No More Austerity in Greece?

Some surprising news this morning: the Greek prime minister declares “no more austerity”. Can this really be true?

From EUbusiness.com:

Greek Prime Minister Antonis Samaras on Saturday promised his recession-weary nation that there would be “no more austerity measures” as international creditors prolonged an audit of crisis reforms. “There will be no more austerity measures,” Samaras said in a televised speech to his conservative party’s political committee. “And as soon as growth sets in, relief measures will slowly begin,” Samaras said. But he noted that Greece’s ailing economy was “out of intensive care, not out of the hospital.”

It is important to understand what an austerity cease-fire means. It stops the rise in taxes and halts the cuts in government spending. That’s all. The cease-fire does not in itself bring forward any reforms to the economy: there are no changes to government spending programs, no changes to the tax system and no reforms that otherwise would boost economic activity.

Therefore, the prospect of an improvement in the Greek economy is only marginally better if the prime minister can actually deliver on his promise. The marginal improvement consists, plainly, of avoiding a certain collapse under the pressure of austerity. That will not help spark any recovery.

The key issue, though, is whether or not government will actually be able to keep its no-more-austerity promise. As we go back to EUbusiness.com, we learn that the pressure for deficit-reducing spending cuts is still on:

Representatives from the so-called troika of Greece’s creditors — the European Union, the European Central Bank and the International Monetary Fund — are currently reviewing the steps Greece has taken to meet its multi-billion bailout obligations. Thorny issues that Athens still needs to address include shrinking the number of jobs in the public sector, speed up privatisation plans and recapitalise four of its main banks. … Under the bailout conditions adopted last year, Greece needs to cut public sector workers by 25,000 in 2013 and a total of 150,000 by the end of 2015. The job cuts have sparked friction with Samaras’ junior coalition partner Fotis Kouvelis, head of the moderate Democratic Left party, who is citing Greece’s soaring unemployment rate.

And all of this without cutting taxes to stimulate the private sector. In other words, a lingering austerity pressure.

If Greece does indeed abandon austerity, it would be a relief in the short term that would probably help the country avoid a political collapse. It would also inspire other countries in similar situations – Italy, Portugal, Spain, even France and down the road the Netherlands – to do the same. That said, since the underlying problems, caused by an overbloated welfare state and excessive taxes to pay for it, will remain, then so will the budget deficit.

If there was a major flight from austerity, the EU would effectively be left with member states that turned their back on the deficit-capping stability and growth pact. That, in turn, would shake the foundations of the euro.

For this reason, I find it unlikely that the EU and the ECB will allow Greece to simply stop austerity. More likely is a moratorium for a year, and then a return to the same policies under the auspices that the economy is “improving” and strong enough to endure more of the same.