New York: European Union finance ministers agreed on Tuesday on a complex deal to provide a 130 billion euro ($172 billion) bailout to Greece and stabilise the euro, but analysts believe the bailout leaves deep doubts about Greece‘s ability to recover and could unravel quickly.
While the deal provides time for the eurozone to put new austerity measures in place over the coming months, it means Greece will struggle for years without economic growth. Economists said the agreement between the European authorities and Greece won’t resolve Greece’s economic crisis and is likely to make it worse.
“The European authorities seem more intent on punishing Greece than helping the economy recover,” said Mark Weisbrot, co-director of the Center for Economic and Policy Research (CEPR), in Washington. “For two years now they have been pushing the Greek economy into recession, and there’s still no light at the end of the tunnel.”
The Financial Times reported that the EU is fully aware that this deal could unravel within a few months. It said a “strictly confidential” report on Greece’s debt projections prepared for eurozone finance ministers reveals Greece’s rescue programme is way off track and suggests the Greek government may need another bailout once the second rescue runs out.
The leaked document contains a “sustainability analysis” which portrays a grim scenario with explosive debt and Greece needing “about 245 billion euro in bailout aid, far more than the 170 billion under the ‘baseline’ projections euro zone ministers were using.”
“Given the underestimation of Greek losses so far, and the recessionary impact of budget tightening, mass layoffs, a 20 percent reduction of the minimum wage, and other austerity measures – I think the pessimistic scenario outlined in the leaked document is a very plausible scenario,” said Weisbrot.
Prospects of growth in Greece are so dim that it brought thousands onto the streets of Athens to protest on Sunday. The austerity measures will deepen a recession already in its fifth year. The bailout basically means Greece will get the money before 20 March and be able to make the next round of payments on its debt. Economists say it doesn’t mean Greece can actually afford to pay its bills, so another round of all this when the next round of payments falls due is a given.
“I don’t want to be a Cassandra, but the idea that it’s over is an illusion. I am amazed by the short-term psychology in the market,” Kenneth S. Rogoff, professor of economics at Harvard University and co-author of This Time Is Different: Eight Centuries of Financial Folly, told The New York Times.
Proponents of a euro zone exit for Greece
Since the EU and International Monetary Fund (IMF) are not offering debt-ridden Greece a growth option it may be better off leaving the euro and renegotiating its debt, say some economists. Jennifer McKeown, senior European economist at Capital Economics, said there is a “risk of a euro zone exit later this year” for Greece.
“The bottom line is that you can’t shrink your way out of a recession – you have to grow your way out. This is pretty much standard Econ 101,” said Weisbrot. “What they are doing to Greece really makes no economic sense. At this point, it looks like the economy would do better if Greece were to exit from the euro, as opposed to enduring indefinite recession and stagnation.”
He said Greece should take a leaf out of Argentina’s playbook. Argentina was trapped in a severe recession from mid-1998 to the end of 2001.
“Attempts to stabilise the economy and maintain the currency peg to the US dollar, through monetary and fiscal tightening, led by the IMF and backed by tens of billions of dollars in lending, failed to arrest the economy’s downward spiral. In December 2001, Argentina defaulted on its debt, and a few weeks later it abandoned the currency peg to the dollar. Recovery began after one quarter of contraction and continued,” said Weisbrot.