Another round of Greek bailout money: where next?

The International Monetary Fund (IMF)’s litmus test states that the government’s debts should shrink to 124 per cent of the country’s annual economic output by 2020. Greece’s centre-right Prime Minister Antonis Samaras wished for the two-year cooling-off period in economic reforms, attributing it to domestic political turmoil and time required to meet the budget targets as charted by the EU and IMF.

The trouble with Greece’s economy began way before it even signed up for the single currency. Decades of liberated spending, inexpensive lending and not enough financial reforms contributed to the economic downturn. Public sector wages from 1999 to 2007 accelerated in comparison to the rest of the Eurozone nations, while hugely prevalent tax evasion in the country affected the government’s income.

The high budget deficit, the difference in how much Greece spends and absorbs, made it unable to cope with the global financial meltdown. When debt levels escalated and Greece could not repay its loans anymore, European partners and the IMF were requested to help the flagging economy by granting loans. The troika (the IMF, the European Commission and the European Central Bank) pitched in with the loan-aid, asking Greece in return, to devise a large-scale austerity package involving spending cuts, tax rises and labour market and pension reforms.

A strict austerity package has placed the country in a rather tough position because Greece already has a weak economic recovery, having been in recession for four years now. The European Commission expects Greece’s economy to shrink by another 4.7 per cent this year, and without the much needed economic growth, the country cannot increment its income, relying upon aid money instead to pay off loans.

The credibility of the euro is becoming increasingly mysterious and these financial convictions are likely to affect other European nations on the bailout as well, like Ireland, Portugal and Spain. More depressing news is the downgrading of Greece’s credit rating, which evaluates the country’s capacity to repay debts, to the lowest in the Eurozone because it has the potential to be looked upon as alarming by foreign investors.

Since the issues facing Greece are long-term and unlikely to be solved in the near future, positive impacts of the austerity package and financial reforms required which is expected to stabilize the economy will also take time to be in effect. The national debt of €300bn at the moment is larger than the economy, while the deficit is 12.7 per cent.

Antonis Samaras’ government has started to cut back spending and austerity measures aim to truncate the deficit by more than €10bn. The government has also administered a surge in taxes on fuel, tobacco and alcohol, raised the retirement age by two years, enforced public sector pay cuts and exercised fresh tax evasion regulations. Some resistance has been faced from different echelons of Greek society about this, with workers nationwide staging strikes which closed down airports, government offices, courts and schools.

The Greek population remains concerned about the big issues facing their society which hinders economic growth, such as bribery and corruption. Unemployment is still widespread in the country, with many Greek urbanites coming to the countryside or emigrating for better opportunities. Many people consider the government to be not doing enough to re-ignite the economy’s competitiveness and invite foreign investment. The troika recently asserted that the government should reduce waste, inefficiency and corruption, all the while making entrepreneurship and a reduction of the inflated state sector a priority.