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Debt trap averted?

Debt trap averted?
With bailout funds expiring on February 28, the Syriza party-led government is faced with the daunting and uphill challenge of keeping Greece afloat and ensuring that the anti-austerity promises that Greek Prime Minister Alexis Tsipras made in the run up to the election are not ditched altogether.

Accomplishing these twin objectives will be akin to walking the tightest of tightropes for Tsipras and his officials. Early signs indicate that Tsipras government is failing at the onerous task of avoiding austerity cuts. Commentators watching the situation closely have pointed out that if Tsipras’s government had rejected austerity measures then the immediate side effect would be the collapse of the Greek banking system. Adding insult to injury for the beleaguered Greeks is the fact that the European Union insists on tethering the Greek economy to self-defeating austerity measures.

The starting point of these austerity measures imposed by the European Union is that Greece finds itself locked in a programme that demands it run a budget surplus approved by the troika of – the IMF, the European Commission and the European Central Bank – in return for the foreign exchange to service its debts and stave off the collapse of its banking system. Not only that, this holy trinity of financial institutions has spelled out precisely what it expects Greece to do, from privatisations to eliminating redundancies in the public sector, in order to meet the tough budget targets.

“Instead, Syriza is now being forced to do what most Greeks – and the country’s creditors – believe is a must. It has to modernise the state, broaden the collection of taxes beyond Greek’s ordinary citizens to the top families, upper middle-class and shipowners, for whom tax evasion is habitual. They also have to radically thin out the byzantine regulations that govern contemporary Greece. Signs that this is at last happening will then allow politicians in the north of Europe to sell debt rescheduling to their electorates – along with a relaxation of Greek austerity,” according to an editorial in The Observer.

These steep budget targets are the unfortunate legacy of a decade worth of reckless borrowing in which Greece recklessly and repeatedly maxed out its credit cards (figuratively speaking at least). The Syriza party wanted a four-month extension of the bailout, a commitment from the European Union to reschedule Greece’s humongous debts and injection of new funds to recapitalise its banks.

During this time, the Syriza government also wanted to be able to negotiate new, radically softer budget targets, and to be free to decide how to do deliver them. Understandably this is a proposition that the members of the European Union are not comfortable with especially given Greece’s erratic history of debt repayments.

The Tsipras-led Syriza government may have lived to fight another day but it faces an uphill battle. Adding to its woes, in June Greece will have to re-enter negotiations with the EU for a long-term financing agreement. Economists have pointed out that the only option available for the Greek government is to undertake a series of radical measures ranging from forbidding house foreclosures, writing off domestic debt, reconnecting families to the electricity network, raise the minimum wage etc.
 
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However, it is clear that Germany and other leading EU member nations do not want Greece to leave the euro, despite the massive amount of debt the latter holds. Aside from economic risks, there are geopolitical ones too. Greece happens to have one of the best armed forces and air force in Europe. The Germans, under Chancellor Angela Merkel, are smart enough to not allow a member state to weaken as Russian President Vladmimir Putin flexes his muscles in the region. “Negotiations and the compromise in Brussels show that this isn’t just a problem for the Greeks. Democracy is also at stake across the European Union, with the standard of living declining in many European countries,” said Alekos Flambouraris, the state minister for the Syriza government. Statements such as these do create concern within the Euro leadership.

These austerity measures have come at a terrible cost. It is, however, clear that if Greece dropped the euro for drachma, things would have gone south. Leading economists believe the debt crisis is about hard figures. “In reality, without the euro and the accompanying bailouts, the Greek, Irish and Portuguese banking systems would by now have collapsed – and the domino effects would have profoundly affected not only the eurozone banking system but Britain’s. Europe would not be slowly recovering from a long recession: it would be languishing in depression, while countries with no euro mounted competitive devaluation after competitive devaluation in a system of floating exchange rates – trying to export unemployment to each other,” the editorial in The Observer adds.

They, however, also point out that the governments and the finance ministers in the euro zone have not yet found a common language. It is widely hoped that the negotiating partners understand that aid for Greece is also aid for Europe. It remains to be seen whether the Tsipras government has the political will and vision to pull Greece out of the economic abyss it currently finds itself in.

With key inputs from The Guardian, The Observer
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