Greece passes key austerity plan
Eric Reguly, The Globe and Mail
9:45 AM, E.T. | June 29, 2011International
Greece stepped back from the brink of default by narrowly voting in favour of a sweeping austerity program, early reports from Athens said, though the final tally was not known yet.
The “yes” vote in parliament will pave the way for fresh bailout loans at the risk of plunging the country into deeper recession.
The parliamentary vote was in danger of going against socialist government of prime minister George Papandreou because his PASOK party has only a five-seat majority in the 300-seat chamber.
The vote came after two days of often violent protests in central Athens. Some protesters tore up marble structures in Syntagma Square, facing the parliament building, to make stone-sized weapons that were hurled as police. Vehicles were burned and dozens of police and protesters were injured.
The vote to approve the austerity program may trigger more protests, violence and strikes.
The vote does not automatically secure new loans from the European Union and the International Monetary Fund. A second vote on Thursday, one that would approve the implementing legislation for the austerity program, is required to allow a loan agreement between Athens and the EU and IMF to be negotiated. Wednesday’s vote, however, is the more important of the two.
The austerity program approved Wednesday is worth about 28 billion euros through 2015, a figure that has been promised to international creditors. It includes a “solidarity levy” on incomes as low as €12,000 a year, wealth charges, increases in the value-added tax (VAT), a commitment to cut 150,000 public sector jobs by 2015, and reductions in social and military spending.
It also includes a commitment for €50 billion in privatizations, a figure that some economists consider overly optimistic and perhaps counterproductive. The rushed sales could result in fire sale prices and would deprive the government of the cash flow from those assets, from ports to holiday property.
The vote unified the Opposition parties and caused rifts within Mr. Papandreou’s own PASOK party. PASOK member of parliament Thomas Robopoulos last week caused near panic in the governing party when he threatened to vote against the austerity measures. On the day of the vote, he changed his mind, saying a “no” vote risked economic suicide.
“This is a critical moment,” he said. “If we don’t vote the bill through we will default. I will not take that decision. Let [Opposition leader Antonis] Samaras take it.”
The spending reductions and tax hikes, while necessary to secure the next euros 12 billion tranche of last year’s euros 11 billion EU and IMF bailout package, as well as new bailout loans, threaten to deepen and prolong Greece’s recession.
The recession is already three years long. Greek gross domestic production fell 4.4 percent last year, and will shrink 3.8 percent his year, according to a report from the EU and IMF earlier this month. Deustche Bank expects a 2.9 percent GDP fall this year and a lesser contraction in 2012.
As the cutbacks are implemented and economic growth remains in reverse, the unemployment rate—now at 16.2 per cent, though more than double that among the young—is soaring.
In a recent note, Marshall Auerback, portfolio strategist at hedge fund Madison Street Partners, said “There is no relief in sight as the EU elites continue to grind the nation into the modern day equivalent of a debtors’ jail. They seem to be incapable of understanding that if you savagely cut government spending while private spending is going backwards and the external sector is not picking up the tab then the economy will tank.”
The stock markets rose sharply Wednesday morning in anticipation of a “yes” vote in the Greek parliament.