Greece Bows to E.U. Pressure


The Greek cabinet announced that it would take actions to cut its national deficit by $6.5 billion for the fiscal year. "Measures which will yield 4.8 billion euros have been decided. Half will be from spending cuts and another 50 percent from tax increases," a government official toldReuters.

Early reports about the details of the actions by the Greek government say that it will raise taxes on tobacco and liquor and that the nation's value-added tax will also be increased. Government pension fund contributions will be frozen and bonuses for government employees will be cut by 30%.

The Greek government is gambling that the new cuts will encourage nations in the eurozone, particularly Germany and France, to back loans to the country from their state-owned backs. This support, in turn, may help Greece sell more of its sovereign debt in the global capital markets. The Greek budget deficit has been projected at over 12% of GDP, a figure that most economists believe is not sustainable without driving the nation into default on some of its bond obligations.

The hurdles to the success of the Greek plan are more likely to be internal than external. Greek labor unions, especially those linked to government employees, will probably hold protest strikes. There have been several of these in the past weeks and one was large enough to virtually shut down that nation's transportation infrastructure. The irony of these labor actions is that they cut into GDP growth potential by robbing the economy of some of its productivity. That, in turn, almost certainly increases the amount of the Greek deficit.

Greece is getting close to an economic death spiral. While the government struggles to cut costs and raise revenue, a portion of the labor force is thwarting the effects of these measures by freezing the activity of a large portion of the economy. What country will lend Greece money or back its debt offerings when the southern European nation is in a state of financial and social chaos?

Originally published