Greece: A deeper crisis to clean up the budget

Authors:
José Alberto López Rafaschieri and Luis Alberto López Rafaschieri
www.morochos.net

Greece is experiencing a serious problem of public finances. The government deficit reached 14% of GDP and national debt closed 2009 at 1.13 times the size of the economy. The issue is so dramatic that the Greek government has gone to the IMF and the European Union to seek financial support and save the country from a catastrophe. After negotiations, the plan agreed between the IMF and the Hellenic executive consist in a loan of one hundred and ten billion euros to Greece, in exchange for reducing the deficit to 3% by 2014 by implementing stringent budgetary measures, which include huge public spending cuts, suspension of year-end bonuses, wage freeze for four years, and tax hikes.

The problem with the IMF's measures for Greece is that they will plunge the nation into a major recession in order to overcome a public finances crisis, because such guidelines will depress even more the economy of a country that grew -2% in 2009 and whose unemployment round 10%.

Similarly, the political implications of the package in question cannot be overlooked. Greece has experienced since 2008 one of the worst governance crisis of the past thirty years, witnessing widespread protests across the country. In this climate, implementing the IMF's rigorous cost-cutting demands will promote instability in the political system.

In sum, what will be the benefit for Greece? to end the year with a small deficit but with a recession of -4%, an unemployment rate over 14 percentage points, and exacerbated political unrest?

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