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The Greek Thrills Are Far From Over

A woman makes a transaction at an ATM during a rally against austerity measures outside the Finance Ministry in Athens late last month.

A woman makes a transaction at an ATM during a rally against austerity measures outside the Finance Ministry in Athens late last month.

Mapping the price fluctuations of Greek bonds over the last few months -- intrinsically the market’s perception of the likelihood of Hellenic bankruptcy -- would make for a flawless rollercoaster blueprint. Driven by market worries, spiked by every last word from German Chancellor Angela Merkel, exacerbated by untimely credit-rating downgrades, and greatly feared by the Papandreou administration, it would make for a vertiginous ride.

It now seems like at the end of every weekend, Greek, European, and International Monetary Fund (IMF) authorities come up with a new and improved plan to halt the sovereign debt crisis that has been unfolding since December. On May 9, the EU presented the world with a 750 billion-euro ($1 trillion) loan-guarantee package seeking to put a "definitive" end to debt doubts. But creating a special purpose vehicle to buy European debt is just a fancy way of solving an issue of too much debt by issuing more debt. After a day of calm, markets remained unconvinced that such a flood of liquidity could put an end to what was at heart a solvency problem.

A week before (May 1), the Greek government, in coordination with the IMF and the other eurozone members, announced that it had agreed to a gigantic rescue package with strong conditionality incentives for domestic reforms; analysts had hoped that this would be the beginning of a smoother end to an already extended ride. But last week's tragic protests in Athens, coupled with continued market stress and credit downgrades, point elsewhere. It should come as no surprise: Look beyond the big-number headlines and into the deal's details, and it becomes clear that the thrills are anything but over.

Somewhat paradoxically, loss of monetary independence coupled with market slumber enabled successive Greek governments to avoid much-needed structural reform, thus allowing the monstrous public sector to keep feeding off cheap credit. The debt orgy continued until late last year, when investors worldwide awoke to the fact that Greek bonds are not, well, German.

'Consensus' Cocktail

Somewhere between the heated May Day protests in Athens and the frigid German electorate, a rescue package was drafted, negotiated, and passed. Sensibly, it shuns abandoning the eurozone -- a solution akin to jumping from the roof of a skyscraper to escape a fire. The plan came with the ringing endorsement of an army of economists from the IMF, the European Union, and the European Central Bank; holistically, it can best be described as a $145 billion run-of-the-mill "Washington consensus" cocktail with a moderate splash of EU-strength taxation liquor.

This means there is some good, some bad, and lots of ugly.

Greek Prime Minister George Papandreou
On the positive side, a structural base includes increasing the percentage of their workforce that companies can fire en masse, halving state-mandated severance payments, and dropping the legal requirement to take unresolved workplace disputes to arbitration. This will go a long way toward reversing the structural rigidity of the Greek economy, a land where it is so hard to fire someone that the state still has pilots on payroll for an airline that hasn't flown in years.

The fiscal bitterness brings in a public-sector wage cut by about 10 percent and pensions (public and private, all state-managed) slashed by 14 percent. It also plans for a considerable rise in the retirement age, a much-needed change to begin addressing the country's daunting demographic challenge.

The cuts are significant. They apply directly to the state budget, and at least some will have an immediate effect. Several are also quite clever. The pension and wage cuts, for instance, come from ironing out an anomaly in the payment system, whereby Greek workers and pensioners receive 14 wages: one full wage before Christmas and two half-wages -- one before Easter and one before the summer vacation. Thus, the full fiscal brunt will not be felt until December, giving the economy valuable time to adjust and perhaps some midterm structural gains. These are positive indications that the government intends to use foreign funds to effect changes that are both permanent and gradual.

Murky, Counterproductive

Yet the package also includes certain measures that are at best murky and at worst counterproductive. A further value-added-tax (VAT) increase for an economy like Greece (from 19 to 23 percent) definitely looks like fiscal tightening, but one would be well justified in doubting its wisdom. On the one hand, the economy is already deep in recession, which a general taxation hike will only worsen, while a VAT increase without further evasion-control efforts will incentivize businesses to skip producing receipts in order to avoid taxes altogether. Greeks have deep pockets, hence the primary goal must be for the state to collect what it is due, instead of merely hiking rates.

Just as worryingly, the plan avoids any permanent staff reduction in the bloated public sector, unsurprisingly Europe's least efficient. Rather, it plans for an opaque dose of privatization, featuring a new fast track for unprofitable state enterprises to be sold, as well as a relaxation of regulated professions ranging from notaries public to truck drivers.

Protesters, wearing white masks, stand outside the parliament in Athens on May 9.
These measures may sound like a step in the right direction, but even the most cursory look at how such a process unfolded in Eastern Europe and Latin America in the 1990s will remind us that there is usually a meaningful tradeoff between speed and efficiency. Rushed privatizations in places like Argentina and Russia ended up exacerbating fiscal problems by gifting state-owned gems to multinationals and oligarchs through a healthy dose of bribes. There is little reason to expect Greece will be any different.

Although the huge international disbursements mean that Athens can now survive for a couple of years without relying on private capital markets, the austerity plan's evasions and uncertainties can only lead to further stress. Paradoxically, this will be compounded internally by social backlash and externally by contagion fears through European banks heavily exposed to dubious sovereign debt. Undercapitalized as it remains since the advent of the global crisis, the European financial sector is the weak link for contagion in the same way American banks trembled during the 1980s Latin American debt crisis.

Structural Anomalies

Following the most recent massive liquidity package, it may seem that the rest of the European Union is also shielded from a liquidity trap for the foreseeable future; bank executives must have had a good Sunday. But as the liquidity fears ebb, they will leave bare the structural anomalies that were born in and remain tied to the eurozone's weakest link, Greece.

The essential dichotomy is between the domestic and international dynamics of the crisis. The necessary reforms are so painful to approach with neither devaluation nor debt restructuring that the Greek electorate is likely to spurn them as soon as the immediate crisis abates, just as international markets are prone to interpreting even the largest of rescue packages as evidence the end is nigh. What no package can assuage is the perception that it is not enough; such a reflexive process easily translates into a negative feedback loop that can transcend rationality long enough to fulfill its own prophecy.

Ultimately, this crisis may force Europe to face its most existential issue: It needs to advance integration in a way that creates long-term EU-wide fiscal accountability. Otherwise, in the context of leaders' hesitance, banking weakness, and the irrevocably dismal timing of credit rating agencies, the holes of Greece's austerity plan will make relief only temporary.

The rollercoaster ride is far from over; for Europe as a whole, seatbelts are a must.

Pierpaolo Barbieri is the Lt. Charles Henry Fiske III Harvard-Cambridge scholar at Trinity College, Cambridge, and Dimitris Valatsas is an Athens-based entrepreneur. The views expressed in this commentary are the authors' own and do not necessarily reflect those of RFE/RL