Demonstrations are expected in Athens today as the head of the International Monetary Fund, Dominique Strauss-Kahn, arrives for a two-day visit to the debt-laden country.
Nearly a year after Athens emerged on the frontline of Europe’s worst-ever fiscal crisis, George Papandreou, the prime minister, faces one of the biggest tests of his political leadership as he uses the visit to negotiate an extension of the repayment period Greece has been given for the €110bn (£95bn) EU and IMF-sponsored rescue package it received in May.
The IMF chief will also meet Greece’s finance finance minister, opposition leader and central bank governor, and is due to speak at Parliament’s economic affairs committee. Left-wing unions planned to hold demonstrations in Athens in protest at his visit and the strict austerity programme the government has imposed to meet IMF and EU conditions attached to the bailout.
Giorgos Papaconstantinou, the finance minister, said ahead of the long-awaited talks: “The decision to extend the loan is very important. It opens the way to a return to the markets earlier than expected.”etc…
The socialist government hopes an extension will dilute fears that Greece will have to restructure its debt when the bailout expires in 2013. In line with Ireland, Athens is expected to be given until 2024 to pay back the emergency aid without which it would not have averted bankruptcy after its borrowing costs soared earlier in the year.
But concerns are also mounting over the depth and pace of Greece’s economic recovery. This month Eurostat, the EU statistics agency – upwardly revising the country’s deficit from 13.6% to 15.4% in 2009 – projected that its public debt would reach 160% of gross domestic product in 2013.
Although the loan rescheduling will ease the debt burden, fears in Brussels are growing over the lack of progress, with reforms now seen as crucial if growth and competitiveness are also to be restored. Anxiety has been compounded by the deepening recession following spending cuts, tax increases and other unprecedented austerity measures that Athens has been obliged to take in return for the financial support.
Unemployment is set to hit a record high of 15% next year, with the labour ministry estimating that 2 million Greeks already live below the poverty line. More than 25,000 businesses have been forced to close since May and there are reports that seven out of 10 shops can barely pay bills. Amid resurgent fears of social unrest, the middle classes, society’s great stabiliser, face plummeting living standards.
Highlighting the bleak outlook, the former Italian finance minister Tommaso Padoa-Schioppa, one of Papandreou’s senior advisers, let slip last week that it would be “several generations” before Greece’s parlous public finances recovered.
“It is impossible to say when growth will return,” he told an economic conference in Athens. “We’re still in the honeymoon of the [fiscal consolidation] programme and risks remain high. The biggest risk is exhaustion. Reshaping an economy which has faced serious structural difficulties for a long period of time is something that will take years, not months – maybe a decade – so patience is needed.”
Within days, the credit-rating agency Standard & Poor’s warned that Greece’s sovereign debt rating could be further downgraded because of concerns over its ability to implement reforms. The coming months are critical for a government told that it must enact “corrective measures” to restructure the wider public sector if it is to receive the next €15bn instalment of the bailout agreement in March.
The changes, which include streamlining loss-making public utilities and liberalising a plethora of “closed-shop” professions that have kept competition at bay, entail the socialists confronting entrenched vested interests and, in many cases, their own trade unions and supporters.
Clamping down on tax evasion – a national sport that loses the Greek state €16bn a year – has also been cited by international creditors. “It will be a revolution, a combination of Thatcherism and shock therapy that no other government has attempted,” an insider said. “Around 100 bills have been lined up. We will have to take on everybody.”
Greeks know that if they fail, the consequences will be dire – not only for themselves but the entire eurozone. “Greece is the great experiment, the laboratory of Europe,” said Theodore Pelagidis, professor of economic analysis at Pireaus University. “What happens here will determine what happens in Europe. and if the euro breaks up, survives and on what terms it survives.”