European countries feel the pain as cuts keep coming

By Howard Schneider
Washington Post Staff Writer
Saturday, May 15, 2010

ATHENS -- A retiree at age 59, with a comfortable pension and a generous severance payment as well, Yolanda Hatzi knows she got a good deal when she left the National Bank of Greece three years ago.

She also knows such arrangements have added to the rage that had her college-age daughter "throwing stones" in recent riots. That deep anger threatens to mount across Europe as governments slash at social guarantees considered integral to the continent's political life but which have become too expensive to sustain.

Some foresee widespread social protest as cuts take place amid high unemployment; others predict a potential shift of sovereign authority to European institutions. But the outcome of efforts to control government debt could rewrite an economic order that has left Hatzi's generation in relative comfort but world markets nervous about financing it.

Investors speculate that Europe might not have a dynamic enough future to foot the bill, and it has left politicians from Athens to Madrid, and from London to Berlin, scrambling for a response.

"I have so many benefits," Hatzi said. In contrast, she says her daughter resents the prospect of less certainty and fewer protections. She feels she is inheriting "burnt ground."

So far, the fire remains largely figurative. But the evolving debate over high government debt in Europe could mark a volatile period as markets demand deficit control, a still-strong trade union movement fights to retain benefits, and protest movements jell on the left and right.

In Greece, that has led to a firebombing that killed three people last week. Residents in the immigrant neighborhoods of Athens say brawls with nationalist groups now include accusations blaming outsiders for the country's economic problems.

José Luis Rodríguez Zapatero, Spain's socialist prime minister and a staunch union supporter, cut public workers' wages 5 percent this week to demonstrate he is serious about controlling spending. Britain's change of government was partly shaped by concern over the country's deep deficits, and a by-election in Germany was laced with ethnically tinged opposition to the bailout of "indulgent" Greece.

It has proved difficult for politicians to stay ahead of the curve as they battle fast-moving global bond markets with policy decisions that take months to show results. For example, the trillion-dollar fund announced by the European Union this week to defend the value of the euro represented a huge commitment, but it has not prevented the common currency from continuing to fall in value as investors question the ability of governments to cut deficits -- or even to keep the 16-nation eurozone intact. The euro sank on Friday to 1.24 against the dollar.

Former U.S. Federal Reserve chairman Paul Volcker spoke this week of the "possible disintegration" of the euro because of the strains between stronger and weaker national economies. Meanwhile, the International Monetary Fund issued a blunt report on government debt control.

Developed nations have overpromised, the IMF said, particularly on pension and health benefits for an aging population. The choice is to cut spending and raise taxes, or find ways to boost growth.

Greece is an object lesson for the discussion spreading across the eurozone. It may be cast in epochal terms: staving off another global financial crisis. But at ground level, it is about unwinding an economic culture built, as Greek economist George Pagoulatos describes it, on "particularism and fragmentation": a system in which narrow lobbies and broad constituencies have carved out ways to nip a bit more of the pie without necessarily helping enlarge it, and the benefits of competition are suspect.

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