Why the Greek Bailout Won’t Work in the Long Run

For the second time in a little over 3 years, Athens is burning.  In December of 2008, police shot and killed a teenage student, igniting an explosive reaction by young people throughout the country and beyond.  Back then, the riots gained traction because of a deep frustration with the Greek economy—high unemployment, government inefficiency, and a sense that the future would never live up to the past.

Now that the Greek parliament approved a massive new austerity package late Sunday, the nation truly is on the brink. There was a teargas-scented social explosion outside of parliament even as Prime Minister Lucas Papademos warned of one within.  Some 2,000 riot police had to surround the chamber. Protestors believe the plan that was being debated inside is too severe.

PHOTO GALLERY: Anti-austerity Riots in Greece

The scene in Greece followed a cliffhanging few days in both Athens and Brussels late last week. On Thursday, eurozone finance ministers threw the Papademos government’s $4 billion austerity package back in its face, calling it “incomplete.” They demanded an additional $429 million in spending cuts, and, in a sign of mounting ill will, written commitments from the leaders of Greece’s political parties that they will observe the terms of the pact regardless of how national elections in April turn out.

The passage of the austerity plan is a fateful point of no return for Greece, and especially Prime Minister Papademos and his European negotiating partners.  The deep spending cuts are in exchange for the  release of $171 billion in bailout funds by international leaders — in time for Greece to avoid a disorderly default next month on $462 billion in national debt.

There is little doubt that the deal was a necessary result of out of control Greek government spending. The question is how extreme and painful the pact will prove for Greeks and whether so steady a diet of austerity will produce a positive result. While the Greek parliament debated the austerity package over the weekend, Papademos warned of “a collapse of the economy and a social explosion” if the measures did not pass.

But Greece, ironically, faces the same dangers now that the deal is done. A small, conservative party in the governing coalition withdrew from the government; a dozen deputies committed themselves to opposing the bill, and Papademos had to accept the resignations of six cabinet members and undersecretaries. And   the blood on the floor inside parliament spilled over to the city and country as the hours wore on.

Even with Papademos’ comfortable parliamentary majority—more than 50 seats in a 300-member chamber— there was inevitable resistance. Athens reported last week that industrial output dropped 11.3 percent in December from the same month a year earlier. Unemployment has just hit a record high of 21 percent. And it is in this environment that Greeks must now accept a 22 percent cut in the minimum wage, pension cuts of $396 million, a freeze on private-sector salaries, and a cut of 150,000 from a public sector of 800,000 employees.

Few of any political stripe would argue that Greece has mismanaged its economy. The party had to end, notably in the monstrously bloated public sector, where jobs have been secured for life. I would argue just as strenuously that the Greek rescue must itself be rescued for the sake of European unity. In this respect, there is simply too much at stake in letting Greece default and drop out of the euro.

But these facts together do not mean one must sing the praises of the Greek deal. Greeks need and deserve more consideration of their circumstances than bureaucrats and ministers in Brussels seem to have it within themselves to offer. They are living on the edge of desperation—on this point one takes Papademos very seriously. Without stimulus for the Greek economy, the bailout risks pushing Greece further into the swamp of low growth and high unemployment.

Applause for the Greek rescue plan, then, and for those who structured it. Goodness knows it has been a long time coming, and let us now hope the financial markets will be a little less jittery. In addition, $171billion is a hefty payout. But let’s keep this applause faint. Too much of that money is going to pay off banks, which will do the economy no good whatsoever. Without some offsetting stimulus measures—of the quasi-Keynesian kind—this will not be the last rescue the Greeks will require.