Greek economy spirals down as EU forces final catharsis

 

By Ambrose Evans-Pritchard, in Athens

8:33PM GMT 14 Feb 2012

A Greek default and traumatic ejection from the euro moved a step closer last night after eurozone finance ministers cancelled a crucial meeting, accusing Athens of failing to flesh out austerity cuts.

An eldery woman begs by the Bank of Greece headquarters in Athens on Tuesday. The slogan on the wall at reads 'cops, your children will eat you'. Photo: AFP

The escalating brinkmanship came as fresh data showed that Greece's economy contracted by 6.8pc last year and at an accelerating 7pc rate in the last quarter, far worse than expected by the European Union (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF) "troika".

The country appears to be in a self-feeding downward spiral that is playing havoc with budget targets, leaving Greece with a Sisyphean task of ever deeper cuts.

Premier Lucas Papademos called his cabinet together late last night to find a further €325m (£272m) of fiscal austerity demanded by the troika, likely to be defence cuts and lower salaries.

The coalition parties failed to convince the Eurogroup that they would stick to the deal, and the mood has been poisoned by EU demands for an escrow account to seize Greek budget revenues at source.

Blackened buildings set alight by protesters on Sunday were cordoned off on streets around parliament in Syntagma Square, a vivid reminder to Greece's politicians that any misjudgment could push the country towards anarchy.

 

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Approval of EU finance ministers is needed to unlock all parts of the complex €130bn loan package, including a 70pc "haircut" for private holders of Greek bonds, allowing the country to avoid default in March.

Germany and Northern allies seem willing to force Greece out of the euro unless there is total compliance, calculating that the eurozone is now strong enough to stem any contagion.

Luc Frieden, Luxembourg's foreign minister, spelled out the warning in crystal clear terms. "If the Greek people or the Greek political elite do not apply all of these conditions, I think they exclude themselves from the eurozone. The impact on other countries now will be less important than a year ago."

Mr Frieden even suggested a return to the drachma. "It might be something which would allow Greece also to get a new start, to create an economy that can create jobs," he said.

The tone of recent comments from Germany, Holland and Finland suggest that the creditor powers have already decided to eject Greece, causing great bitterness in Athens.

"You answer war with war," said Kostas Kiltidis, an MP from the conservative LAOS party. "We are the cradle of European civilisation and nobody can take us out of our own home. There is no legal mechanism for this. If they try, others are going to die economically with us."

Eurozone finance ministers will today hold a teleconference today to discuss their next move. Jean-Claude Juncker, chair of the Eurogroup, said the sticking point last night was the failure of the parties to pledge that they would deliver on the planned cuts after elections in April.

Antonis Samaras, leader of political party New Democracy, enraged Berlin over the weekend by hinting that he would tear up the deal as soon as he had the chance.

"I want to avoid jumping over the cliff today, to buy time, and to go to elections tomorrow," he said, adding that Greeks would later be able to "change the policy forced on us".

However, polls show a splintering political landscape with a surge in support for the far Left and far Right. It is likely that the existing order will be overthrown.

"The next government is going to look like a gnu. It will be unstable, unworkable, and won't last, which is a disaster for us at this time," said Spyros Kouvelis, a MP who voted against the cuts on Sunday and resigned from the PASOK party.

The severity of the Greek slump may in any case render the latest EU deal dead. It also calls into doubt the strategy of troika, which brushed aside warnings that harsh austerity without the cushion of devaluation would asphyxiate the economy.

Unemployment is soaring and reached 20.9pc in November. It is certain to rise further as the government starts pruning 150,000 public sector jobs.

"We think GDP will fall by another 7pc this year, and our forecasts have been very accurate," said Yannis Panagopoulos, head of the Greek Confederation of Labour. "These cuts are going to fuel the vicious circle."

Angelos Tsakanakis from the Foundation for Economic and Industrial Research (IOVE) said the threat of EMU exit and a return to the drachma is preventing any hope of recovery.

"Nobody is going to make any plans to invest here until that currency risk is off the table. A belief has taken root that everything is now futile, as if the country was being abandoned," he said.

Mr Tsakanakis said Greece had clawed back 15pc of the lost labour competitveness since the crisis began and can regain viability if the EU fulfils its responsibilities as well.

"We are not some small child that ate a lot of ice cream and has to be punished. The deficits of Southern Europe were fuelled by the surpluses of the North," he said.

In a rare piece of good news for Greece, the ECB signalled that it is willing to help debt relief by forgoing profits on its €47bn holding of Greek bonds purchased at a 22pc discount.

Benoît Cœuré, France's ECB board member, said this could be done without breaching EU treaty law by distributing the money to member states, which could in turn help Greece.

It is not clear how this squares with promises by ECB chief Mario Draghi that the bank would not resort to "legal tricks" to circumvent the treaty ban on bailing out EU governments.

Greek economy spirals down as EU forces final catharsis - Telegraph