Business

Greece austerity vote: Will it secure Greece's future?

  • 7 November 2012
  • From the section Business
Car park exit sign
Image caption Without 13.5bn euros of aid, Greece says it will run out of money by 15 November

While the US presidential elections are stealing the limelight, on this side of the pond, votes taking place in the Greek parliament could prove equally crucial.

With the country stuck in its fifth successive year of recession, Greek politicians must on Wednesday night vote on a fresh round of spending cuts and tax hikes totalling 13.5bn euros ($17.3bn; £10.8bn) - the fourth such package since the debt crisis started three years ago.

On Sunday there is a second vote to approve Greek Prime Minister Antonis Samaras' proposed budget for 2013.

The austerity measures include a two-year increase in the retirement age from the current average of 65, salary and pension cuts and another round of tax increases.

Both these reforms and the proposed budget must be passed for Greece to receive its next tranche of 31.5bn euros of aid, which is already on hold from the end of September. Any chance of getting approval for a subsequent softening of its 130bn euro bailout terms also hinges on these votes.

Without the 31.5bn euros, needed to recapitalise Greece's banks, Mr Samaras has warned the country will run out of money by the middle of this month, and descend "into chaos".

With the left-wing and socialist members of the fragile coalition government wavering, Mr Samaras has insisted that these cuts will be the "very last", with the only other option a eurozone exit leading to what he has estimated would be an 80% drop in the standard of living.

"We promised to avert the country's exit from the euro and this is what we are doing. We have given absolute priority to this because if we do not achieve this everything else will be meaningless," Mr Samaras added.

Greece in crisis

So will the vote secure Greece's future in the eurozone?

Many analysts say it is not threatened in the short term. Despite strong public opposition, demonstrated by the 48-hour "mother of all strikes" by Greece's two biggest unions, the votes on austerity measures and the budget are expected to be passed by a narrow majority.

However, from the point of view of the troika of inspectors from the International Monetary Fund (IMF), the European Union and the European Central Bank (ECB) whose job is to ensure Greece can repay its debts, the key issue is not the approval of the measures, but their implementation.

Mr Samaras' revised budget last week predicted that Greece's total debt would peak at 192% of gross domestic product (GDP) in 2014 and only reduce slowly, indicating the near-impossibility of Greece meeting the troika's deadline of cutting its debt to GDP ratio to 120% by 2020.

If Greece has not made sufficient progress on reforming its finances, then the troika cannot authorise the release of further bailout funds.

Implementation is key

Panos Skourletis, spokesman for the main opposition Syriza party, argues implementation is unlikely.

"These measures may be voted through, but they cannot be enforced because the tolerance levels of Greeks have really passed their limits," he said.

IHS Global Insight economist Diego Iscaro is equally pessimistic:

"The real problem with Greece is implementation. This is a deeply rooted institutional problem that makes implementing reform difficult. For example, despite taxes going up, tax collection has fallen because evasion is high," he told the BBC.

Mr Iscaro believes that ultimately to keep Greece in the eurozone, it will need "significant" debt relief, an option he warns is "politically toxic" for stronger eurozone members such as Germany. It could also strengthen the case for other struggling countries such as Spain and Italy to negotiate similar deals.

Despite these evident hurdles, the IMF is reported to be considering a number of such options, including the ECB and eurozone writing off some of their loans or Greek bondholders selling their debt back to Greece at a discount. A third option under consideration is eurozone countries revising the terms of loans they made to Athens, such as cutting the interest rate or extending the repayment period.

So it may be that the meeting of finance ministers on Monday will not yield an immediate deal.

The likely approval of the austerity measures and the subsequent vote on the budget may simply be the next steps in Greece's story, not a definitive conclusion.

"It is simply sticking plaster after sticking plaster. Greece doesn't appear to have the administrative structure to deliver on what it promises," says Investec economist Victoria Clarke.

"Essentially the vote buys Greece time. It will have a real fight if it does want to stay in eurozone."