In Greece, fears that austerity is killing the economy

Deeply indebted and nearly bankrupt, this Mediterranean nation was forced to adopt tough austerity measures to slash its deficit and secure an international bailout. But as Greece’s economy slides into free fall, critics are scanning the devastated landscape here and asking a probing question: Does austerity really work?

Unemployment has surged to 18.8 percent from 13.3 percent only a year ago. Overburdened public hospitals are facing acute shortages of everything from syringes to bandages because of budget cuts, with hiring freezes forcing the mothballing of operating rooms even as more unemployed are relying on the public health system. Rates of homelessness, suicide, crime and HIV cases from intravenous drug use are jumping.

Greece has been forced to cut spending and raise taxes in the middle of a severe downturn, slashing pensions as well as state salaries, jobs and services. As public confidence has evaporated, consumer spending — the biggest driver of the economy — has plunged, generating cascading losses at private firms. The result is a dizzying economic plummet and social crisis that is bringing the cradle of Western civilization to its knees.

“Conditions have deteriorated so dramatically that doctors in this country now believe that the Greek crisis is no longer just a financial crisis but a humanitarian crisis,” said Dimitris Varnavas, the president of the Federation of Greek Hospital Doctors’ Unions.

The economic pain here is intensifying the debate over how to fix Europe’s fiscal woes, potentially influencing U.S. policymakers as they chart their own course to cut the deficit.

On Monday, German Chancellor Angela Merkel and French President Nicolas Sarkozy turned up the heat on Greece, suggesting that its bailout deal is in danger of unraveling if Athens does not press ahead quicker with pledged budget reforms and seal a deal with bondholders to voluntarily restructure its massive debt. But they also acknowledged that new steps are needed to combat slowing growth in the euro zone, where economists fear a looming regional recession as other indebted nations from Italy to Spain to Ireland also make deep spending cuts to reassure worried investors.

Greece, proponents of austerity say, has no one to blame but itself. After a decade of excessive borrowing and spending, evidence emerged in late 2009 that Greek officials had lied about the extent of the country’s whopping deficit. That lighted the first sparks of the European debt crisis, touching off a firestorm of investor panic that spread across Europe and is jeopardizing the global economy.

European powers, led by fiscally conservative Germany, have been insisting that Greece correct years of mismanagement by enacting swift waves of cuts and other major economic reforms to regain the confidence of investors and ensure the integrity of the euro. Slashing the deficit quickly is essential to ushering in a sustainable future, they have argued, and the resulting social pain is necessary to impress on Greek politicians and society that such excesses should never happen again.

Fueled by borrowing and overly generous government handouts, Greek living standards, they argue, became artificially high. As the standard of living and average wages here shrink dramatically, supporters of quick cuts say, Greece will also become more globally competitive. This month, Greece is set to negotiate a second, more sweeping bailout — valued at $175 billion — that could bring more cuts, force a reduction of wages in the private sector and compel the country to make good on promises to slash tens of thousands of public-
sector jobs.

But increasingly, critics of the quick-cuts theory are pointing to the worsening recession here as evidence that the medicine is killing the patient, with the nation’s sharp, sustained decline leading some economists to suggest that the country has entered a more serious depression. Some are calling for more-staggered cuts, an increased focus on modernizing the economy, and tax incentives — as opposed to recent tax increases — that could spur growth or at least ease the downturn.

“This idea of cut, cut, cut and tax, tax, tax is not going to work,” said Andonis Papagiannides, an economist and editor of Greece’s Economic Review. “It has sent Greece into a depression with no end in sight. They want milk, but you don’t get milk by killing the cow.”

Athens’s ‘new poor’

To glimpse Greece’s spiral, step inside the Klimaka homeless shelter and soup kitchen in the center of this ancient capital. Here, the proprietors say, you can tell the newcomers by their clothes.

