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FAQ: Why is Greece in such trouble? And can it be fixed?

at 03:48 PM ET, 05/14/2012

Ever since the Greeks went to the polls on May 6, the country has been gripped by political paralysis. The Greek parliament can’t form a new government, and Greece now faces the risk of being booted from the euro zone — with potentially horrific consequences. Here’s a look at how Greece reached this point and whether there’s any way out of this mess.

What, exactly, are Greek politicians bickering about these days?


A rocky relationship. (Simon Dawson - Bloomberg)
Recall Greece’s basic problem: The country racked up many billions of dollars in debt that it can’t repay without help, and the Greek government doesn’t have enough cash to cover all of its own obligations. In February, the European Central Bank, the European Commission, and the IMF (known as the “troika”) agreed to renegotiate Greece’s debts with lenders and give Greece a €130 billion ($170 billion) bailout. In return, Greece agreed to shrink its deficits with a series of spending cuts and tax hikes.

Here’s the dilemma: These austerity measures are spectacularly unpopular, and Greek voters keep punishing any party that tries to implement them. That puts the whole bailout deal at risk. Under the terms of the deal, the Greek government is supposed to pass an additional €11 billion in spending cuts this summer before it receives its next bailout payment of €31 billion. If those cuts don’t happen, Greece won’t get its bailout money. It will then default on its debts, and the country would likely have to leave the euro. That could be bad.

So how did the recent Greek elections make this whole situation worse?

Basically, the elections have created a deadlock in the Greek parliament. The two Greek parties that had previously supported the bailout agreement, PASOK and New Democracy, lost votes. They no longer have enough seats to form a government on their own. Instead, a lot of voters flocked to the Coalition of the Radical Left, or Syriza, which is led by a 37-year-old engineer, Alexis Tsipras. Syriza flatly opposes the austerity/bailout agreement and refuses to form a government with any other party that doesn’t agree. At the moment, there aren’t enough votes for a pro-bailout or an anti-bailout government.

What happens if the Greek parliament can’t break the deadlock and form a functioning government?

Then there will be a new set of elections, probably on June 17. This is the most likely outcome, says Kevin Featherstone, a professor of contemporary Greek studies at the London School of Economics.

But it’s not at all clear what would happen in the next election. Polls show that Syriza, the anti-bailout party on the left, is gaining in popularity. That could create more paralysis. Many Greek experts think that Tsipras doesn’t actually want to lead — he just wants to complain about spending cuts and the troika deal while leaving it to other parties to actually implement the painful austerity measures. But Syriza’s also getting popular enough that he’s making it tough for a pro-bailout government to form.

So the politicians are paralyzed. What do the Greek people actually want?

Greek public opinion seems to be all over the place. Polls show that some 80 percent of Greeks would like to stay in the euro, but they also don’t want to agree to the austerity measures that are part of the bailout deal, especially with unemployment already at 21.7 percent. “People do not understand that if Greece backs off from its commitments, they’ll have to leave the euro,” says Elias Papaioannou, an economist at Dartmouth who’s in Greece right now. He says that much of the TV chatter in Greece gives off the impression that it’s possible to stay in the euro and oppose the bailout.

Well, is there any way for Greece to stay in the euro and somehow still avoid sweeping austerity measures?

Not really. Papaioannou notes that there are plenty of ways, in theory, to tweak the terms of the troika bailout to make it a bit less painful for Greece. Greece could get even more time to pay off its debts. It could be allowed to ease up on spending cuts and wage cuts — to implement them over a longer time period. (Remember, Greece’s economy is expected to shrink by 6 percent this year, so it’s not a great time for austerity.) Wealthier European countries could also pony up some more cash to help ease the Greek people through this period of contraction. But there’s only so much tinkering that can be done, adds Papaioannou. Greece is very severely in debt, and it’s going to have to make some painful adjustments no matter what.

So what’s the best-case scenario for Greece staying in the euro?

One possible scenario is that Greece’s president appoints a new technocratic government to implement the austerity measures, says Featherstone. This could only happen, however, if the president was supported by PASOK and New Democracy — the two pro-bailout parties — as well as the Democratic Left party. That last party is pro-euro but anti-austerity and would probably take a huge hit in popularity if it turned around and supported a caretaker pro-austerity government. “It’s a slim chance that this will happen,” says Featherstone. On Monday, Greek President Karolos Papoulias will meet with the parties for one last-ditch effort to form a government.

And even if Greece did form a new government that was in favor of the bailout agreement, could they actually go through with the austerity measures?

That’s not clear, either. Experts say that both left-wing and right-wing parties — including the growing neofascist Chrysi Avgi, or Golden Dawn party — are likely to take to the streets if a new government forms and pushes through with €11 billion in additional cuts. Bitter strikes and protests could ensue. Likewise, Syriza will no doubt denounce whatever government pushes through an austerity bill.

Germany and other European leaders are now openly talking about kicking Greece out of the euro. Won’t threats like those convince Greek politicians that they need to make cuts?

Maybe not. It’s quite possible that threats from the rest of Europe could actually hurt the chances that Greece will cave, says Papaioannou. He notes that similar threats by Germany before the May 6 elections may well have pushed people to extremist parties. “It’s totally counterproductive,” says Papaioannou.

But wouldn’t Greece actually be in worse shape if it got kicked out of the euro?

Probably. A recent analysis from UBS Investment Research found that Greece could lose 50 percent of its economic output in the first year alone after an exit. Not only that, but Greece wouldn’t get any bailout money from the troika, and it wouldn’t be able to borrow money from anyone else, so it would have to implement even more severe austerity measures than it’s already being forced to do. Other reports have found less apocalyptic, but still dire consequences. The Financial Times has a fuller rundown of some of the ways a Greek exit could play out. None of them are pretty.

So even though Greeks don’t actually want to leave the euro, and even though it would be horrible, they could still manage to get themselves kicked out inadvertently?

Right. Of course, it’s possible that Germany and the rest of Europe will try to find a way to accommodate Greece, rather than letting the euro implode. But right now there’s a standoff, and it’s not at all clear who’s going to blink first — or if anyone will blink at all.

 
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