Commentators are reclassifying the financial crisis as a political crisis after the debts of countries like Greece continue to mount up. This means the crisis is leading to political and social complications, as reflected in the tensions formed both inside and outside of countries with sovereign debt. The International Monetary Fund (IMF) claimed: “The set of policy choices that are both economically viable and politically feasible is shrinking as the crisis shifts into a new, more political phase.”
Greece hasn’t defaulted yet but financial markets have already responded negatively to the ongoing political discussions and the possibility of it doing so. Their debt-to-GDP ratio is believed to be 160 percent and is not improving.
The political element of the crisis was apparent from the start, with Greek Prime Minster George Papandreou struggling to persuade his country and parliament to swallow the bitter pill of bailout packages tied to austerity measures offered by EU member states and other institutions. He managed to do this against the backdrop of protest and anger amongst his electorate.
The new tranche of aid on offer is worth 8bn euros (£7bn) and is the last to be offered after the 110bn euro bailout last May and the 109bn euro bailout this July. Greece is still paying back tranches of the first bailout. The new expectation is that Greece makes significant progress in improving its structural overspend. If the money does not arrive by 10th October, Greece will not be able to pay its civil servants and pensioners.
Another new element to the debate is talk by European leaders that a potential solution could be that Greece is cut adrift of the EU, as reflected by German Finance Minister Wolfgang Schaeuble’s warning that Greece had better decide whether it wants to carry the burden of being in Europe. Greece responded with a resounding “yes I do,” but the message is clear: there is only so far the EU will go.
Following the fears that Greece would default and their talks with international institutions earlier this month, the country’s Finance Minister Evangelos Venizelos said in a statement that Greece “should not be a scapegoat” for “international institutions in order to hide their own lack of competence to manage the crisis.” He added that the country had to work hard to reduce the deficit. There are 15 new measures tied to the new bailout by the EU, the European Central Bank (ECB) and IMF, one of which is the 10,000 reduction of civil service staff.
The reason for jittery market reactions to recent events is because analysts are now claiming that any restructuring of the Greek economy will need to be passed onto private sector creditors and banks. The amount of debt, which may need to be written off, is estimated to be around 200bn euros.
The UK, although not part of the eurozone, is very much tied in financially and politically. The eurozone crisis recently wiped £28bn off UK firms. The effects could be wide reaching and is likely to impact on individuals with more austerity and knock-on effects to pension funds, ISA savings and the daunting, if not distant, possibility of another banking crisis.
The eurozone crisis, as centred on Greece, is coming to its penultimate phase. The solutions are thin on the ground and the outcomes already expected. The crisis doesn’t end here, however, with Italy and Spain also facing huge structural deficits. Further afield, the US is also tackling its own debt and restructuring. Greece is at risk not only of becoming an international pariah, but an example of things to come.