Greece's Painful Road to Economic Recovery

by Joanna Kakissis

Time
September 9, 2010

It's hard to be an optimist in Greece these days, but Prime Minister George Papandreou is trying. In a major speech on Saturday in the northern city of Thessaloniki, he told Greeks that painful economic reforms would "unleash the country's creative potential." He promised to cut corporate taxes to stimulate investment, open up restricted professions and privatize the energy market.

Papandreou and Finance Minister George Papaconstantinou are also encouraging investors to buy Greek bonds and assuring them that the country won't default on its 300 billion-euro debt. Papaconstantinou is hopeful that Greece's economy will shrink less than the 4% predicted by the International Monetary Fund (IMF) and the European Union last spring.

But that hope is dimming. Greece's statistics service ELSTAT said last week that gross domestic product in the country shrank 1.8% from the first to the second quarter. That's the steepest quarterly decline since the nation's economy fell into recession at the end of 2008.

And the rest of the year probably won't be any better. Consumers will spend less as they start to feel the effects of the austerity measures that were a stipulation of the 110 billion-euro bail out Greece got from the IMF and the EU last May. And if the government can't cut the deficit by collecting tax revenues — a challenge in a country where people have long evaded income tax — it may be forced to impose a new indirect tax on the petrol that's used to heat homes in winter. That's after already having increased value-added tax on goods by 4%, to 23%, earlier this year.

Greece could find itself caught in a vicious circle, says Yiannis Tsarmougelis, an economics professor at the University of the Aegean, as attempts to tackle debt by imposing new taxes will only further stifle economic growth. "If the government must impose new measures, the economy could even shrink by more than 4%," by year's end, Tsarmougelis says. "It all depends on how well they do collecting tax revenues."

As the Greeks try to cut their deficit, they must also convince international markets that the economy will rebound. But prominent economists say this won't happen anytime soon because the Greek public won't be able to handle a deep recession. Hans-Werner Sinn, head of the Munich-based Ifo Institute for Economic Research, even went so far as to tell UK paper The Daily Telegraph that Greece's austerity measures could push the country to "the edge of a civil war."

More