EU to police Greek accounts
ATHENS: The Greek government has played its hand by detailing its austerity programme. The news of cuts and tax rises is aimed at different audiences.
Firstly, the steps are intended to persuade the markets that Greece is serious about reducing its deficit. It has won the backing of the European Commission, but the EU remains wary. It has described the Greek plan as "risky and ambitious". And the EU has put in place a rigorous monitoring programme. It wants an assessment every three months on what is happening inside Greek accounts. If targets are not met they'll insist on further measures.
Furthermore it wants the Greek government to set aside 10% of current expenditure to create a reserve in case of future budgetary problems. The word of the Greek government will not be enough in the future.
The austerity plan is also aimed at persuading the Greek public that this is a national emergency and sacrifices have to be made. There will be a freeze on public sector pay and cuts in some of the allowances that many workers rely on. Fuel prices will go up in order to raise an extra billion euros a year. In the background there is growing pressure for reform of pensions, healthcare and the labour market.
The room for manoeuvre is slight. If the cuts are too severe the public sector workers will resist on the streets. If Greeks back away from spending it will depress the economy further, stifle growth and reduce tax receipts. If the government fails to implement tough decisions the markets will push up the cost of borrowing on the international markets.
I spoke today to Stefanos Manos, a former economy minister. He remains sceptical about the austerity plan until he sees more detail. He is certain there will be some unrest. The question is how the majority of Greeks will react. He believes Greece can reduce its deficit. He says there is "extraordinary fat" in the system. He points out that there are four times as many teachers per student in Greece as there are in Finland and that the system needs shaking out. Some of the proposed reforms will undoubtedly confront a public sector culture where people have job security and receive allowances.
I spoke too to Joseph Stiglitz, the Nobel-laureate economist, who is in Athens. He is much more optimistic about the outcome. He believes the Greek government has got it right, with some public sector trimming but not enough to raise fierce opposition or dampen demand. He also believes the euro will survive its greatest crisis. He says that speculators are targeting Greece as the weakest link in the euro. Some traders have bet that the value of the euro will fall and want to see the euro weaken.
The initial reaction in the markets is mainly positive, but cautious. The reaction from civil servants and public sector workers may not be apparent until next week, when strikes are being organised. The question then will be whether the protests have enough support to stifle the government's plan. Over the next few weeks the stability of the euro may be determined by events on the streets of Athens.