ATHENS – Despite more than two years of record cost-cutting, including slashes in salaries and pensions in addition to record tax hikes demanded by international lenders in return for $325 billion in two bailouts, Greece’s economy is continuing its downward slide as the austerity measures have worsened into a deep recession, raising unemployment to 21.9 percent and shutting down 1,000 businesses a week.
As Greeks get set to vote in critical June 17 elections that could determine whether anti-austerity parties win and take Greece out of the Eurozone of the 17 countries using the euro as a currency, opponents of the draconian measures got more ammunition with data showing that the Gross Domestic Product (GDP) shrank in the first quarter by 6.5 percent, indicating that the austerity measures have failed. Led by the Coalition of the Radical Left (SYRIZA) the anti-austerity parties won 68 percent of the vote in the stalemated May 6 elections and are poised to win a sizable majority again.
The first quarter GDP preliminary projection was based on seasonally unadjusted data. It topped a previous minus-6.2 percent year-on-year flash estimate and follows a 7.5 percent year-on-year GDP decline in the last quarter of 2012, statistics service ELSTAT said. A narrower trade deficit provided some relief but was not enough to make up for sharp falls in consumer and investment spending.
“The positive reading in exports and shrinking imports could not offset the decline in consumption and fixed capital investment,” said National Bank economist Nikos Magginas. “Recessionary pressures will continue unabated in the second quarter. Uncertainty coupled with the labor market’s deterioration will further limit domestic spending while support from export sectors is seen as weak,” he said.
The austerity measures have made Greeks keep their wallets in their pockets, driving down tax revenues instead of raising them, despite a doubling of income and property taxes and new taxes assessed on the poor as many Greeks have been driven to hide their incomes and evade taxes. Consumer spending fell 7.5 percent year-on-year in the first three months of the year while gross capital investment plunged 21.3 percent as the cash-strapped government struggled to shrink the budget hole.
The recession, now in its fifth year, weakened imports, helping to reduce the trade deficit by 41.9 percent and partly contained the contraction in GDP. The $300 billion Greek economy is expected to contract by 5-5.3 percent overall this year, based on recent central bank and OECD forecasts, making it even more unlikely the country can recover from the downward spiral initiated by austerity that the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) said was required because of decades of overspending and the once-ruling parties of New Democracy and PASOK packing public payrolls with hundreds of thousands of unnecessary hires in return for votes.
Greece is surviving on a first round bailout of $152 billion and waiting for a second of $173 billion that is being withheld until the election results. The Troika has warned that the new government must cut spending another $15 billion and continue with reforms or face the risk that the money pipeline could be shut off.
“Most recent higher-frequency macro data signal no concrete improvement in the second quarter. Domestic political developments and the evolution of the euro area crisis will be crucial for the domestic economic outlook in the second half,” Eurobank economist Platon Monokroussos told Reuters. Other data showed that weak domestic demand led to a further easing in consumer inflation to 1.4 percent, but that was of little solace to Greeks who have already stopped spending.
Greece must stick to the austerity commitments it has made if it wants to remain part of the Eurozone after elections on June 17, German Chancellor Angela Merkel said. Speaking after conferences with New Zealand’s Prime Minister John Key, Merkel said, “What we have always said is that we want Greece to remain a member of the eurozone. The precondition for that to succeed is that the future Greek government sticks to the memorandum that was agreed with the International Monetary Fund, European Central Bank and the European Commission.”
U.S. President Barack Obama issued a similar warning. “We recognize the sacrifices that the Greek people have made, and European leaders understand the need to provide support if the Greek people choose to remain in the Eurozone,” Obama said. “But the Greek people also need to recognize that their hardships will likely be worse if they choose to exit from the Eurozone,” he said.
(Sources: Kathimerini, Reuters, AFP)