Euro crisis: “gaining time is the least bad outcome, both for Greece and Europe as a whole”

In the midst of a 48 hour general strike, and with police clashing with protestors on the streets, the Greek Prime Minister, George Papandreou, won the first of two crucial votes on the latest package of tax hikes, spending cuts, and privatisations.  By 155 votes to 138.

But as the BBC Europe editor, Gavin Hewitt, wrote before today’s vote

But here’s the thing. No one in Greece believes the tax increases, lay-offs, privatisations will ever be fully implemented. This morning I bumped into Elias Iliopoulos, the General Secretary of the Civil Service Union. He thought the measures would be approved, but he predicts that Greece is heading for elections in the autumn. Depending on the result, the whole deal may have to be renegotiated with the EU and IMF.

If the budget cuts are approved Greece will receive the next tranche of money from the original bail-out. The 12bn euros (£10.7bn) will stave off a default in mid-july. Then the EU and IMF will work on a second bail-out thought to be around 120bn euros.

The EU will breathe a huge sigh of relief if parliament votes “yes”, but there will not be a Greek national consensus behind the plan.

The opposition in Greece is adamant: the austerity medicine did not work the first time around. It won’t work this time either, they say. All that will happen is that Greece’s debt mountain will continue to grow. Even people in government believe default is inescapable eventually.

It’s a point echoed in the FT blog by Ian Bremmer [free reg req]

This is where the real problems begin. Mr Papandreou might have survived a parliamentary vote, but the chances on him surviving a public vote are slim. Any fresh elections will probably yield a new coalition government with New Democracy, the main opposition party, as leading partner and PASOK as the junior partner.

Superficially, that looks like it will create the new national political consensus and conciliatory approach that European Union negotiators wisely demand. It will, for instance, be much easier to demand future sacrifices from Greece if virtually its entire political class has publicly accepted the need for it.

But for a preview of the way any new coalition government will consider further austerity measures, consider the fact that New Democracy leader Antonis Samaras warned before today’s vote that any ND deputy voting in favour of the plan would be expelled from the party. There is little room for a conciliatory approach in his attitude, nor is one likely to emerge in the coming months. In short, there is simply no reason to believe that the opposition will throw away its chance to vilify PASOK for every imposition of pain when it doesn’t have to.

And, still everyone’s hero, Robert Peston is looking ahead

Right now Greece needs to borrow money from the rest of the eurozone and from the IMF not just to service the interest and principal payments on its debt.

It also needs the emergency credit to pay the wages of its civil servants and to keep the lights on in schools and hospitals.

Greece has what economists call a primary fiscal deficit, in that what it raises from taxes does not cover the basic running costs of the state, let alone its borrowing costs too.

So Greece can’t afford to stick two fingers up to Germany, France and the eurozone and announce a unilateral decision to default. If it were to do that, the vital apparatus of the Greek state and the Greek economy would grind to a halt.

That’s true now. If however Greece’s austerity measures were to turn out to be successful in reducing Greece’s primary deficit – such that it was able to pay all the costs of the police force, schools, hospitals and so on from tax revenues – then at that point Greece would be less dependent on the putative generosity and charity of its eurozone neighbours.

You will know that there are economists who believe that there’s no chance the austerity package will reduce the primary deficit to nil, because of how it may be putting the Greek private sector into a death spiral.

But let’s assume those economist are wrong and the Greek premier is right.

If that were the case, it could still be misguided to see a vote today for the austerity package as the moment when Greece avoids default.

If Greece’s parliament goes for the package of cuts, tax rises and privatisation, that may be the start of a process to make a Greek default affordable and bearable for Greece.

Or to be more explicit, the moment that Greece reduces its primary deficit to zero – the moment that the government can fund itself from revenues levied on its own people – is the moment when Greece is most likely to decide to default on what it owes overseas investors and banks.

And that’s likely to be the best case scenario, for Greece.

As for the wider picture?

The existential crisis will remain…And, for supporters of the “European Project”, the longer-term options are stark.

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