June 17 (Bloomberg) -- Prime Minister George Papandreou promised a year ago that he would “change” debt-stricken Greece. “We’ll be back here at the edge of the precipice again some years down the road” otherwise, he said in an interview.
Today, Greece is again at the edge of the precipice -- and so is Papandreou, who is hanging onto his job by his fingertips. Should they tumble, much of Europe may feel the impact.
Papandreou has to keep his Pasok party’s shrinking parliamentary majority in line to pass 78 billion euros ($110 billion) in austerity measures required for Greece to get a second bailout from the European Union. EU reluctance to lend until the conditions are met has roiled markets from Amsterdam to Athens.
“His political authority inside Pasok and on the domestic stage has been severely, possibly irreversibly, damaged,” Jens Bastian, a visiting economist at Oxford University, in England, said in an e-mail. “He will not resign, but try to soldier on as long as he is convinced that his reform efforts are worth it and he can command the support of his MPs.”
A Greek default would weaken the balance sheets of such banks as BNP Paribas SA and Dexia SA, hobble the ability of Greek institutions to tap the European Central Bank for emergency funds and weaken the fabric of the 53-year-old EU and its 12-year-old single currency. Three years of recession and probable further austerity may already have damaged Papandreou.
The prime minister, who celebrated his 59th birthday yesterday, today named Evangelos Venizelos, the defense minister, to the post of finance minister as part of a cabinet reshuffle. He replaces George Papaconstantinou. The move came after weeks of public protests against austerity measures that brought tens of thousands of Greeks into the streets.
The yield on Greece’s 2-year bond topped 30 percent for the first time yesterday after two members of his parliamentary group resigned. The cost of insuring Greek debt rose to an all-time high.
Since Papandreou took power in October 2009, the Athens Stock Exchange General Index has fallen 41 percent, versus a 20 percent rise in the Stoxx Europe 600 Index. Greek stocks are the world’s sixth-worst performers in the past 12 months.
The son and grandson of Greek prime ministers, Minnesota-born Papandreou grew up in part outside his home country. He lived in Sweden, Canada and the U.S. as well as Greece after the military took power in 1967 and exiled his father, Andreas Papandreou. The younger Papandreou graduated from Amherst College and has a master’s degree in sociology from the London School of Economics.
After his victory, he initially assumed the foreign-minister portfolio as well, a job he had held under a previous Socialist government. The economy became a priority when Papandreou discovered within weeks of taking office that successive governments had been cooking the books on the country’s finances.
He was eventually forced to acknowledge that the country’s 2009 budget deficit had reached 15.4 percent of gross domestic product, about three times what the outgoing New Democracy government had claimed.
The prime minister was able to reduce that to 10.5 percent last year; the latest budget and tax measures are intended to get it to 7.5 percent of GDP by next year. Papandreou had to enact wage and pension cuts for 768,000 state workers and eliminate their bonuses, raise taxes on alcohol, tobacco and food and agree to sell stakes in Greek telephone, gambling and power companies.
“They have carried a huge burden of responsibility, pretty much also a burden of the past, and we have come a long way,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a Bloomberg Television interview in Brussels yesterday. “They have made significant progress in fiscal consolidation, which tends to be forgotten in the current turmoil.” He added that “further steps” are needed.
Rehn helped craft the initial rescue package for Greece in May 2010 of 110 billion euros, of which 80 billion euros were from euro-area governments and 30 billion euros from the International Monetary Fund. The rescue foresaw Greece’s return to bond markets in 2012, a goal now being abandoned in favor of a second aid package.
“We are on a difficult course, on a new Odyssey for Greece,” Papandreou said on the island of Kastelorizo on April 23, 2010, when the first bailout was triggered. “But we know the road to Ithaca and have charted the waters. We have ahead a journey with demands on all of us, but with a new collective conscience and common effort we will make it there safe, more sure, just and proud.”
It was a turnaround from his campaign message, when he promised Greek voters higher wages and pensions and heavier taxes on the wealthy. As recently as Sept. 12, 2010, Papandreou was telling Greeks that he would “restore, and increase, pensions and wages” once the other elements of the economic package were in place and fiscal conditions had stabilized.
His office did not respond last week to an interview request.
After more than a year of austerity, Greece’s budget deficit is still greater than three times the EU limit. The country’s debt will reach 166 percent of GDP next year without policy changes, the European Commission said on May 13.
The deficit this year will be 9.5 percent of GDP without further austerity, wider than a 7.4 percent target set under the European-IMF rescue last year, the commission, the EU’s executive arm in Brussels, forecast last month. An EU-IMF review painted a picture of flagging Greek government resolve as the economy passes through its third year of recession.
At a Standstill
“After a strong start in the summer 2010, reform implementation came to a standstill in recent quarters,” the commission, the ECB and the IMF said in a joint report earlier this month. “A reinvigoration is necessary to prevent the fiscal deficit from getting entrenched at unsustainable levels, but also to reach a critical mass of structural reforms.”
Papandreou may have been reluctant to dismantle the social system built in part by his father, the founder of Greece’s Socialist Pasok party, when he was prime minister in the 1980s.
“In the early phase of his government, he wasn’t quick enough,” said Janis Emmanouilidis, a senior analyst at the European Policy Centre in Brussels, said in a phone interview. “And over recent months, the reform effort has become slower.”
At the same time, the premier’s reluctance to level with the Greek public has reduced willingness for sacrifice, he said: “There is a high degree of frustration and anger; people see the future of their kids and grandkids at risk.”
“Papandreou will have great difficulties surviving,” Stefanos Manos, economy minister from 1992 to 1993 in a government led by the current main opposition New Democracy party, said in a phone interview. “There has been too much talk and not enough action on real reform. The only thing he has done is constantly raise taxes to pay for new spending. That has been his demise.” Manos now has his own political party.
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