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President Obama’s Ticking Greek Time Bomb

Wednesday, August 15, 2012

Developments in Athens suggest matters are spiraling out of control.

The last thing that President Obama needs before the November election is a Greek exit from the euro. Such an event would surely cause contagion to the rest of southern Europe, which would in turn roil global financial markets. Yet the evidence coming out of Athens suggests that such a Greek event could very well occur over the next few months, with all of its adverse consequences for the U.S. and global economies.

Among the least favorable signs coming out of Athens is the pause in International Monetary Fund-European Union (IMF-EU) negotiations with Greece over the next loan disbursement. These negotiations have now been suspended until early September in order to give the Greek coalition government more time to iron out its differences on the budget measures to be taken. In the meantime, the Greek government is literally running out of money. Without any further disbursements from the IMF-EU program, Greece will almost certainly default on its official loan obligations by October.

In the IMF-EU negotiations, Greece’s German taskmaster, Chancellor Angela Merkel, is insisting that Greece fully comply with its original commitments under its IMF-EU program before any further money is released. In particular, the Germans are insisting that Greece credibly commit itself to cutting public spending by as much as 5.5 percent of GDP in 2013–2014 as a means to restore Greece’s battered reputation with respect to its seriousness about implementing the IMF-EU program. And the Germans are doing so despite the already very depressed state of the Greek economy and the likelihood that further budget austerity will only exacerbate and prolong Greece’s economic depression.

Greece’s weak coalition government is having great difficulty agreeing on how to cut public spending by the amount being demanded.

It is hardly encouraging that Greece’s weak coalition government is having  great difficulty agreeing on how to cut public spending by the amount being demanded. And this is even before the government has to go through the difficult process of obtaining parliamentary approval for such cuts. At issue are the massive reductions in public employment that such cuts would entail. These layoffs would sorely affect the political fortunes of Pasok and the Democratic Left, the two junior left-wing parties in the coalition, whose political base consists largely of the public sector employees who would be most impacted by the proposed spending cuts.

It is also problematic that there is every indication that Greece’s economy is now collapsing at an accelerating rate. Standard and Poor’s Ratings Services recently projected that Greece’s economy would decline by a staggering 10–11 percent in 2012–2013. Another concern is that the latest Greek unemployment figures show overall Greek unemployment exceeds 23 percent, while youth unemployment stands at 54 percent.

Further complicating matters is the likely stance of Syriza, Greece’s far-left opposition party. Against the backdrop of a Greek economy in shambles, Syriza is sure to mobilize street opposition to further austerity measures in the run-up to any parliamentary vote on additional public spending cuts. In drumming up support for such opposition, Syriza would almost certainly make the case that the Greek government is now going back on its election pledge that it would renegotiate the terms of its IMF-EU arrangement to ease the austerity policies being applied to the country.

It is possible that President Obama could be lucky and have the Greek situation hold together until after the election. However, the rapidly deteriorating political and economic developments in Greece suggest that the odds against that occurring are fast increasing.

Desmond Lachman is a resident scholar at the American Enterprise Institute.

FURTHER READING: Lachman also writes “Groundhog Day in Europe,” “The Predictable European Summit Ritual,” “Does Greece’s Election Really Matter?” “Will the IMF Support Greece or Not?” and “Greece Needs a Plan B Based on Quitting the Euro.” John H. Makin contributes “As Greece Leaves, What Happens to the World's Economy?

Image by Darren Wamboldt / Bergman Group

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