Greek austerity squeaks through, but budget woes remain

The Greek Parliament passed an austerity package today, but the possibility of default still looms.

Petros Giannakouris/AP
A protester throws a garbage bag to riot police in front of the Greek Parliament during clashes in central Athens on June 29.

Greek lawmakers under terrific urging from European Union officials today voted 155 to 148 to accept a package of austerity necessary to avert a government default and avoid a feared chain reaction of market turmoil around Europe and the world.

Markets were optimistic before today’s vote that Greek politicians would ignore a howling public that polls as high as 80 percent opposed to the $40 billion in government spending cuts and tax hikes that are the price of the international bailout that's staving off default. Other struggling “peripheral” euro-zone members, including Ireland, Portugal, Spain and Italy, are anxious not to suffer the negative market consequences of a Greek default.

The current Greek crisis, the second in slightly more than a year, is seen by some as a possible harbinger of European disunity, a turning point for greater isolation between the 17 eurozone members. Others see it as a necessary spur towards deeper integration.

Prime Minister George Papandreou framed today’s vote in historic terms and together with new finance minister Evangelos Venizelos, a heavyweight in the ruling Pasok party, pushed through the package and also avoided defections that could have brought the government down.

News reports have a Pasok party headquarters in Crete being burned down, and in Athens the outcome of the vote has brought enough tear gas on the street to put 30 people in the hospital. The nation is in the second day of general strikes called by the trade unions. In the past weeks, atmosphere for the mostly peaceful protests in Syntagma Square, epicenter of political anger, has turned violent.

Tomorrow brings another vote in Parliament to enable the austerity legislation. That vote is being treated as pro forma, though some of the specific details – for instance, a huge cut in utility spending – remain sensitive.

Show Greece the money

Today’s vote, if ratified tomorrow, allows the release of a of $16.5 billion slice from the $142 billion bailout agreed in May 2010, after the Papandreou government admitted its books had been cooked to hide a $350 billion deficit. [Editor's note: This story was edited after posting to correct the size of the bailout package.]

Lacking a growth package and any structural adjustments, many Greek citizens say that agreeing to an austerity package merely sentences them to an unrelenting long-term debt problem that they can’t see a way out of.

“I’m not sure what will happen now. What I see is a lot of political and social polarization in Greece,” says Takis Pappas, an expert on Greek politics at the University of Strasbourg, “and this is what worries me at the moment. Greece doesn’t have room to maneuver. Will the opposition try to take down the government or be silent. The opposition [New Democrats] will likely play hardball.”

'Kicking the can'

The fresh $16.5 billion, however, will only sustain the Greek payroll through the summer, causing some analysts to say today’s vote merely “kicks the can down the road.”

Yet analysts at Morgan Stanley, speaking anonymously, say that the new money and time bought by “kicking the can” is necessary as a measure to calm markets and allow for new solutions and adjustments to emerge.

Philippe Waechter, chief economist at Natixis Asset Management in Paris, says the vote may be salutary but still doesn’t offer a long term answer.

“Thanks to this vote we can avoid the problematic situation that would arise from Greece's straight default,” Mr. Waechter argues, “but this vote, on a very, very drastic austerity plan, only allows for Greece to benefit from the Troika's [EU, IMF, European Central Bank] next financing tranche. What is preoccupying is that a considerable effort is made to just meet a short-term deadline. What will happen tomorrow if Greece is again in the same situation, which will surely occur if nothing is done to tackle long-term problems?”

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