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Why Austerity Is The Thorn In The Side For Greece

The next act in the Greek drama (Part 3 of 4)

(Continued from Part 2)

Structural reforms at risk. In my opinion the real risk is less about an imminent exit by Greece, and more about the limited reforms being dialed back or reversed. The new coalition government has already suggested reversing several reforms introduced by the previous administration, which in itself is a dangerous proposition for the country, but the implication for the Continent could be greater and graver.

As anti-establishment and populist parties rise in other peripheral countries (the Spanish election is up next), we worry that a step backward in Greek reforms could be the beginning of more reckless reform abandon. For now, fears of a Greek exit are being held in abeyance. That is probably reasonable. But if the price of Greece staying in the eurozone is a reversal of much needed reforms, it will still count as a loss for Europe.

Market Realist – The entire Greek drama boils down to one thing: austerity. Austerity measures were put in place as conditions of the bailout program offered to Greece in 2010. Though the measures helped bring down deficits, as the graph above shows, cutting back spending has resulted in one of the worst depressions for Greece. The following points show why austerity is the thorn in the side for Greece.

  • Though Greece (GREK) exited the recession last year after a modest growth in GDP by percentage, the GDP is about 25% lower than what it was at the start of the 2008 US financial crisis (XLF). The average rate of growth in GDP since 2010 has been -6%. This is much lower than average growth rates of other troubled nations from Europe (EZU) commonly known as PIIGS – Portugal at -1% (PGAL), Italy at -0.5% (EWI), Ireland at 0.6%, and Spain at -1% (EWP).

  • The unemployment rate has climbed to more than 25%. The youth unemployment rate is however as high as 50.6%. This can be seen in the previous graph.

  • According to the Public Policy Analysis Group of Athens University, over 44% of Greeks had incomes below the poverty line in 2013. 30% of the Greek population is at risk of poverty. The child poverty rate has climbed to over 40%.

The Greek government is proposing anti-austerity reforms to reverse the damage done to the economy. Tsipras has already promised to:

  • rehire public workers that were let go due to the bailout program

  • restore the public broadcaster ERT with 800 jobs

  • provide free electricity, housing, food, and medical insurance to families

  • raise the minimum wage to pre-bailout levels of 751 euros per month, as reflected in the above graph

  • bring back union-friendly collective bargaining rule

  • stop privatization and asset sales

  • increase the pensions of low income elders

However, these promises seem to be rather populist measures that would only calcify the labor market further and increase the already rampant bureaucracy in the Greek economic set-up. What Greece really needs is an overhaul that would galvanize the labor market, enhance the efficiency of the tax system, reduce regulatory barriers to competition, and promote growth.

Read on to the next part of the series to understand the key dates to watch as the Greek crisis unfolds.

Continue to Part 4

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