RUNNING TO the International Monetary Fund (IMF) is “out of the question”. The government “is determined to put the economy back on a path of fiscal sustainability in the context of the EU rules”. These are the words of Greek minister for finance George Papaconstantinou facing a challenge even greater than Ireland’s, a reality reflected in money markets last week when the difference between the interest on Greek and German government bonds soared to a seven-month high.
And on Wednesday EU finance ministers warned eurozone-member Greece it had not taken effective action to reduce its deficit. The move takes Greece one step closer to commission-instigated disciplinary action in February, the last level in a multi-stage procedure that ultimately can lead to loss of cohesion funding or major fines – but never yet has.
The deficit problems inherited by the new Socialist government are monumental. Its predecessor was found to have cooked the books and statistical revisions would lead to a quadrupling of commission forecasts for the public sector deficit to 12.7 per cent this year. Escalating external public debt, now greater than GDP, and a looming pensions crisis exacerbate its problem.
Mr Papaconstantinou’s attempt to bring the deficit down to 9 per cent, largely through measures to recoup evaded taxes, is regarded with outright scepticism in Brussels, and his own central bank governor has demanded that two-thirds of the reduction effort should come in the form of spending cuts. In truth he is in a real political bind. The Socialists were elected on an anti-cuts platform and there is little public appetite for the sort of pay and services-cutting austerity programme that the Irish Government is contemplating. Not least of Athens’s problems is a public sector which added 50,000 employees in the last five years.
If Greece becomes unable to service its debts, a prospect increasingly discussed, there are serious doubts about the willingness of the European Central Bank to bail it out. Earlier this year then German finance minister Peer Steinbrück said that in the worst case “we would have to take action” – of considerable comfort at the time to Ireland – but such talk is now seen as increasing the risk of moral hazard, the rewarding of bad behaviour by a state unwilling to take painful medicine. That could mean that Greece might have no alternative but to turn to the IMF which is likely to apply severe conditions on any loans it provides.