The Greek parliament approved a $113 billion austerity package that had been demanded by the European Union and the International Monetary Fund as a condition for receiving a $17 billion installment of the $160 billion "bailout" package negotiated last year. This cash infusion will allow Greece to avoid defaulting on debt obligations due in July and August. This is a precursor to negotiations on a new "bailout" package that must be created to prevent Greece from defaulting on its debt over the next five years.
Unfortunately, the Greek experience makes the soundness of European Union austerity policy questionable.
The new austerity measures include a sale of $72 billion in public assets and $41 billion in additional tax increases and spending cuts. These new taxes will affect people earning as little as $12,000 and will include a new tax on people earning over $17,000 annually. Also included are new increases in consumer taxes, increased taxes on businesses and further cuts in public employment.
The new measures are on top of the austerity program enacted last year that included a 20 percent to 30 percent reduction in public sector wages, cuts in unemployment benefits and a suspension of a 2009 poverty support program. In addition, last year's measures suspended collective bargaining; lowered and froze public pension payments; raised the retirement age for public pensions; increased the value-added tax from 19 percent to 23 percent; imposed consumption taxes on fuel, tobacco and alcohol; and raised income taxes on middle-income earners.
While the objective of these measures was to reduce government deficits below 3 percent of gross domestic product by 2012, they have left more than 800,000 Greeks jobless — a 40 percent increase since they were enacted. The Greek unemployment rate is more than 16 percent, while the Greek economy contracted 4.5 percent in 2010. Further contraction of 3.5 percent is expected in 2011.
Assuming new austerity measures are adopted, the Greek economy seems likely to contract yet again. The government's net financial liabilities are estimated at nearly 125 percent of GDP in 2011, up from approximately 114 percent in 2010 and a little over 100 percent in 2009.
The Greek public is angrily protesting these measures, which are also opposed in the Greek parliament by opposition parties to the Socialist government. Still, the future of the Greek economy and the Euro Zone itself depend on Greece receiving the additional $145 billion. A default by Greece on its debt would ripple through the other weak economies in Europe, threatening the existence of the European Union.
SPG Trend Advisors has long been critical of the wisdom of the European austerity programs, believing the harshness of the fiscal spending reductions and tax increases and the short time period mandated to meet European Union leverage objectives would precipitate recession and create severe social and financial hardship. An economy in recession, with almost 20 percent of its population unemployed, is not positioned to generate the revenue necessary to pay down debt.
In addition, there is significant doubt the proposed privatization program will generate the required $72 billion in revenue. Shortfalls in this program will create another "gap" in the expected success of the new austerity program.
Our firm has long advocated the European Union adopt a longer time period for debt reduction — at least 10 years rather than the current three to five. This will allow for reasonable economic growth to provide the revenues necessary to pay down debt. Clearly, Greece will also need to reform its economic model to live within its means and reduce its generous public sector spending.
Greece must also crack down on tax evasion and collect more revenues. More of the increased tax burden should be assessed at the high end of incomes and wealth rather than at middle and lower income levels. Responsible privatization that generates a healthy flow of additional income to the state is also a solution.
I fear that "squeezing" the Greek population and economy further will lead to a political backlash which, in turn, could result in the dissolution of the existing government in favor of a populist regime set on repudiating the European Union's austerity measures, demanding debt restructure, or threatening default on the debt. So great would be the political and financial disruption that it would signal the end of the European Union and result in a worldwide financial "tsunami" of credit losses.
Morris Segall is president of SPG Trend Advisors, a Baltimore-based economics and capital markets consulting firm specializing in domestic and global economy issues. His email is firstname.lastname@example.org.Copyright © 2015, The Baltimore Sun