Greece’s new austerity measures may prove to be enough—if they are fully implemented

GEORGE PAPACONSTANTINOU, the overworked Greek finance minister, likens the effort to steer Greece away from economic disaster to “changing the course of the Titanic.” Until this week it looked as if the country was headed for an iceberg labelled default. Two austerity packages had failed to convince Greece’s European partners—or the financial markets—that measures to cut the budget deficit this year from 12.7% of GDP to 8.7% would work.

Critics in Brussels said that Greece’s Socialist government was relying too heavily on pledges to cut tax evasion and soak the rich, rather than slash spending, especially on public-sector pay and pensions. The markets pushed spreads on Greek bonds over their German equivalents to record highs. Greece’s ten-year bonds were offering mouth-watering yields of some 6%, twice the German level.

On March 3rd, however, the mood changed. George Papandreou, the prime minister, at last threw his full weight behind austerity. His government announced some severe measures: a rise in the top rate of value-added tax, from 19% to 21%, more increases in excise tax on fuel, tobacco and alcohol, a freeze on pensions and an unprecedented 30% cut in civil servants’ Christmas, Easter and summer bonuses. This last is equivalent to a cut of one month’s pay for Greece’s 700,000-strong public-sector workforce.

Mr Papandreou had shrugged off earlier warnings from Brussels (and Berlin) that more had to be done. He changed tack after blunt remarks by Olli Rehn, the new European economics commissioner who visited Athens this week, that extra measures were needed to meet this year’s deficit target. Mr Papandreou claimed that Greece had now taken enough “painful but necessary measures” to qualify for support from its European partners, but without specifying what form that might take.

Greece desperately needs €20 billion ($27 billion) in the next two months to roll over expiring debt. If it can get it, more than half this year’s borrowing requirement of €53 billion will have been covered and the markets’ pressure will ease, say bankers. One way forward might be to persuade other euro-area countries to buy Greek bonds, perhaps by providing guarantees for euro-area investors. “We want to be able to borrow at the same rates as other euro-zone countries,” Mr Papandreou said, perhaps optimistically given Greece’s record of huge budget deficits and deceitful accounting. On the other hand, as he has also pointed out, Greece cannot afford to go on borrowing indefinitely at 350 basis points over Germany. The gains from austerity measures could be swallowed up by such a high debt premium.

Imminent visits by Mr Papandreou to Berlin, Paris and Washington, DC, could help to resolve Greece’s debt problem. The German chancellor, Angela Merkel, has considered the possibility of Germany providing bilateral help to Greece, though she insists she is not yet ready to talk about aid with Mr Papandreou. Germans still fret about moral hazard: a bail-out would mean that Greece gets away with years of irresponsible fiscal policy and could set a bad precedent for other euro delinquents. The German constitutional court ruled two decades ago that the Maastricht treaty was acceptable only if its no bail-out provisions were respected—so any bail-out would have to be disguised to avoid legal challenges. Yet German banks are on the hook for so much Greek (and other Mediterranean) debt that some kind of taxpayer support may be unavoidable.

France’s president, Nicolas Sarkozy, seems readier to help—though Greece may come under pressure to buy more expensive French frigates for its navy. This is not a deal that Mr Papandreou likes, since Recep Tayyip Erdogan, Turkey’s prime minister, has just proposed that the two formerly hostile neighbours should make a joint agreement to cut defence spending.

To strengthen his hand with the rest of the euro zone, Mr Papandreou is threatening to turn to the IMF for a standby loan. The conditions are unlikely to be much harsher than the latest austerity measures, say Greek officials. But this could also be too optimistic. The IMF would probably tell Greece to sack thousands of public-sector workers and cut pensions sharply. Even so, as one Greek official notes, “at least with the fund you can stop worrying about where to get the money to finance the debt.”

Greek trade unions are predictably furious over the bonus cuts, which come on top of a 4% pay cut they have already swallowed. Strikes will spread. Some strikers are unpopular, for example the taxi-drivers who have been protesting over being obliged to give passengers receipts. There is more sympathy for pensioners, who face a double blow from a freeze in pensions and the impact of tax rises. Militant pensioners unexpectedly broke through a police cordon blocking the road to Mr Papandreou’s office as he was announcing the new measures. They will soon be on the march again, says their union. “You cannot make ends meet on 400 euros a month,” declared one retired plumber. So Mr Papandreou’s approval ratings have held up, with more than 60% of Greeks accepting that tougher measures are needed.

Fears loom over the timetable set in Brussels for implementing the new plans. Greece will shortly complete an overhaul of its tax legislation and come up with proposals to reform state pensions, which now eat up over 11% of GDP. A shortage of competent bureaucrats makes it harder to ensure that any new targets are met. If Greece is to stay on course, Mr Papaconstantinou and his team will have to keep putting in long hours.