What’s the best way forward for Greece?

Placed in the heart of the Mediterranean, complete with sun, sea, 13,676 km of coastline, and a
rank of 29 in the 2011 Human Development Index (HDI) – just one place below Britain -, one would
be mistaken to think that this would be a country with plenty of rioting and striking.

It has been almost 2 years since the Greek government requested for a bailout package of €45
billion, which was later increased to €110 billion.The boom years of the early 2000s enabled the Greek government to run a large deficit through various public spending programmes, most notably the Olympic Games of 2004. But most of the new infrastructure created now lay derelict, having seen better days.

Since 2005, austerity measures have been in place, beginning with the New Democracy party’s
budget by increasing taxes on alcohol and tobacco in addition to a VAT increase from 18% to 19%. Four and a half years later, and a change in government back to the Socialists, Papandreou and the Greek government called for two further sets of austerity measures. There is no doubt that these measures further alienated the Greek population and lead to the various strikes. With the bailout package of 2010 came a set of austerity measures where there were spending cuts and tax increases, and yet more protesting. In June 2011, there was another set of austerity measures in order to release €12 billion so that the Greek government would not default on its mid-July loan repayments. Another bailout worth €109 billion was approved in July 2011, later increasing to €130 billion on the condition that Greece would have further austerity measures in place.

With the vote on whether the government should accept the second bailout package and further
austerity measures looming, I will look at the different ways the Greek government can deal with
this catch-22 situation.

If the Greek government votes in favour of the bailout deal, more austerity measures will probably
be in place, and another wave of rioting would be likely to occur, along with more striking. The
Greek people have already experienced various tax increases, wage cuts, and job cuts. This time,
there will be further public sector job cuts of 15,000, a lowering of the minimum wage by 20%, and a liberalisation of labour laws which would mean that people may be exploited in the sense that they may work for below the minimum wage. In addition to this, the government would negotiate a debt write-off deal with the banks. However, the Eurozone ministers still want €325 million in savings. With the large size of the Greek public sector, standing at about 40%, the easiest way to make these savings would be to cut more public sector workers, but this of course will cause a backlash.

On the contrary, if the Greek government votes against the bailout deal, the Greek economy would
end up defaulting on its debt repayments and fall into a state of disrepair.In the short term, this
will not be good for Greece’s economy as they will not be able to pay wages. It would also probably lead to Greece leaving the euro and returning to its former currency, the drachma. The implication of this is that the drachma will depreciate in value, leading to hyperinflation. However, this would make their exports seem cheap and therefore more competitive on the world markets. Since Greece is a popular holiday destination for many Brits, it will seem cheaper for Brits to go there and they will bring revenue into the Greek economy. However, this would mean that their imports would be expensive and will consume less. This would be good for Greece’s economy as their GDP will increase. In the long run, if they become more competitive, the GDP could increase to pre-recession levels.

Thankfully, I’m not a member of the Greek Parliament and won’t have to worry about the possible
implications of voting for or against the bailout terms. Having said that, it would probably be better
for Greek government to accept these austerity measures attached with the bailout. In theory,
returning to the drachma would seem like the best option because of increasing competitiveness
and increased GDP due to the low value of the drachma. However in reality, we may not even reach that point if they leave as there will almost certainly be a deposition of the Greek government.

Contributed by Alex Chan

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