July 13, 2024

Greek Parliament Expected to Back Implementation of Austerity Plan

Stocks rallied modestly around the world for a second day and the euro neared its highest level in three weeks, after the passage of one of the most radical overhauls of the Greek economy since democracy was restored in 1974.

After several days of sometimes violent demonstrations, central Athens was expected to remain relatively calm Thursday, with no major protests expected.

The changes are deeply unpopular in Greece, where street protests continued, and the Socialist government of Prime Minister George A. Papandreou will need to overcome widespread skepticism that it can carry out the budget cuts, layoffs, tax increases and forced asset sales, beginning with a vote Thursday on putting the measures in effect.

Economists also expressed concern that the austerity program demanded by European and international lenders could end up pushing the Greek economy into a deeper slump, making its debt even harder to pay back. More broadly, critics said they doubted that Europe had done more than postpone a day of reckoning for the euro, with Ireland, Portugal and Spain, as well as Greece, all struggling with slow or negative growth and rising debts.

The passage of the measures, a difficult and possibly debilitating feat for a Socialist Party elected on a social welfare platform, ensures that Greece’s foreign lenders will unlock the next installment of $17 billion in aid that the country needs to meet its debt obligations through August. But analysts in Athens predicted that the existing government might not last much longer than that, suggesting that political and financial uncertainty could continue for some time.

“It’s a giant step in terms of conception,” said Theodore Couloumbis, a vice president of the Hellenic Foundation for European and Foreign Policy, in Athens. “But it’s a baby step in terms of realization or implementation.”

European political leaders have pressed Greece for months to commit to a thorough overhaul of its bloated, state-led economy, and they hailed the vote on Wednesday as offering hope that the debt crisis was manageable.

Chancellor Angela Merkel of Germany welcomed the development as “really good news,” while the president of the European Commission, José Manuel Barroso, and the European Council president, Herman Van Rompuy, said in a joint statement that Greece had taken “a vital step back — from the very grave scenario of default.”

They urged Greek lawmakers to pass the second vote on Thursday on carrying out the measures, adding that “it would also allow for work to proceed rapidly on a second package of financial assistance, enabling the country to move forward and restoring hope to the Greek people.” Officials have promised that they will make more money available to help stimulate growth in Greece if it sticks to its austerity pledges. Europe has much at stake in making the new bailout a success because several other countries that use the euro face similar, if less immediate, problems of high debt, widespread unemployment and little or no growth. Ultimately, many economists say, the sovereign debt of Greece and some other countries will have to be restructured, with their creditors accepting a discount on the debts’ face value. European officials have so far sought to avoid taking that step.

“If Europe comes together with an appropriate framework, that will enable a default to be avoided,” said Joseph E. Stiglitz, the Nobel-winning economist. “But there’s every sign that Europe won’t do that, so the likelihood of a problem down the line is very significant.”

Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, who is now a Harvard professor, said the Greek vote and the infusion of aid would only buy a little time.

“It’s certainly kicking the can down the road,” Professor Rogoff said. “Greece is basically being bribed not to default. But as long as Greece doesn’t grow briskly for a sustained period, it’s in hot water.”

Hope is also in short supply among many Greeks, who said that the first round of austerity imposed after Greece’s first bailout last year had worsened rather than improved their plight, and that the second round demanded even deeper cuts in many areas.

“Of course things will get worse,” said Thimios Vilias, 35, who said his two-year contract at an insurance company would run out soon and who came out to protest on Wednesday. “The measures won’t do any good for Greece. We have more debt, more debt, more debt, and we have no work,” Mr. Vilias added.

The measures approved on Wednesday will at least on paper lead to the dismantling of a big part of the economy’s state-run sector. They call for the privatization of 50 billion euros, or about $72 billion, in state assets, including ports, telecommunications concerns, real estate and stakes in the public power corporation.

They also include one billion euros, or about $1.4 billion, in cuts in the defense sector over the next five years; more than two billion euros, or $2.9 billion, in cuts to the health sector through 2015 by reducing regulated prices for drugs; tax increases on heating oil and the self-employed; and a shrinking of permanent and temporary public-sector employment.

They do not, however, provide for changing the Greek Constitution, which states that public-sector workers on permanent contracts have lifetime tenure. Since last year, Greece has cut the wages of its 800,000 public workers — a quarter of the work force — by more than 10 percent.

After days of heated debate, Mr. Papandreou won by a simple majority, 155 to 138, with all but one lawmaker from his Socialist Party voting in favor and only one conservative opposition deputy breaking ranks to support the measure.

Perhaps the greatest challenge for the government will be to modernize the country’s confusing tax code, and to collect the billions of dollars in tax revenue that analysts say is at the heart of the country’s solvency problems.

At his first news conference as newly appointed finance minister after a cabinet reshuffle this month, even Evangelos Venizelos acknowledged that the new changes were emergency measures that did not constitute a new tax plan.

“It is not the new national taxation policy, it is not the modern complete taxation system that takes into consideration everything and that eradicates injustice and contradiction,” Mr. Venizelos said.

Mr. Papandreou is also running low on political capital, having failed to form a coalition government with the center-right opposition after a revolt in the Socialist Party. It is unclear if he can hold onto power long enough to see the austerity plan through.

“This only buys Greece time to get the serious work done,” said Carl Weinberg, chief economist of High Frequency Economics in New York. “But now they have to make the debt situation sustainable beyond August. Much depends on whether the government will stay the course, and when there are new elections, whether a new government decides to stick with the austerity measures this government passed, which is not certain,” Mr. Weinberg added.

Niki Kitsantonis contributed reporting from Athens, and Liz Alderman from Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=2149e0fa8018c45e4e386f690d22d9eb

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