Greek lawmakers helped the world skirt a renewed financial crisis on Wednesday when they faced down massive protests and public opposition to approve a package of tax increases and budget cuts to avoid a default.
Although world markets cheered the outcome, the relief may be temporary: The emergency loans expected to be made available to Greece will pay its bills for perhaps only two more months. Unless international negotiators agree to a long-term plan for the country, it will be back to the brink by the end of summer.
Those talks are proceeding and — it is hoped — will be completed in September along with an agreement by major banks and financial institutions that hold Greek bonds to leave much of their money invested in the country.
But even if all that happens on schedule, it is only the beginning of a struggle that has the potential to disrupt the global economy for months or even years as Greece faces a grueling series of battles over how to enforce new tax and other policies, reorganize its economy, and work its way out of mountainous public debt that is still accumulating.
The new measures will touch the lives of almost every Greek citizen through higher income taxes, tougher tax enforcement and fewer government services. They also will force a major showdown between the ruling party of Prime Minister George Papandreou and the country’s well-connected public unions and state-owned companies — the start of which could be witnessed in the tear gas and rocks flying between police and demonstrators as the Parliament met.
At the center of the financial plan the Parliament approved Wednesday is $70 billion to be raised by privatizing state assets, including major companies that generate electricity, run trains and employ tens of thousands of people. It amounts to a virtual rewiring of the country’s patronage-based politics, and Greek and other analysts expect intense political combat over each deal as the unions and well-connected bureaucrats at state-owned companies try to preserve their jobs and influence.
Failure to follow through, however, would put at risk the expected flow of help from the International Monetary Fund and euro zone countries.
The plan “has to be implemented, and it contains very specific benchmarks” that the IMF and European officials will be monitoring, IMF Acting Managing Director John Lipsky said in a CNBC interview. “It involves important structural reforms to eliminate the crippling inefficiencies in the Greek economy. . . . They have to do better.”
Wednesday’s parliamentary vote was being closely monitored around the world as the possible spark of a broadening economic crisis. In the United States, the Dow Jones industrial average rose 0.6 percent to end at 12,261 after the austerity plan was approved. The S&P 500, a broader measure of stocks, jumped more than 0.8 percent.
Greek lawmakers needed to pass the proposal, including the privatization plans and an additional $40 billion in tax increases and spending cuts, for the IMF and a group of European countries to release $17 billion in emergency loans that Greece needs to pay its immediate bills.
Those debts include billions of dollars due to bondholders in July and August. A default on those payments, it is feared, could have a calamitous domino-like effect — probably triggering the bankruptcy of Greek financial institutions that hold the country’s bonds; stressing major French and German institutions that are also investors; driving up borrowing costs for other indebted European countries; and perhaps causing losses in major U.S. money funds with large European holdings or prompting a general credit freeze such as the one that followed the Lehman Bros. failure in 2008.
Greece is also considered the central test case for the ability of the 17-nation euro currency union to look out for its own — and prove that it can stay intact in the long run. Ireland and Portugal are also under emergency loan programs with the IMF and other European countries. But Greece represents the more difficult political case — testing whether institutions such as the European Central Bank can develop ways to help troubled countries, and the degree to which more economically successful countries such as Germany are willing to transfer money or back loans for the weaker economies.
Greece has had a year under an initial three-year $160 billion package of emergency loans negotiated in 2010. That plan included initial rounds of spending reduction that some economists blame for deepening a three-year recession as the government eliminated the equivalent of 5 percent of the country’s annual economic output from its books.
Even that effort has slipped behind schedule and is to be supplemented by a renegotiated agreement that will add even more public funding to the mix. The continuing rise in Greece’s overall debt — at about 150 percent of its annual economic activity, or more than $400 billion, it is among the highest in the world — has caused some analysts to question the wisdom of continuing to lend to a nation considered likely, at some point, to force its creditors to accept losses.
For now, the mood in Europe is that a bullet has been dodged.
“This was a vote of national responsibility,” European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso said in a joint statement after Wednesday’s parliamentary vote. A follow-up will be needed on Thursday, but Papandreou’s 155-member majority in the 300-seat Parliament is expected to win. “The country has taken . . . a vital step back — from the very grave scenario of default.”