They knock on the bright-red door wearing clean, name-brand shirts and jackets. Their pants pockets and bags bulge with cellular phones and other totems of broken middle-class lives. They seem dazed for the first few days. Many, like Lambros Zackarrlos, a 55-year-old plasterer in a Formula One jacket who lost his job eight months ago as the Greek debt crisis built, cannot bear to tell loved ones how far they’ve fallen.

“I told my son I got a new job as a truck driver and am on the road outside Greece,” he said. “I did not want him to know where I am. Like all of us now, he has his own financial problems.”

The swelling numbers of “new poor” using Athens shelters and soup kitchens — up as much as 25 percent since the crisis began in earnest in 2010, according to nonprofit groups and city officials — speak to the effects of the economic medicine being imposed on Greece and other troubled economies in Europe. In a country where homelessness was largely limited for generations by a culture of close family ties, officials say the roughly 1,000 beds available in Athens shelters are now fully occupied, with weeks-long waiting lists for newcomers.

Most of them are economic refugees like Leon Hannen, 64, a fluent English speaker and a maker of sacred icons for the Greek Orthodox faithful. When Greece’s economy went from bad to worse in 2011, squeezing wallets, religious shops rapidly stopped purchasing his wares. He said he went from a monthly income of roughly $2,600 as recently as 2009 to about $260 a month by last summer.

“Before I knew it, rent was six months overdue and I was asked to leave,” he said. “I had nowhere to go. I slept under the stars, on park benches, at first. I chose the ones by street lamps to be careful. Frankly, I feel as if I’ve had an easy life up until now. But none of us do anymore.”

Health care takes hit

In May 2010, Greece pledged to meet tough targets to cut its deficit as part of a bailout deal with the European Union, the International Monetary Fund and the European Central Bank. But it resoundingly missed those targets in 2011, in part because the Greek economy went into a nose dive, estimated to have shrunk by nearly 6 percent, or twice as much as initially predicted. That happened despite the government actually putting into effect less than a quarter of pledged measures, suggesting, critics say, that a fuller embrace of the austerity would have been far more socially damaging.

Greece agreed to stringent bailout terms to avoid a catastrophic debt default that could force it to exit the euro, an event that would probably increase the immediate hardship here but potentially set the stage for future growth. But skeptics caution that a default may happen anyway. Some economists are suggesting that more cuts this year would force Greece into another economic contraction that would be far worse than the current estimates of a 3 percent drop this year. That could cause the government to again grossly miss its agreed-upon deficit targets, triggering a standoff with its lenders, who have suggested they would cut Athens off from rescue funds if it does not fulfill its pledges.

Greece is no newcomer to economic chaos. After decades of budget crises and high inflation, stabilization came with the adoption of the euro a decade ago. Using its new, solid currency to access record-low interest rates, Greece proceeded to rack up a massive national debt of roughly $442 billion — or $40,000 for each of Greece’s 11 million citizens.

The current cuts, critics say, are exacerbating a growing social crisis here, particularly in public health. A rising tide of unemployed Greeks have lost their private health-care coverage, leaving them turning to public hospitals left dangerously understaffed by hiring freezes. Suppliers are cutting off shipments of syringes, catheters, gauze and other medical materials because of the government cash crunch.

In the cold foyer of the Nikaia hospital in south Athens, Miranda Tzima, 37, said her husband almost died last week. After a car crash, his ambulance had to take him to a more distant public hospital because the closest one was overburdened, causing him to lose more blood en route.

Leaving her children with her parents, she has moved into her husband’s hospital room to tend to him amid a hospital staff shortage. She has been warned that it may take him months to learn to walk again, perhaps longer, given cutbacks in the public physical therapy staff. Once, she would have turned to private medicine, but her family lost its health coverage when she was laid off from her job at a Citibank branch in Athens as the economy tanked in 2011.

“They say we are doing this to stay in” the euro, she said. “But I look our situation, and I wonder, is it worth it?”

Special correspondent Elinda Labropoulou contributed to this report.

Anthony Faiola is The Post's Berlin bureau chief. Faiola joined the Post in 1994, since then reporting for the paper from six continents and serving as bureau chief in Tokyo, Buenos Aires, New York and London.
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