Greece: Brewing Unrest and a Eurozone Precedent?

Greece was hit by a nationwide strike Dec. 17 as Communist-led trade unions protested the government's planned austerity measures in more than 60 towns across the country. Strikes involved secondary education workers, public sector workers and journalists, though the country's two largest trade unions, GSEE and Adedy, which are allied with Prime Minister George Papandreou's Socialist government, did not join in. The strikes are a response to Papandreou's proposed spending cuts, which were unveiled Dec. 14. Meanwhile, Finance Minister George Papaconstantinou is on a whirlwind tour of European capitals, having visited Paris and Berlin on Dec. 16 and moving on to London and Frankfurt on Dec. 17. The stated purpose of the trip is to convince his counterparts and the European Central Bank (ECB) that Greece will not be the next Iceland. The strikes by leftist union groups show that Papandreou's Socialists will not be immune to social unrest as it attempts to curtail spending. Despite a mounting budget deficit (12.4 percent of gross domestic product for 2009) and government debt (112.6 percent of GDP for 2009), Greece has been hesitant to set up an austerity plan due to the unpopularity of cuts to social spending. The government initially spooked investors by dismissing the need for urgency on reining in the deficit. Unlike Ireland, which enacted a difficult budget filled with cuts, Papandreou initially promised to keep social spending essentially at the same level while increasing revenue by taxing the rich and cracking down on tax dodgers. This relatively lackadaisical attitude toward budget cuts led Fitch Ratings to reduce Greece's credit rating from A- to BBB+ on Dec. 8, prompting fears that financial instability in Greece could spread to other countries in the eurozone. Until the recent problems with Greece, eurozone economies have escaped investor scrutiny due to the perception that membership in the bloc means that whatever goes wrong, Berlin and the ECB will be there to clean up the mess. However, Greek deficit levels are egregiously high even compared to the usual big spenders in Europe, such as Italy and France. There has thus far not been a concrete offer of help from Berlin mainly because Germany does not want to send a signal to other eurozone economies that spending at Greek level will be tolerated or supported by Europe's largest economy. Instead, Athens has been pressured to get serious on cutting the budget. The latest proposal would cut the budget deficit to 8.7 percent, with half of the reductions ($13 billion) coming from a 10 percent decrease in government operating costs — which undoubtedly will mean cuts in public sector pay — including reform of the pension system and tax rules. These policies are not very different from those of former Prime Minister Costas Karamanlis, who lost the snap elections in October largely because of the widespread unpopularity of such reforms. We can, therefore, expect the following year to continue to be a highly volatile one for Greece. Greece already has had a turbulent end in both 2008 and 2009, with an increase in violent anarchist activity and outbursts of social unrest. The rest of Europe will be nervously watching how Athens' budgetary measures are received by both international investors and the Greek public. Both receptions could signal where things will fall for the rest of eurozone.