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Greece’s socialist government confronts limited economic choices

Signs of plenty in Athens continue to be on public display; long lunches at cafes, an apparent lack of necessity to work, all of the signs of a relaxed life that have long characterised what is often perceived by outsiders as indicators of a relaxed Mediterranean life.

But no street café, no train or street corner is immune from beggars, and some areas are much more obviously poverty stricken than others. The high streets often have a look of desperation about them. Back from the main retail streets, shops are closed, boarded up, graffitied, rubbish remains uncollected.

From the ‘underemployed’ selling cigarette lighters, pens and lottery tickets to an extensive array of buskers to plain begging, Greece’ increasingly desperate poverty is inescapable.
Greece’ unemployment rate has improved from a year ago from just over 27 per cent to just under 26 per cent, with youth unemployment at around 60 per cent. Added to cuts to wages and pensions and the generally fixed prices of Euro-denominated goods, homelessness is as obvious as the poverty. Hunger can be seen in the faces of too many, and some beg not for money but just for something to eat.

Greece’s socialist Syriza government was elected by an increasingly desperate people, by fearful employed as well as unemployed. Although seen on the world stage as playing hard to renegotiate the country’s crippling debt, there is growing cynicism with the government at home.

Reform has been limited and compromises many. Promises to support poorer Greeks have been partially or completely abandoned, the rich have yet to begin to pay as planned, and restructuring the tax regime, including sequenced payment of back taxes, struggles to be implemented.

With national debt at more than 170 per cent of GDP and the country struggling to meet debt repayments, the government is trying to stave off a major economic disaster. Disaster could come if the government moves in one of two directions and will certainly arrive if it does nothing.

There are two deeply divergent views on Greece’ economic future. The first, propagated by European financial authorities, is that Greece needs to reduce spending, increase tax revenue and stimulate its economy – ideas that would be mutually exclusive if only based on domestic investment.

In short, with limited economic activity elsewhere in its economy, reducing government spending would push the country further into economic depression. Similarly, just asking for taxes sue to be paid could further frighten businesses already deeply nervous about their viability.

While there is a public commitment to start making Greece’s broken tax system start working again, there is also doubt about the country’s ability to do so.

It has been estimated that the country lost 120 billion Euros in tax revenue in the first decade from 2000 as a result of corruption. That is more than a third of the country’s national debt of around 320 billion Euros, or enough to cover debt repayments for the next six years.

This tax-dodging is reflected in widespread perceptions of high levels of official corruption, especially of tax officials. Greece is listed as the world’s 69th most corrupt of 175 countries by Transparency International.

The second option is that Greece will, and perhaps should, eventually exit the Euro zone and revert to its own currency. The immediate advantage of this would be that imports would jump in price and the cost of exports would decline, helping to bring Greece’s economy back towards a balance in trade and reduce private debt.

However, it would also see inflation spike to dangerously high levels and kill foreign investment in the short term at least. To the extent that it’s new currency was devalued against the Euro, such a move would also proportionately increase the size of the country’s already towering debt.

If a new currency was devalued by half of the Euro, it would double foreign debt. The reality is, however, that a new Greek currency would be lucky to be anywhere near that high, with consequent implications for national debt.

There would also be a liquidity crisis, with no money available for lending for business – or any other – activity. And until the government restocked its own treasury there would not be enough money to pay public servants – about a third of the workforce – or pensions. The economy would grind to a very quick halt.

Greece is therefore likely to continue to try to find a middle path, in which is does not default on its debt entirely, but in which it may continue to negotiate how it pays back that debt and over what time frame. The question will be where that balance falls.

In the short term, Greece does not have enough money to survive on its own income, so will have to continue to borrow. To do so it will need to show some commitment to repayment, and to implementing financial reform. Much of this will come at the cost of its political promises.

It may be that Greece slowly moves its way out of the Euro Zone, in a graduated way to take advantage of the benefits of a currency devaluation without plunging the economy into chaos. Or it may stay in the Euro Zone and go through the difficult process of restructuring its economy and, inevitably, reducing the standard of living of its citizens.

This, however, would not be a popular move for a socialist government that had promised more or less the opposite. Almost inevitably, the Greek people still want quick answers to their economic woes. But, as Prime Minister Alexis Tsipras and his ministers have learned, no such answers are available.

It may be that, with careful planning and a high degree of discipline, Greece can turn its economy around and at least return to a more stable economic footing. But it will be a much poorer country as a consequence. And careful planning and a high degree of discipline have not been notable features of the Greek economy, or its previous governments.

If there is one lesson, then, to come from this continuing economic crisis, it is that the social contract between wealthier and poorer Greeks will have to be strengthened, where the poor remain poor, or perhaps get poorer, but the wealthier also start to pay according to their ability and their legal obligations.

The alternative is, inevitably, that the system will break. The last time this happened, in 1967, there was a military coup. The alternative to Greece’s loss of democracy is a much more radical leftist revolution, which would make Syriza look like the social democrats they are beginning, in practice, to become.

In the meantime, the Syriza government plays its high-wire balancing act with Europe’s increasingly grumpy econocrats, playing for the time the country no longer appears to have. Pulling off a continuing financial arrangement with Greece’s lenders will require not just sound but consummate skill and a great deal of luck.

So far the Syriza government has shown a great deal of skill. But luck is not a commodity upon which most politicians wish to rely.

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