Budget deficit data report speeds up the currency’s decline
New York Times 08 February 2010
(ATHENS) Dimitris Damianidis is a high-school teacher and a strong supporter of Greece’s socialist government. But that won’t deter him from going on strike with hundreds of thousands of other public-sector workers this week to fight for the 28,000 euro (S$54,000) pension that he expects to receive annually after he turns 60 next year.
‘Why should I as a worker pay for the errors in policies?’ he asked, in response to reports that the embattled Greek state will cut his pay and, by extension, retirement benefits. ‘The worker can’t be the scapegoat. So we have to defend ourselves.’
As Mr. Damianidis and others on the state payroll prepare to stop work on Wednesday, fear is building that the country’s new government may lack the nerve to cut public wages and pension payments, which make up 51 per cent of its budget.
Over the past decade, Greece took full advantage of a strong euro and rock- bottom interest rates to fuel a debt binge by the country’s consumers and its government. This year, if Greece can’t persuade investors to buy 53 billion euros of its government debt, it may have to seek a bailout from its European Union brethren or the International Monetary Fund (IMF) - or, worse, default.
The stakes are high, not just for Greece but for the entire eurozone, where efforts to forge a common economic identity are threatened by the financial crisis.
The panic has spread to Portugal and Spain, and the cost of insuring their debt against a default soared to record levels as investors bet that, like Greece, governments in those countries won’t be able to rein in bloated budgets.
‘The risk of contagion is a real one,’ said Scott Thiel, head of European fixed income at the asset management firm BlackRock in London. ‘Investor sentiment is now focused on countries like Spain and Portugal, where fundamentals are weakest.’
He said that, for now, he saw little risk for Italy, given the relative stability of its economy.
The euro, which has become one of the world’s strongest currencies since its introduction over a decade ago, is down 5 per cent against the dollar this year. The euro’s decline picked up speed when the European Commission’s statistical office revealed in mid-January that Greece had been submitting false data to calculate its budget deficit.
(Late last year, Greece stunned investors by saying that its government deficit would be 12.7 per cent of its gross domestic product, not the 3.7 per cent the previous government had forecast earlier).
Greece’s problems, and those looming over its neighbours, have laid bare the dangers of divergent fiscal and political policies in the eurozone, calling into question the grand European experiment of squeezing 16 disparate countries into a monetary union.
‘We have a centralised monetary policy, but we allow budgets and wages to move in different directions,’ said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, Jose Manuel Barroso. ‘Without a political union, in the long run, the eurozone cannot last.’
As core economies such as those of France and Germany show signs of economic recovery, Greece, Portugal, Ireland and Spain are just entering savage recessions. Spain, the largest of the peripheral economies, announced recently that the number of its unemployed had reached four million - the highest in its history - and warned that the country’s deficit might be worse than previously thought. As growth slows and debt rises in these countries, government largess for university fees, secure government jobs and lifetime pensions will come under increasing pressure.
So, on a continent where the culture and legitimacy of the mother state are so deeply ingrained - and now in some cases unaffordable - a question remains: Can the European Commission say ‘no more’ to prodigal nations such as Greece and, to a lesser extent, Spain and Portugal? And how will the countries themselves confront the political fallout of economic distress?
‘People view these welfare policies as acquired rights,’ said Jordi Gali, an economist who leads the Center for Research in International Economics in Barcelona. ‘If the Spanish government were to stop paying the fees for students at universities or any move in that direction, there would be a major social uprising.’
To avoid such a possibility - and to calm the panic in the markets - the European Commission may decide to rescue one or more of the governments.
But a bailout of Greece, Spain or Portugal would not be as easy as the United Arab Emirates capital Abu Dhabi writing a cheque to Dubai: The European charter includes a no-bailout clause. Even if such a clause were to be overridden, much of the financial burden - and it would be huge - would fall upon Germany, the richest member of the union, said Daniel Gros, who leads the Center for European Policy Studies in Brussels.
‘That is why it would be easier to call in the IMF,’ he said.
For decades, both conservative and socialist governments in Greece have rewarded the demands of public-sector unions with higher pay and more jobs.
In 2009, striking farmers were paid 400 million euros by the government - and this year they are back again, having briefly closed Greece’s border with Bulgaria. Protesting dockworkers extracted big payouts from the government in November.
And the country’s tax collectors went on strike on Thursday even though their services are needed more than ever.
Striking is a bit of a national sport in Greece. Last month, the country’s unionised prostitutes took to the streets, protesting against unlicensed competition from Russian and Eastern European immigrants.
With concessions and accessions, the country’s budget has become bloated. In Parliament, for example, the administrative staff has increased to 1,500 from 700 in the last few years, even though the number of Members of Parliament has remained the same.
Last year alone, 29,000 public-sector workers were hired to replace 14,000 who retired, according to the Finance Ministry.
‘There is no end,’ said Stefanos Manos, a former minister for the economy in the 1990s and a persistent critic of what he considers spending abuses in Greece. ‘The hiring and the spending is uncontrollable.’
The pressing question now is whether the new prime minister, the life-long Socialist George Papandreou, can break this cycle of appeasing various constituencies.
This will determine Mr. Papandreou’s success as a reformer, to say nothing of Greece’s ability to rein in public expenditures and meet its target of a budget deficit of less than 3 per cent of gross domestic product by 2012.
Greece’s government, meanwhile, has made bold promises to rein in spending, but the more than one million public workers may not accept that the state can no longer meet its commitments.
2 comments:
Euro taking the brunt of Greece’s woes?
