Greece austerity: Cure or poison?

@CNNMoney June 29, 2011: 1:09 PM ET
Protests have gotten violent in Athens, as the Greek Parliament gets ready to vote on a new wave of austerity measures.

Protests have gotten violent in Athens, as the Greek Parliament gets ready to vote on a new wave of austerity measures.

NEW YORK (CNNMoney) -- Riots have erupted in Athens once again, as the Greeks -- already burdened by the most severe austerity measures in Europe -- protest the next wave of belt-tightening in the ongoing debt crisis.

Greece is facing a terrible truth: In order to cut costs to get help in resolving the debt crisis, the nation desperately needs more of the austerity measures that have stifling its sluggish economy. Greece's Parliament voted Wednesday to adopt the new austerity measures.

"The Greeks are having an external austerity program rammed down their throats, and it's ultimately going to collapse the Greek economy," said Mark Blyth, professor of international political economics at the Watson Institute at Brown University in Providence, R.I. "In Greece, they're basically hacking themselves to pieces."

Desmond Lachman, resident fellow at the American Enterprise Institute for Public Policy Research and former policy adviser at the International Monetary Fund, said this is part of the Greek government's effort "to reduce their deficit from 15% of GDP to 3% of GDP in the space of three or four years."

"It's a huge fiscal adjustment," Lachman said. "Once they go into deep recession, they find they can't collect the taxes they thought they were going to collect. It's really an impossible exercise."

The new austerity measures include reducing the pay of public workers, increasing the attrition of public jobs and ramping up tax compliance. Approval is required if Greece wants to win the last $17 billion of a $156 billion debt crisis relief package that was granted last year by its European neighbors.

For Greece, the real challenge is still ahead

The new austerity measures are worth an estimated $112 billion to the Greek economy, according to Deutsche Bank analyst Jim Reid. But the austerity that the Greeks already adopted last year -- including pension cuts; a sales tax boost; excise taxes on fuel, cigarettes, alcohol and luxury goods; tougher eligibility for disability benefits; and a hike in the retirement age to 65 from as low as 61 -- have further dragged down the economy, analysts say.

The most painful symptom, particularly to the country's youth, has been the increase in unemployment. The jobless rate has soared to 16.2% from 11.6% in March 2010, according to Marko Mrsnik, the lead analyst in the recent Standard & Poor's downgrade of Greece.

Ireland and Portugal have also donned the yoke of austerity in exchange for bailouts from European neighbors to bring down their sky-high deficits.

Ireland, which according to Eurostat has a 2010 deficit equal to a whopping 32% of GDP, was granted a bailout of $122 billion last year. That's after the republic agreed to a painful four-year austerity plan with deep cuts in spending and public-sector jobs, a lower minimum wage and higher taxes.

The parliament of Portugal, which has a 2010 deficit equal to 9% of GDP, is also considering a four-year austerity program for a European bailout program worth $112 billion.

The fiscal future of these countries is uncertain. But for Greece, analysts can only see one possibility: a stagnant or declining economy placing more burdens on its people to take on more debt.

And in retrospect, it's easy to see how they got there, according to Blyth.

"You look at the Greeks, they've been lying about their budget deficit for years; they haven't been paying their taxes for years," he said. "We've found that everyone was swimming naked when the tide went out." To top of page

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