At a meeting of the International Monetary Fund in Washington this past weekend, European government leaders said they would significantly step up their response to the eurozone’s spiraling debt crisis. With the world economy hovering on the edge of a double-dip recession, European leaders had to acknowledge that their efforts so far have not been sufficient. A default of Greek debt is quickly moving from a threat to a reality, with Group of 20 sources saying that it is likely that up to 50 percent of the face value of Greece’s 350 billion euro debt will have to be written off, but only after European leaders have vastly shored up an existing bailout fund, the European Financial Stability Facility.
European Union leaders had to acknowledge that a second 109 billion euro bailout created by Europe and the International Monetary Fund in July has failed to solve the debt crisis. They must now spend the next six weeks seeking to boost the bailout fund, the European Financial Stability Facility (EFSF), by nearly 5 times it current size. Currently the EFSF can make as much as 440 billion euros, or $600 billion, in loans to troubled nations and banks. On Saturday, Olli Rehn, the European Union’s monetary affairs commissioner, said that there is “increasing political will” among European leaders to address the fears of investors and increase the bailout fund, so that it can insure a few trillion euros in loans.
US Treasury Secretary Timothy F. Geithner said in a statement on Saturday that “the threat of cascading default, bank runs and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally.” The Obama administration has been putting the pressure on Europe, especially Germany — Obama has met or spoken with chancellor Angela Merkel 28 times since he has been in office — to intensify efforts to prevent contagion from Greece’s debt crisis spreading to the other weaker eurozone economies of Italy, Ireland, Portugal and Spain. On Sunday, Merkel spoke of erecting a “barrier” around Greece so that, as she said, “we can in fact let a state go insolvent” if it can’t pay its bills
Continued instability in Europe might undo not only the “fragile,” sputtering US economy but Obama’s re-election prospects if investors, watching one European country’s economy after another fall under its debt burden, hastily pull out their holdings and set off a credit crisis like the collapse of Lehman Brothers — only on a global scale.
Growing Economic, Political, Societal Crisis in Greece
But investors remain deeply unsure if even these measures can save Greece from default. Greece’s debt is $360 billion, totaling 150 percent of the country’s GDP and 5 times that of Argentina which defaulted on $95 billion of debt in 2001.
The Greek government has implemented stringent austerity measures, cut pensions and salaries and raised taxes, but, more and more, Greeks are feeling that “there is no light at the end of the tunnel, no source of hope,” says Dr Thanos Dokos, who directs the Athens think tank Eliamep. Both the suicide and the crime rate have risen in Greece while the average household income has fallen by 50 percent; unemployment is at 16 percent, and it’s higher for those in their 20′s. Greece’s economy is set to contract in 2012 for a fourth year in a row and analysts predict Greece’s debt burden could rise to 190 percent of its GDP by next year. Last week, Athens announced that it would lay off 50,000 public sector workers and reduce salaries and pensions further:
“The belt is now at the eighth notch, it’s become so tight there are only two more left, but nothing has improved,” said Georgios Valsamis, a young taxi driver who joined a barrage of strikes that brought public transport to a halt last week. “People in power, MPs, they’re like robots, they do whatever those foreigners [the EU, ECB and IMF] say. We are no longer willing to be a laboratory for failed policies. Low-income earners, those who have been really hit, can’t endure much more.”
That ordinary Greeks, among Europe’s lowest wage earners before the crisis erupted, are being stretched to breaking point is too obvious to ignore. When austerity was first introduced, after the newly elected socialist government discovered the budget deficit to be three times higher than the outgoing conservatives claimed, families took the blow by reining in spending and tucking into savings.
The Aganaktismenoi or “Indignants” have continued to rally in Athens’ central Syntagma Square and workers have held numerous strikes. On Monday, there will be virtually no mass transportation in Athens, with train, metro and tram employees striking for 24 hours. Strikes could also occur on Tuesday and Wednesday. Unions are planning a nationwide civil service strike on October 5 and a general strike on October 19.
Faced with no prospects for years to come, young Greek are returning to rural villages or leaving the country in the largest numbers since the 1960s. Psychology professor Fotini Tsalikoglou says that “Greeks feel like they are in a bad dream. You wake up not knowing what will be overturned today or what was overturned yesterday.”
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Photo taken in Athens on September 22, 2011, by mkhalili