Budget deficit data report speeds up the currency’s decline
New York Times
08 February 2010
(ATHENS) Dimitris Damianidis is a high-school teacher and a strong supporter of Greece’s socialist government. But that won’t deter him from going on strike with hundreds of thousands of other public-sector workers this week to fight for the 28,000 euro (S$54,000) pension that he expects to receive annually after he turns 60 next year.
‘Why should I as a worker pay for the errors in policies?’ he asked, in response to reports that the embattled Greek state will cut his pay and, by extension, retirement benefits. ‘The worker can’t be the scapegoat. So we have to defend ourselves.’
As Mr. Damianidis and others on the state payroll prepare to stop work on Wednesday, fear is building that the country’s new government may lack the nerve to cut public wages and pension payments, which make up 51 per cent of its budget.
Over the past decade, Greece took full advantage of a strong euro and rock- bottom interest rates to fuel a debt binge by the country’s consumers and its government. This year, if Greece can’t persuade investors to buy 53 billion euros of its government debt, it may have to seek a bailout from its European Union brethren or the International Monetary Fund (IMF) - or, worse, default.
The stakes are high, not just for Greece but for the entire eurozone, where efforts to forge a common economic identity are threatened by the financial crisis.
The panic has spread to Portugal and Spain, and the cost of insuring their debt against a default soared to record levels as investors bet that, like Greece, governments in those countries won’t be able to rein in bloated budgets.
‘The risk of contagion is a real one,’ said Scott Thiel, head of European fixed income at the asset management firm BlackRock in London. ‘Investor sentiment is now focused on countries like Spain and Portugal, where fundamentals are weakest.’
He said that, for now, he saw little risk for Italy, given the relative stability of its economy.
The euro, which has become one of the world’s strongest currencies since its introduction over a decade ago, is down 5 per cent against the dollar this year. The euro’s decline picked up speed when the European Commission’s statistical office revealed in mid-January that Greece had been submitting false data to calculate its budget deficit.
(Late last year, Greece stunned investors by saying that its government deficit would be 12.7 per cent of its gross domestic product, not the 3.7 per cent the previous government had forecast earlier).
Greece’s problems, and those looming over its neighbours, have laid bare the dangers of divergent fiscal and political policies in the eurozone, calling into question the grand European experiment of squeezing 16 disparate countries into a monetary union.
‘We have a centralised monetary policy, but we allow budgets and wages to move in different directions,’ said Paul De Grauwe, an economist in Brussels who advises the president of the European Commission, Jose Manuel Barroso. ‘Without a political union, in the long run, the eurozone cannot last.’
As core economies such as those of France and Germany show signs of economic recovery, Greece, Portugal, Ireland and Spain are just entering savage recessions. Spain, the largest of the peripheral economies, announced recently that the number of its unemployed had reached four million - the highest in its history - and warned that the country’s deficit might be worse than previously thought. As growth slows and debt rises in these countries, government largess for university fees, secure government jobs and lifetime pensions will come under increasing pressure.
So, on a continent where the culture and legitimacy of the mother state are so deeply ingrained - and now in some cases unaffordable - a question remains: Can the European Commission say ‘no more’ to prodigal nations such as Greece and, to a lesser extent, Spain and Portugal? And how will the countries themselves confront the political fallout of economic distress?
‘People view these welfare policies as acquired rights,’ said Jordi Gali, an economist who leads the Center for Research in International Economics in Barcelona. ‘If the Spanish government were to stop paying the fees for students at universities or any move in that direction, there would be a major social uprising.’
To avoid such a possibility - and to calm the panic in the markets - the European Commission may decide to rescue one or more of the governments.
But a bailout of Greece, Spain or Portugal would not be as easy as the United Arab Emirates capital Abu Dhabi writing a cheque to Dubai: The European charter includes a no-bailout clause. Even if such a clause were to be overridden, much of the financial burden - and it would be huge - would fall upon Germany, the richest member of the union, said Daniel Gros, who leads the Center for European Policy Studies in Brussels.
‘That is why it would be easier to call in the IMF,’ he said.
For decades, both conservative and socialist governments in Greece have rewarded the demands of public-sector unions with higher pay and more jobs.
In 2009, striking farmers were paid 400 million euros by the government - and this year they are back again, having briefly closed Greece’s border with Bulgaria. Protesting dockworkers extracted big payouts from the government in November.
And the country’s tax collectors went on strike on Thursday even though their services are needed more than ever.
Striking is a bit of a national sport in Greece. Last month, the country’s unionised prostitutes took to the streets, protesting against unlicensed competition from Russian and Eastern European immigrants.
With concessions and accessions, the country’s budget has become bloated. In Parliament, for example, the administrative staff has increased to 1,500 from 700 in the last few years, even though the number of Members of Parliament has remained the same.
Last year alone, 29,000 public-sector workers were hired to replace 14,000 who retired, according to the Finance Ministry.
‘There is no end,’ said Stefanos Manos, a former minister for the economy in the 1990s and a persistent critic of what he considers spending abuses in Greece. ‘The hiring and the spending is uncontrollable.’
The pressing question now is whether the new prime minister, the life-long Socialist George Papandreou, can break this cycle of appeasing various constituencies.
This will determine Mr. Papandreou’s success as a reformer, to say nothing of Greece’s ability to rein in public expenditures and meet its target of a budget deficit of less than 3 per cent of gross domestic product by 2012.
Greece’s government, meanwhile, has made bold promises to rein in spending, but the more than one million public workers may not accept that the state can no longer meet its commitments.
Post a Comment