A turbulent week in Greece ended with workers walking off the job in a general strike for the second time in days, and with protestors lobbing gasoline bombs outside the Greek parliament building in Athens. The uproar is simply the latest installment of the public fury at the Greek government’s imposition of austerity measures and the prospect of still more cuts to come after the country’s politicians approved another 3 billion euros of budget reductions. That’s the price that Greece must pay in order for creditors – including fellow eurozone members – to forge ahead with a fresh bailout package that will stop the country from defaulting on debt payments in the coming weeks.
The economic data show just why Greeks are taking to the streets to protest the austerity measures. In recent days, the government has released data showing that the unemployment rate in the fifth year of recession has soared to an astonishing 20.9%, while industrial production has plunged 11.3% over year earlier levels. As can be seen in the charts below, Greece’s economic plight is far worse than that of its eurozone peers, with gross government debt expressed as a percentage of the country’s GDP skyrocketing to about double the level across the eurozone. It isn’t just the magnitude of gaps of that kind that worry economists, but the fact that as austerity measures have kicked in, those gaps appear to have widened.
Greek politicians are walking a narrow line as they attempt to preserve the country from economic ruin. On the one hand, austerity measures themselves clearly take a toll on the country, with the economic costs being matched by the growing level of public fury. Coalition leaders have signaled that they may oppose some of the provisions of the latest agreement on budget cuts, including wages: they must remember the fact that they will be facing angry voters in an early election that could happen as soon as April. Meanwhile, eurozone finance ministers aren’t making the task any easier by insisting that the entire parliament must sign off on the plan before they agree to another bailout.
The Greek crisis offers some eerie parallels to the situation that prevailed in Argentina ….as the latter underwent a chaotic bankruptcy a decade ago, even though European policymakers of all stripes are desperately seeking to avoid a Greek bankruptcy. Still, the table and charts below show how perilously close Greece comes to the Argentinean situation of early 2002: the Greek unemployment rate is only a few percentage points behind that recorded in Argentina, while the decline in GDP in Greece so far hasn’t been quite as bad as the peak-to-trough 20% nosedive experienced in Argentina. By one intractable measure, however, the state of affairs in Greece is already far more disheartening: Greece’s public debt as a percentage of its GDP is expected to be treble the level of that in Argentina, as recorded by the IMF.
A blog post published today on Reuters.com, draws attention to these parallels and points to the IMF’s post-crisis analysis of events in Argentina, in particular its conclusion that tightening fiscal policy would exacerbate the downturn. “In hindsight, the most viable option would appear to have been an early debt restructuring involving a significant present value reduction, combined with the abandonment of the currency board,” the IMF concluded. “However, the authorities were unwilling even to consider the possibility of an exit: neither the government nor the public were prepared to take such a drastic course until it was forced upon them by events.” It’s hard to avoid seeing the Greek protests and the political reluctance to forge ahead with still more austerity measures as an echo of this.
At least in the case of Argentina, the country’s default on its debt and the political crisis that accompanied this set the stage for a relatively rapid recovery (helped by the country’s status as a commodity exporter, just as commodity prices boomed in the early stages of a secular bull market.) In contrast, it is hard to envision a scenario in which the Greek crisis is followed by a similarly rapid recovery, not least because of the fact that it’s not the only eurozone country battling debt problems.