Austerity: The Real Cost of Greece’s Bailouts

It’s as if a doctor were giving a patient some terrible medicine that prolongs life for a while, but at the same time makes the disease worse, and ultimately incurable. Greece’s disease is a mountain of debt that it can’t handle, and the only long term cure is for the country’s economy to grow enough so that tax revenues can not only service that debt, but eventually pay it off. The two bailouts are the medicine, but the cost to Greece is harrowing austerity that not only makes real economic growth unlikely, but is largely to blame for keeping the ancient land in recession.

The debt Greece owed mainly to private and public banks and other financial institutions in Europe rose to 159.1 percent of gross domestic product in the third quarter, up from 138.8 percent a year earlier, according to Eurostat, the European Union’s statistical agency. European finance leaders want that figure down to 120 percent by 2020 — a goal associated with the second bailout of 130 billion euros. Without the bailout, Greece will default on a 14.5 billion-euro bond payment in March, an event that most everyone agrees would be catastrophic, its ramifications extending into uncharted territory.

In return, European leaders want Greece to cut its public sector to the bone, and beyond. The Greek government employs an estimated workforce of 750,000; Prime Minister Lucas Papademos has promised to cut 150,000 of these jobs by 2015, but so far has announced cuts of only 15,000. How even that many jobs could be erased is unclear, as the Greek constitution forbids the firing of public workers. Also promised are more pension and wage cuts.

Additional measures required by euro-zone ministers have forced Greece to trim its minimum wage by 22 percent in an attempt to meet demands that it pinpoint $432 billion in spending cuts, plus billions more throughout 2012 in structural expenditure reductions. Despite much violence in Athens, Thessaloniki, and smaller cities throughout the country, Parliament has approved the austerity package, but foreign ministers are now demanding more specifics by the time they meet again on Wednesday.

One might suspect that the Greek public sector comprises a majority of the country’s workforce, given the relative uproar compared to other European nations facing austerity, but according to a recent study, public jobs account for roughly 22.3 percent of overall employment, a smaller proportion than in most of Scandinavia and Hungary, and about even with Canada. The unemployment rate in Greece in 19 percent, with about half of all young people without jobs. Cutting 150,000 jobs would not only have a drastic impact on the unemployment rate, but would stifle consumer spending, causing the economy to shrink dramatically.

The ideal economic transformation, many would say, would be for public workers to switch to jobs in a growing private sector as their old government positions are eliminated. But as desirable as that might be, it’s unrealistic given the burden of austerity, which has concomitantly hurt private industry. Furthermore, public jobs in Greece pay somewhat more than private, and were long thought to be safer than jobs tied to to the fate of a private business. So by eliminating steady incomes, leaving Greeks with few alternatives in a shrinking economy, the government has little chance of ever paying off its debt by itself.

As the government moves forward with cuts required by its international lenders, hammering the nails into its own coffin, the public will be holding yet another general strike today, as smoke still rises from below the Acropolis.

To contact the reporter on this story: Mark Lawson at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com