Why Austerity Isn't Working For Greece

by: George Liu

Austerity hasn't worked out for Greece because austerity, as ordered by the troika (the European Commission, European Central Bank and the International Monetary Fund), has not factored in significant real-world repercussions.

In other words, austerity is a solely economic strategy forced upon a social as well as economic situation. The meticulously calculated sizes of the loans, the projections of the mitigation of Greece's huge debt-to-GDP ratio (expected to top 162% this year), and the mathematically dissected effects of the troika loans on the Greek deficit make the austerity route extremely attractive on paper. However, in packaging a healthy dose of forced austerity with loan packages to Greece, the Eurogroup leaders have misunderstood one critical factor that must play a pivotal part in any Greek recovery: the Greeks themselves.

To this day, Greece's constitution strictly prohibits the firing of government workers. Greek authorities have found out ways to work around this measure, but this component of the Greek constitution stands as a testament to a completely different bygone era. This era was one in which public sector wages rose 50% between 1999 and 2007. This was also the time of huge pensions, early retirement ages and generous wages as well as high standards of living for the Greek populace.

Compare this bygone era to the one right now. Greece has an "official" unemployment rate of 21 percent, a number that soars to 48 percent for adolescents. Greece, along with Portugal and Spain, also accounts for 95 percent of the rise in unemployment in the E.U. since late 2010. Dissatisfaction and poverty have hit Greece in the gut. As noted in Nicholas D. Kristof's column, "it's stunning here in Athens to see many traffic lights not working, to see beggars pawing through garbage for food, to see blackened ruins of shops burned in rioting."

Greeks have witnessed their world turn upside-down due to the recession, only to now witness the effects of the austerity measures: the Greek government is significantly increasing income taxes, excise taxes and property taxes while closing schools, cutting social security, raising the retirement age, and laying off huge amounts of state employees. At a time when Greeks need their government the most, their government is forced to relentlessly cut programs and aid. It's no wonder that many Greeks have lost faith in their government and have become increasingly disillusioned. This in turn has fueled massive unrest in the form of riots, strikes, and protests across the nation.

The widespread dissatisfaction of the Greek populace has had a huge economic consequence. Tax evasion and corruption, which were already widespread in Greece before the crisis, has soared due to widespread discontent. According to a 2011 report by the EU's Task Force for Greece, the amount of taxes past due to the state is $78 billion, half of which is expected to never be collected. Inflows in the first 20 days of May were down 20 percent compared to the same period a year ago. Greece's State General Accounting Office has suggested that the budget revenues target this year will have to be revised and warns that revenues may miss by as much as 1.35B euros. Things have gotten so dire that Greece is considering tapping into its Hellenic Financial Stability Facility, which was originally designated as a recapitalization fund for banks.

This is what the austerity plans drawn up by the troika and implemented by the Greek government failed to anticipate: a social backlash that has led to a self-perpetuating cycle of misery. As Greece collects less revenue due to large portions of Greeks failing to pay taxes, it will not be able to sustain even a heavily reduced budget and will have to continue to rely on the troika for loans, which the troika will only provide with promises of more austerity. This austerity then will continue to alienate the Greek populace, thus repeating the cycle. This problem is exacerbated by the fact that Greece has no control of its currency (the euro) and thus cannot simply print more money.

Of course, Greece itself deserves significant blame for getting itself into this mess in the first place and forcing the troika to come to its aid. Greece's major breaches of the Maastricht treaties and huge spending binges were entirely Greece's fault, and it is understandable that the troika instinctively made Greece go down a path of austerity it still continues today. However, this path is ultimately self-destructive and detrimental to not only Greece, but the entire Eurozone.

In the end, one of the main obstructions to a Greek economic recovery is Greece's continued alienation of its masses through the implementation of stringent and ever-harsher austerity measures. This alienation has created a self-perpetuating cycle that has produced barely any positive results for the Greek economy. The new Greek government led by New Democracy needs to keep this in mind as it decides to accept future bailout packages coupled with further austerity measures.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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