Greece and the euro - Athenian dances

Dec 17th 2009From The Economist print edition

Urgent measures must be taken by the most profligate euro-area member of all

IN GREECE ouzo and olives have given way to debt and downgrades. The country stands out among post-Dubai sovereign risks for its bloated and corrupt public sector, and a budget deficit and public debt of almost 13% and 125% of GDP, respectively. Spreads on Greek government bonds over German Bunds have widened to more than 2.5 percentage points. Nor were investors impressed by this week’s promises by George Papandreou, the prime minister, to cut the deficit to under 3% by 2013. They noted an absence of detail, a heavy reliance on hoped-for new revenues and talk of public-sector pay rises in 2010—and, warned by a credit downgrade by Standard & Poor’s, pushed spreads wider still (see article).
By Greek standards Mr Papandreou has been courageous, but he should have been braver still. Ireland set the pace on December 9th by producing a budget that sharply cut public-sector wages. Mr Papandreou and his finance minister, George Papaconstantinou, talk up the need to balance fairness and social peace with fiscal austerity. But the socialist Pasok party won a big majority in October’s election, making it Greece’s strongest government in a generation. The opposition has an untested new leader. Mr Papandreou wants to avoid direct confrontation with his trade union supporters, but the need to re-establish fiscal credibility ought to have come first.
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To its credit, his government recognises that Greece’s ills go far beyond the public finances. Stuck in the euro, its economy has lost competitiveness. Too many Greeks are underemployed. Education, especially higher education, needs reform. Exacerbating these worries is the poor quality of Greece’s statistics. The previous government admitted that Greece had massaged its figures to qualify for the euro in 2001. The new one confessed that this year’s budget deficit had suddenly shot up from 6.7% to 12.7%. An independent statistics agency set up by Mr Papaconstantinou will help, but it will take years before the markets and Greece’s European Union partners trust its figures. That is one reason why Greece’s fellow euro-area members are so concerned. Their unspoken fear is that, unless the new government gets tougher and pushes through deep reforms, Greece could be on an inexorable path towards default.

Fearing Greeks bearing bonds
When the euro was born a decade ago, it came with central rules limiting budget deficits and banning bail-outs. Yet the rules, which theoretically included huge fines for excessive borrowing, were never likely to stick, and were soon emasculated by France and Germany. Worse, the financial markets came to assume that no euro-area country would ever be allowed to go bust: the EU and the European Central Bank would surely find some way to stand behind it.
It is true that, as Germany’s Angela Merkel has conceded, all euro-area countries have an interest in staving off a default. If Greece went under, the markets’ attention would quickly turn to other euro-area debtors like Spain, Ireland and Italy, and dent confidence in the euro itself. Yet no euro-area country wants to give its more profligate fellows the impression that their debts will be covered. The bond markets’ recent jumpiness suggests that investors, at least, are readier to believe that the strong might be willing to let the weak go under.
Good. The ban on bail-outs must remain credible, in the interests of all the euro members. Otherwise, the burden on the strong could become intolerable, and the weak would get feebler still. Investors are already nervous about Greece; if it finds an easier way out, its political leaders will never have the stomach for difficult choices. Hard times, unfortunately, demand harsh measures.