Greece must step up efforts to tighten the budget and overhaul the economy to prevent a second bailout from collapsing, European officials said, highlighting how little room for maneuver the next government will have.
“Without a regime change in policy implementation and a much broader political consensus in favor of painful but necessary reforms, there is a high risk that the program derails,” European Central Bank Executive Board member Joerg Asmussen told a European Parliament committee today in Brussels. “Political courage is needed more than ever.”
Caretaker Prime Minister Lucas Papademos won parliamentary approval on March 21 for the 130 billion-euro ($173 billion) rescue program. Passage of the legislation moves the country a step closer to elections that may be held as early as next month. Greece pushed through the biggest sovereign debt restructuring in history earlier this month, paving the way for the bailout.
Asmussen’s comments were echoed by European Union Economic and Monetary Affairs Commissioner Olli Rehn, who said that “challenges remain” as Greece seeks to cut its debt to around 116 percent of gross domestic product in 2020 from more than 160 percent of GDP last year.
“The current pace of reform and adjustment are far from sufficient to make Greece’s public finances sustainable or to close the competitiveness gap,” Rehn said in his remarks to the Brussels panel. “Further efforts are therefore necessary.”
Asmussen said Greece, which missed fiscal-austerity targets under its initial 110 billion-euro rescue in May 2010, can’t afford to fall behind in enacting the new program.
Urging the Greek political class to challenge “vested interests,” he said the country must overhaul labor-market policies including by reducing private-sector wages and loosening the salary-setting system to bolster the economy.
Such a step “may not be popular, but there is no way around it,” Asmussen said. “The program is subject to exceptionally high implementation risks.”
A “substantial internal devaluation” is the price for reviving the Greek economy within the euro area, according to Asmussen, who said policy makers in Europe wish to keep Greece in the single currency because an exit would risk destabilizing European financial markets.
“A country leaving the euro area would give incalculable risks to financial stability of the euro area as a whole,” he said.
Greece must act quickly to bolster its banks, most of which are “heavily undercapitalized” as a result of the debt exchange, Asmussen said.
In that context, he said 25 billion euros earmarked under the new program for initial support for Greece’s banks should be used for a “swift injection” of capital into the country’s lenders.