Social unrest harms hopes of Greek reform

Sunday’s explosion of street violence in Athens underlines the danger that political disorder may undercut Greece’s attempt to implement the economic reforms required to avert a debt default, according to Greek politicians and economists.

“The message is very worrying,” said a senior socialist politician. “As long as the economic crisis persists, there is lack of trust in the government and unemployment continues to go up, the social unrest will grow.”

With Greece in its fifth consecutive year of recession and the nation’s eurozone partners frustrated at the slow pace of reform, the flames that burned dozens of buildings in the Greek capital are also licking at the nation’s future in Europe’s monetary union.

The underlying problem remains the inability or unwillingness of Greece’s political classes to confront the bureaucratic inertia, resistance to large-scale restructuring of the public sector, and tax evasion that have sabotaged reform efforts over the past two years.

Many of the measures approved by parliament in a dramatic vote on Sunday night are repeat attempts to hit targets missed or delayed in the 18 months since Greece first sought a financial rescue from its European Union partners and the International Monetary Fund.

Some targets have become less ambitious – Greece has undertaken to cut 15,000 public sector jobs in 2012, after cutting only 1,000 posts last year out of a targeted 30,000. The cumulative target for privatisation revenues has been revised downwards from €50bn to €15bn by 2015 following a more realistic assessment of obstacles to investing in Greece.

Wary of further stalling, Greece’s international creditors have for weeks refused to release €130bn in fresh aid unless the government committed itself to a new austerity plan of public sector job cuts and reductions in wages and pensions.

The government finally did so at the weekend, but the coalition party leaderships paid the political price when, just hours after ferocious clashes between police and demonstrators, more than 40 legislators rebelled. Although parliament passed the measures, the rebellion and the urban violence raise the prospect that the next Greek government, which will take office after elections set for April, will lack the authority and determination to hold firm to the austerity course.

According to opinion polls, the election’s most likely outcome is a victory for the centre-right New Democracy, but without an overall majority. It will probably have to form a government with the remnants of a centre-left Pasok party deeply discredited by its failure to stem the crisis after it came to power in 2009.

“Without a readjustment of economic policy, the country will move to a state of perennial instability,” predicted Emilios Avgouleas, professor of international banking law and finance at Scotland’s Edinburgh university.

He and other economists contend that Greece needs expansionary credit policies and infrastructure investment, as well as structural reforms and a crackdown on corruption and patronage, to have any chance of digging itself out of its debt trap.

Antonis Samaras, leader of New Democracy and the likely next prime minister, and Evangelos Venizelos, finance minister and one of Pasok’s senior figures, are both pledged to the austerity plan dictated by Greece’s European and International Monetary Fund creditors. But Mr Samaras appeared to put his personal commitment in doubt when, before the vote, he suggested to his party faithful that he might seek to renegotiate the plan’s terms if he became prime minister.

Some Greek politicians acknowledge that the country’s creditors are correct to argue that the government of Lucas Papademos, prime minister, and its predecessor, led by Pasok’s George Papandreou, should have achieved more.

“There is a lot of fat in the public sector that hasn’t been touched,” said one former socialist minister. Defence and health expenditure could be cut, he said, and numerous public sector enterprises could be shut down.

Greece’s excessive dependence on the public sector, however, that large-scale cuts in the present deep recession are likely to further throttle consumer spending.

“These civil servants represent the last spending power in Greece – each supports two or three jobs in the private sector,” says Prof Avgouleas. “If you chop them all at once, you’ll strangle the private sector.”