael Lawton

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