The labours of austerity

Economist
April 7, 2011

When the ancient Greeks invented the word “crisis” they had in mind a short period of acute stress. The modern Greeks have been experiencing crisis for over a year and no end is in sight. As Portugal this week joined Ireland and Greece in requesting international rescue funds, it would have drawn little comfort from the example in the eastern Mediterranean. The mood in Greece is one of deepening pessimism. A plan drawn up last May to sort out the country’s public finances risks trapping the economy instead.

At Syntagma, the Athenian square opposite the parliament, taxi-drivers picking up fares report falls of 40% or more in custom. Bar-owners in nearby streets hassle tourists to fill seats in near-empty restaurants. In smart Kolonaki, streets are scarred by the boarded-up premises of failed shops. Tourists snap away at the Parthenon on the Acropolis but the city’s prime attraction is hardly teeming. Nine hotels in the centre have closed in recent months.

The rescue plan was never going to be easy to achieve. In order to get €110 billion ($155 billion) in funding from other euro-area countries and the IMF over three years, the Socialist government led by George Papandreou committed itself to a drastic austerity programme. The project envisaged a two-year stint in the economic workhouse as GDP fell and Greece regained lost competitiveness. At the same time Mr Papandreou promised to carry out a comprehensive repair of the economy’s deep-seated structural flaws.

Some important reforms have certainly been made, in the teeth of protests and demonstrations. Unaffordable promises on pensions, an already high 11.6% of GDP last year, have been slashed: instead of doubling to 24% in 2050, the burden will rise by 2.5 percentage points. The labour market has become slightly more flexible through changes in arbitration arrangements and opt-outs for individual firms from collective-bargaining agreements. The government has also sought to tackle entrenched monopolies such as the trucking industry.

Whether these reforms really measure up to the gravity of Greece’s plight is disputed. Yannis Stournaras, director-general of IOBE, an economic think-tank in Athens, calls the shake-up of the monopolies a qualified success. Stefanos Manos, a finance minister in the early 1990s, thinks that too little has been accomplished. The trucking reform is being phased in over two-and-a-half years. Pharmacists have retained their monopoly and continue to enjoy fat profit margins. Law firms still cannot open branches in different cities.

But the real source of gloom is the shorter-term impact of austerity. A year ago the plan forecast that GDP would shrink by 4% in 2010 and 2.5% in 2011. Instead it fell by 4.5% last year and IOBE predicts it will decline by 3.2% in 2011. The unemployment rate has risen from 9% in mid-2009 to 14.2% in the last quarter of 2010, and is expected to average 15.5% this year (see chart 1).

More