Greece Drinks the Hemlock

Greece’s Parliament did what it had to do on Thursday. Despite some defections from the ruling centrist coalition, lawmakers narrowly approved a $23 billion package of new austerity measures, including further spending cuts to social services, pensions and public salaries, as well as tax increases demanded by Greece’s European lenders.

In return, the troika of official creditors — the European Commission, the European Central Bank and the International Monetary Fund — promise to consider, but not guarantee, reducing the punitive interest rates they charge Greece for bailout loans and unlocking a $40 billion aid payment Athens needs to avoid a default on its debts.

No responsible Greek lawmaker could have ignored the terrible consequences of voting no. But no one can dismiss the threat to social stability from these cuts. Even Prime Minister Antonis Samaras, who fought hard to push the package through Parliament, characterized the cuts it imposed as “unfair.”

The fact is, just about everything in this austerity package has been tried before and failed disastrously. These unpalatable steps will do nothing to make Greece’s debts more payable, bring its budgets closer to balance or help make the structural reforms Greece needs to revive its economy. Instead they will almost certainly further shrink an economy that has already shrunk by an astounding 25 percent over the past few years, making fiscal improvement nearly impossible.

The austerity approach was supposed to reduce Greece’s ratio of debt to gross domestic product. But that ratio has grown, despite debt write-offs and bailouts, because the economy has contracted so much. The new package is expected to shrink it an additional 9 percent.

Greece cannot pay off its debts when it is shutting down its economy. It has to put people back to work. The only way forward is through more debt write-offs and more low-interest European loans, as well as by opening up restricted job markets.

But measures that extend and deepen Greece’s severe recession are certain to intensify public opposition to labor market reforms that could increase an unemployment rate already over 25 percent. And imposing new fuel taxes and health care charges will hurt ordinary people and make a tax system that is scandalously unfair even more so.

Ordinary Greeks are losing confidence in a political system they feel has failed to protect them from economic ruin. Greek lawmakers know this but feel compelled to do as their European creditors ask. And, we suspect, many of those creditors also know that more austerity is not the answer. But so far, they have been unwilling to challenge the leader of Europe’s biggest economy, Chancellor Angela Merkel of Germany, who continues to believe that only economic punishment will push Greeks to reform.

It may be a winning political formula in Germany, where Ms. Merkel stands for re-election next year. But it is a profound, and profoundly unnecessary, tragedy for Greece.

Source: http://www.nytimes.com/2012/11/09/opinion/greece-drinks-the-hemlock.html