Greece: The Incredible Shrinking Country

ATHENS – Even as interim Prime Minister Lucas Papademos, who is leading a temporary coalition government, insisted that he’s on track to keep international aid coming and eventually right the technically-bankrupt country, statistics show the economy is contracting worse than ever, and could shrink more than 6 percent in 2011, the fifth year of a recession that shows no signs of ending.
The dire news came from the International Monetary Fund (IMF,) which, along with the European Union (EU) and European Central Bank (ECB) is lending Greece $152 billion to stay afloat for now, and is considering a second bailout of $175 billion because the first, which came with conditions of severe austerity measures, has backfired and created 17.5 percent unemployment, left 500,000 people with no income, sent another 500,000 fleeing to other countries, and closed more than 100,000 businesses.
Despite deep pay cuts, tax hikes, slashed pensions, and a scheduled layoff of 30,000 public workers, with 120,000 more set to be fired over the next three years, the economic goals have fallen far short of revenue goals and tax collections have lagged as tax evaders who cost the country more than $60 billion remain mostly at large and Greece has failed to implement reforms such as opening monopolies like lawyers, architects, engineers and pharmacists who enjoy a monopoly, and a plan to privatize state-owned entities has not been implemented.
All those factors led the IMF’s mission chief in Athens, Poul Thomsen, to say the only options left now to keep the country from disappearing economically are to decimate a public sector of nearly 1 million workers that has been created by generations of political administrations packing the payrolls with political hires in return for votes. The 6 percent shrinkage estimate was worse than an IMF estimate just a day earlier and much more than the minus-5.5 percent projection made by Greek officials who have notoriously underestimated the severity of the crisis, which has created more than 18 months of protests, riots and strikes that brought down the former ruling PASOK Socialist Administration of then Prime Minister George Papandreou, who resigned on Nov. 11 to make way for a coalition of his party’s leftovers, those from their bitter rival Conservative New Democracy, and the far Right-Wing LAOS party which was set to reign until new elections tentatively set for Feb. 19, but which now seem certain to be moved back because the government has been stuck in neutral as the parties jockey for position.
Many private economists say Greece’s economy will shrink by more than forecast this year, while the country’s budget deficit will surpass even the government’s upwardly revised target of 9% of gross domestic product for 2011, and the Wall Street Journal said it will be more than 10 percent, more than three times the ceiling of 3 percent allowed by the Eurozone, the 17 countries that use the euro and are threatened with being undermined by the Greek crisis that shows no signs of abetting. Thomsen blamed the depth of Greece’s recession, in part, on the government’s failure to implement tough structural reforms and overhaul bureaucracy.
“Reforms are falling short of what was expected,” said Thomsen. “This is the main reason why the economy is still trending down and quite significantly with GDP declining by 6%, maybe more.” The IMF has been pressing Greece to move more aggressively in liberalizing its labor market and opening up closed private-sector professions that are now protected by a web of restrictions that dent competitiveness. Papandreou promised to do that but never did.
Thomsen also said that pay cuts and tax hikes have gone as far as they can and that Greece must do more crack down on tax evasion and to shrink its public sector by closing unnecessary public organizations and sacking surplus government workers. “Greece needs to move more aggressively in closing down state enterprises, and it has to accept larger scale involuntary redundancies,” Thomsen said. Up to now, the government has “been fairly timid” and unwilling to break “taboos” he said, a reference to Greece’s protection of its rich and powerful elite and political leaders.
Despite all that, Papademos, a former ECB Vice-President, insisted he’s on target. “The government is proceeding effectively in the implementation of measures laid out in its program,” Papademos wrote in his blog, taking stock of his first month in government. But Finance Minister Evangelos Venizelos, who has implemented waves of tax hikes, including on the poor, said that is not currently being discussed with creditors, Papademos said that the budget would put Greece on the path to fiscal recovery if it is properly executed. “As long as it is implemented, it will substantially change the country’s fiscal position and pave the way for a gradual recovery from next year,” Papademos said. He noted he was able to get released a long-delayed $11 billion loan installment as part of the first rescue package, even though there has been no progress on the second, which includes a 50 percent write down of much of Greece’s debt, if reluctant international investors will agree.
The Wall Street Journal was particularly damning as it  also said the economy is shrinking far faster than political leaders said, attributing it to the inability of people to pay more and higher taxes, even as their pay has been cut. Those have included double taxation on property and income and many Greeks this week were hit with so-called “solidarity taxes” plus big increases in circulation passes required to drive automobiles, just before Christmas, which means their bonuses will have to go to paying the government instead of shopping, a death knell for many more businesses counting on the holiday season to survive. An unidentified finance official said that,  ““In 2012 we will be entering a fifth straight year of recession and there doubts we’ll be returning to growth in 2013,”  blaming a curb on bank loans, rising unemployment and a lack of consumer confidence. “The market is totally dry. We expect a budget deficit of around 10 percent this year, while recession could slightly exceed 6 percent,” he said.
The U.S. Ambassador to Greece, Daniel Smith, told the annual conference of the American-Hellenic Chamber of Commerce that Greece needs to grow its way out of recession, but urged the government to keep pressing on with austerity at the same time. “Only reform holds the promise of a brighter and more prosperous future,” he said. Smith drew attention to the competitive advantages that Greece can further leverage in its efforts to boost growth including the tourism and shipping sectors as well as the country’s potential in renewable energy. European Union funds constitute a source of liquidity for Greece, he said.