The new government’s task is gargantuan

THE ECONOMIST

Aug 11th 2012 | ATHENS | from the print edition

THE woman was from Patmos. Her husband had lost his job and come back to the island to be with their two children and find work. After he failed and she fell ill with cancer, they ran out of money. The bank seized their house; they could not pay the electricity bill. She was ashamed, she told Lazaros Papageorgiou, of Artos-Drassi, a charity in Athens that feeds the poor. Six months ago she would never have dreamt she would come to depend on charity, but today she needed help.

Under the brilliant blue Athenian sky, anger has given way to weariness and gloom. Outside Greece’s parliament, in Syntagma Square, marchers once braved tear-gas and protesters thronged a tented city. But it is quiet now. Summer has lured Greeks with money to the islands and the beaches; the growing numbers who are without it have gone home instead. On Patission Avenue, about 20 minutes away, shop after shop is barred. Nobody knows how many of them will open again when Athenians return.

The only certainty is that life will get harder. Last week the troika was in town. Representing the IMF, the European Central Bank and the European Commission, it must judge whether Greece should receive the next €31.5 billion ($39 billion) of rescue funds, which the government will mostly spend on recapitalising the banks and paying debt interest. To qualify, Greece will have to slash its budget deficit by a total of €11.5 billion in 2013 and 2014. Failure would mean being cut off from European funds, leaving the government with no choice but to print its own currency. In effect, Greece would be out of the euro.

The troika left Athens on August 5th reporting “good progress” and saying that it would be back in September to finish its work. A bond payment falling due before then will be covered by short-term debt.

However, the reality is as bleak as the communiqué is bland. True, the economy is rebalancing. Basic wages in Greece have fallen by 22%, there has been fiscal consolidation and the private-sector labour market has been reformed. Yet the public sector has not shed any of the 100,000 jobs it gained in a splurge of spending before the crunch. The target for privatisation this year has been cut from €3 billion to €300m. Unemployment is over 22% and climbing month by miserable month. And the economy, which has seen only one quarter’s growth since the end of 2008, is expected to shrink by more than 7% in 2012.

The glimmer of good news is that the mercurial prime minister, Antonis Samaras, who has at times rejected the austerity deal with the rest of the euro zone, now seems fully behind it. As if pinned to the spot by his impaired vision, the result of a detached retina, he seems to recognise that his future is now based on Greece staying in the euro. That means convincing a sceptical euro zone that Greece really wants to change. “We will prove that we mean business, that we are dedicated and mean to implement our plan,” he declares.

Credibility depends in turn on the finance minister, Yannis Stournaras, a respected economist, whose technical expertise might just alloy with Mr Samaras’s political guile to create a machine that can get things done. The two men understand that not a euro of fresh money is to be had right now—indeed, they must know that plenty of euro-zone countries would like nothing more than to throw Greece out.

Their strategy is to keep that threat at bay and ensure that Greece is still at the table when the euro crisis comes to a head. Greece is at its most vulnerable while its exit could serve as an example to show that a bailed-out economy will not enjoy a blank cheque. Mr Samaras is betting that if the euro crisis abates, then this calculation will change. Once the euro is safe, the rest of the euro zone might just conclude that Greece will cause less trouble for the European Union inside the euro zone than outside, where it might sink into the criminal swamp of the Balkans.

Yet much could go wrong. Mr Samaras’s coalition is vulnerable. Even if he commands his own New Democracy party, the PanHellenic Socialist Movement (Pasok) has dramatically lost support and is divided under its leader, Evangelos Venizelos. And the hard-left junior partner is deeply uncomfortable with the austerity it is being asked to endorse.

If the coalition holds, its policies may not be implemented. Cuts to pensions and public-sector wages, accounting for two-thirds of government spending after interest payments, will stir up resentment. Because the private sector has shrunk, many families depend upon a pension or public-sector wage to put bread on the table. Even if the prime minister is determined to prove that Greece has changed, many politicians, with an eye to what comes next, will seek to protect their clients.

Most worrying of all is the economy’s inability to grow. For as long as the threat of a euro exit hangs over Greece, credit will be scarce, foreign capital will stay away and investment will stall. As fiscal tightening forces down wages and demand, so the economy will shrink. Even if the government manages to cut planned spending and introduce a new property tax as promised, a shrinking economy will make it miss its targets—opening the door to euro-zone demands for yet more austerity.

Recession will eat away at the centre parties in Greece and at the nation’s institutions. Syriza, an opposition hard-left alliance, stands every chance of gaining support. So does the far right, including the neo-fascist Golden Dawn, which has sympathisers among the police. As you gaze out at parliament from the office of the finance minister, the outer glass pocked by a bullet-hole from some forgotten demo in Syntagma Square below, the grim prospect is of a hard-left government vying against hard-right law-enforcement. Already, large Greek firms are guarding against a Syriza victory by exploring how to move their listings abroad. Who can blame them?