Bad as things looked in Greece yesterday, they just took another turn for the worse.
The government now says that the economy contracted in the second quarter even more than was originally thought, by 7.3% instead of 6.9%, putting its already-failing plan to cut budget deficits at deeper risk.
The government already concedes that it will fail to cut its budget shortfall as planned this year. Now frightened consumers, more spending cuts, higher taxes and a stalling European economy could put Greece deeper into the hole.
And patience in the rest of Europe is running out, with open questions over whether it all can work.
Finland reinforced its insistence on collateral for more Greek aid, a controversial condition that has Europe divided and threatens to delay new agreements. The European Commission warned Greece to honor its commitments.
Just to make sure Athens knows the stakes, Germany again Thursday hammered home the word that no Greek steps to close budget gaps will mean no €8 billion payout next month. The warnings have rattled Greek officials, who concede that without that check the lights will go out in about 25 days.
The rank-and-file from Chancellor Angela Merkel’s government coalition are talking about Greece being bounced out of the euro zone if it doesn’t shape up. This moved Ms. Merkel to blame-deflection mood: Conceding in open parliament that it was a mistake by her predecessor in office to let Greece into the euro party to begin with.
Even a bigger and better European Financial Stability Facility–the euro-zone bailout fund Europe is putting such stock by–sees trouble in Greece, with EFSF CEO Klaus Regling saying the currency bloc’s rescue plan for Greece just isn’t working.
What about that plan to tap Greece’s private-sector creditors? It won’t work, according to OECD chief economist Pier Carlo Padoan. Other mechanisms could be considered, he said, though he accepted these could be even less attractive for investors. (Translation: deep haircuts.)
The sharper tone radiating on Athens has rattled Greek officials into action, looking at more cuts to a public sector that previously had been the Sacred Cow for the ruling Socialist party. The cuts naturally will choke off more consumer spending and trigger social protests.
And, right on cue, medical staff went out on strike Thursday in a new phase of public protests that in early summer escalated to mass rallies and violent clashes with riot police. Teachers, tax office workers and other civil servants are set to join them in the days ahead as the frantic government mulls cutting another 100,000 public-sector jobs.
Greece’s streets are heating up, but cut it must.
Next week, the EU, ECB and IMF inspectors will return to Athens and they’ll want to see results and proof that there won’t be further slippage in austerity implementation.
With Athens looking down the gun barrel, the rest of Europe is watching with uncomprehending fascination. Financial markets are spinning any number of scenarios on how big the bang will be for the euro-zone and its banking system if Greece slips into default unaided by other euro members.
The Maastricht founders hadn’t prepared anyone for this, leaving out the possibility that its experimental machinery would need an emergency escape hatch.
