The ailing Greek economy is on the verge of a 1930s-style Great Depression, as the Athens government predicted a 25% fall in GDP by 2014, putting intense pressure on the EU to relax the terms on the country’s €130bn (£105bn) bailout package
The finance minister, Yannis Stournaras, said a decline in tax revenues and spiralling unemployment will deepen the country’s four-year recession, which critics of the EU’s stance said could lead to a recession as long and deep as America’s pre-war decline.
Stournaras, who is locked in negotiations over the terms of a second bailout, fears that efforts to revive the Greek economy will be undermined by a draconian austerity programme, early debt repayments and high interest rates on its loans.
“The cumulative reduction (of gross domestic product) since 2008 is just under 20% and is expected to reach 25% by 2014,” he told a Greek–Chinese business forum in Athens.
“The time frame for the adjustment, the conditions of the real economy should be taken into consideration,” he said. “Otherwise there is a great risk of prolonging the negative consequences for the economy and society.”
The finance minister made the plea after revealing that while Greece would meet its nominal 2012 deficit reduction targets, its primary deficit would reach 1.5% of GDP compared to the projected 1% following a sharp decline in the economy’s output.
Concerns that the economic situation is deteriorating faster than expected in Greece, Spain and Portugal dragged down stock markets, which have rallied in recent weeks on better news from the eurozone and expectations, confirmed on Friday, that the Federal Reserve would inject more new money into the US economy.
The FTSE 100 declined for a second day, to 5868, while the Dow Jones industrial average in New York was off 10 points at 13,542 by mid afternoon.
The Greek coalition government, led by the right-wing leader Antonis Samaras, is under pressure from left of centre parties and unions to win concessions on plans for 50,000 public sector job cuts, tax rises and employment reforms applied to a second bailout by the European Union, European Central Bank and International Monetary Fund, known as the “troika”.
Unions have called a general strike for 26 September and several key MPs in the coalition have threatened to quit rather than implement the cuts.
Stournaras won the backing of the world’s major banks in its efforts to win better terms after Charles Dallara, managing director of the Institute of International Finance (IIF) and the spokesman for Greece’s creditors, said a commitment by Greece to make reforms should immediately be rewarded.
“Once that has been done, and I am confident it will be done, Europe and the IMF should move quickly to extend the adjustment period for at least two years and provide the modest additional financial support for that extension to be effective,” Dallara said.
The IIF represents lenders to indebted eurozone countries, among them major US, UK and eurozone banks alongside several hedge funds and insurance groups.
Dallara said: “Only some €15bn-€20bn is needed. This can easily be realised in part by reducing interest rates on the loans which Europe and the IMF made to Greece on more concessional terms,” adding that responses to the Greek debt crisis placed too much emphasis on short-term austerity and not enough on improving the country’s longer-term competitiveness.
Officials in Brussels are keen to soften the troika’s attitude towards Greece to ease the sense of crisis and shore up fading support for key countries in the single currency.
But a deep split between the north and south in the eurozone appeared to be as wide as ever after Austria and Finland repeated their insistence that Greece be made to implement cuts agreed under the original terms of the €130bn bailout package.
Finland’s Europe minister said he was sceptical about giving Greece more time to implement its bailout reforms, especially if this will cost more money, although he said nothing should be ruled out yet.
“We are sceptical about giving more time, especially if it means more money, but we should not exclude any options at this stage,” said Alexander Stubb.
Austria’s finance minister took an even harder line at the weekend, saying Athens would only get “a few weeks”, before it begins to implement the package of cuts and tax rises.
Northern states, which provide the bulk of EU loans, have resisted offering relaxed terms to Athens after its failure to introduce reforms under an earlier €110bn bailout.
Germany’s foreign ministry is understood to be prepared to back a compromise deal, but with strict limits on extra cash payments.
Economists are sceptical Greece can survive without a long holiday from debt repayments and a cut in its interest bill. Without a relaxation in the terms of the deal, Greece could run out of cash and be forced out of the euro, though the EU is unlikely to force the issue before German parliamentary elections next year.