A Fatally Flawed Recovery Plan Greece Back on the Brink

Greece needs even more money -- EU officials estimate that a new bailout will cost over 100 billion euros rather than the previously assumed 60 billion. It will get the aid, even though the rescue strategy adopted so far seems doomed. The economy is shrinking, and ambitious privatization plans are illusory.

Protestors in Athens demonstrating against austerity measures.

Protestors in Athens demonstrating against austerity measures.

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The crisis in Greece does have its upsides, at least for tourists. The Acropolis, a UNESCO World Heritage site above the rooftops of Athens, recently extended its opening hours. It now closes at 7 p.m. Before, it often closed shortly after lunchtime. "It was unacceptable for our foreign visitors," says Transport Minister Dimitrios Reppas.

In the midst of the crisis, the number of museum guards, at the Acropolis, for example, has magically increased, as have the numbers of ambulance drivers and nurses. "People are enthusiastic," says Reppas, adding: "A real consolidation is underway here."

Officials from the European Union, the International Monetary Fund (IMF) and the European Central Bank (ECB), who have a different definition of consolidation, are unlikely to be quite as enthusiastic. They approved €110 billion ($159 billion) in financial aid for Greece about a year ago, imposing tough requirements on the country in return.

Since then, Prime Minister Georgios Papandreou has tried to drastically reduce Greece's €330 billion in debts through radical austerity measures, downsizing and structural reforms. At the same time, the government is seeking to increase revenues by 8.5 percent and reduce its deficit to 7.5 percent of GDP this year.

So much for the theory. A visit to the Acropolis offers an example of what is really happening. There are more museum guards here now, a consequence of the Greek interpretation of consolidation.

Consolidation, Greek Style

Here's how it works: OSE, the national railroad, was expected to eliminate its annual deficit of €1-2 billion by slashing about 1,800 of its 5,800 jobs. But, as in other government-owned businesses, the employees were not let go but transferred to new jobs instead -- albeit with reduced pay.

Greece's partners in the euro zone are gradually losing patience with Prime Minister Papandreou and his team. A year after receiving €110 billion in international financial aid commitments, Greece has hopelessly failed to reach the agreed austerity goals. Its lenders are now questioning the government's ability to reform, the economy has declined even further than feared, and important tax revenues have failed to materialize.

The only certainty is that Greece needs more money than it was provided with last year. The goals stipulated in the bailout package can only be reached under highly unrealistic assumptions, the envoys of the EU, IMF and ECB concluded after analyzing the situation in Greece in recent weeks.

The so-called troika has remained reserved in its official statements, even saying, in a statement issued on Friday, that Greece has made "significant progress." It now appears that the payout of next loan tranche from the current aid package, which was long in question, will now go ahead. However, the team of investigators presented less uplifting news to a group of senior government officials from the euro zone countries at a meeting in Vienna's Hofburg Palace last Wednesday. The necessary measures would require extreme sacrifices from the Greek public, they said, but in light of the mood in Athens, such steps are hardly realistic anymore. In short, the troika team concluded, Greece needs a new program that will give it more time and more money to solve its problems.

The top officials from the European finance ministries seemed unimpressed, and the man from the ECB even felt vindicated. Only the German representative, Finance Ministry State Secretary Jörg Asmussen, raised an objection. At the strict behest of his minister, he called for the involvement of private lenders in the costs of rehabilitating Greece. According to other participants at the meeting, Asmussen said Germany could only agree to a new program if private sector investors assumed a substantial share of the burden.

The man from Berlin bluntly presented his counterparts with the alternative: Without the participation of the private sector, there would be no approval from the German parliament. Without that, there would be no new bailout, which in turn could lead to Greece defaulting on its debt. The meeting ended at 3 a.m. without reaching any conclusions.

When German Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democratic Union (CDU), gave Asmussen strict instructions not to agree to a new solution in Vienna without the participation of private lenders, it was not just out of respect for the German parliament's say in the matter. Schäuble is also loath to present the bill to the reluctant German lawmakers.

New Greek Bailout Costlier Than Expected

That's because the new program costs a lot more money that previously assumed. Experts at the German Finance Ministry and within the troika believe that if Greece is still dependent on foreign assistance in 2013 and 2014, it could end up costing more than 100 billion euros -- compared to the previous estimate of €60 billion. The reason for the sharp cost increase is that additional Greek government bonds, for which follow-up financing will be needed, are set to mature in the second half of both 2013 and 2014.

The necessary funds should not solely come from government coffers, Schäuble recently told a group of advisors. The finance minister senses that he can only trim the aid to a tolerable level if the private lenders agree to waive a portion of their claims. Schäuble's is scheduled to meet his European counterparts again on June 20, but no one doubts that the Greeks will receive additional funds in the end.

Whether it makes sense to lend the Greeks more money that they may never be able to repay is a question the politicians prefer not to address. That's because the alternatives and their consequences -- a drastic debt restructuring and possibly even a return to the drachma -- seem even more horrific.

Nevertheless, there are growing doubts over whether Greece can be rehabilitated through austerity measures alone, and whether the drastic treatment being prescribed will truly cure the patient or make its condition even worse.

The Greek public, at any rate, is becoming increasingly furious with its government and the creditors in Brussels and Washington. Public demonstrations against the austerity measures are held every evening. Lawmakers in Athens have been spat at, and protesters have hurled stones at politicians on the island of Corfu. Many hold the Germans, in particular, responsible for their plight.

Experts are also critical. The draconian EU and IMF requirements are like a "new Treaty of Versailles," says Athens-based economist Yanis Varoufakis. "In the end, they harm both the strong and the weak."

Like many of his colleagues, Varoufakis is convinced that if Greece is ever to become economically independent again, the economy will have to be rebuilt and stimulated with a targeted investment program.


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