Greece has cleared the way for fresh IMF and EU financial aid after its Parliament approved two parliamentary votes on sweeping austerity measures. The Greek government’s victory averted an immediate eurozone crisis and paves the way for the payment of €12 billion in aid this month and a deal on a second bailout to replace the €110 billion package agreed to last year.

The austerity measures adopted are indeed harsh and it is not surprising that the country erupted in violence on the day of the first parliamentary vote. The five-year plan put forward by the Greek Socialist government – under immense pressure from the EU and IMF – consists of public spending cuts of €14.32 billion, tax rises worth €14.09 billion and the raising of €50 billion from privatisations.

The tax increases include rises in income tax, a new solidarity levy of between one and five per cent of income on households, higher property taxes, sharp increases in VAT, higher excise taxes on fuel, cigarettes and alcohol and the introduction of special levies on profitable firms, high value properties and people with high incomes.

The spending cuts include a reduction in the public sector wage bill, a severe curtailment on public sector recruitment, the termination of all temporary contracts for public sector employees and huge cuts in the defence, health, education, local government, public investment and social security budgets.

There is no doubt that the huge mess Greece has found itself has been caused by the gross mismanagement and overspending of various Greek governments, both Conservative and Socialist, over the years. For example, the 2004 Athens Olympics cost nearly €7.57 billion, double the initial budget.

As a recent report by George Mason University’s School of Public Policy, ‘The European Sovereign Debt Crisis: Responses to the Financial Crisis’, makes clear: “The roots of Greece’s fiscal calamity lie in prolonged deficit spending, economic mismanagement, government misreporting and tax evasion.”

Furthermore, when Greece was accepted into the eurozone in 2001, two years after the EU had rejected initial membership because of the country’s failure to meet the Maastricht criteria, some concern was expressed about the wisdom of Brussels’ decision.

A few years later it emerged that Greece had given a false picture of its budget deficits in order to qualify for membership of the single currency. So the country’s financial problems have been accumulating for quite some time.

Greece is going through extraordinary and difficult times, and a whole culture change is needed if the country is to get out of its mess. Prime Minister George Papandreou has tried and failed to form a government of national unity with the centre-right opposition New Democracy party.

Such a government would indeed be ideal in such a situation. However, not only did the opposition reject participating in a new government, but it also voted against last week’s austerity measures in Parliament, despite pressure to do so from the European People’s Party, the European grouping it belongs to.

Joseph Daul, the EPP chairman in the European Parliament, said before the Greek parliamentary vote: “Under these circumstances, and in a spirit of solidarity with Europe as a whole, we advise the Greek New Democracy party to approve this package of reforms at the vote today in Athens.”

National leaders of the EPP, particularly German Chancellor Angela Merkel, also urged the Greek conservatives to back the austerity measures when they met for a ‘pre-summit summit’ prior to the EU summit held on June 21 and 22.

However, New Democracy leader Antonis Samaras did not bow to pressure from his centre-right colleagues and said shortly after his meeting with them: “I have been in full support of fiscal adjustment in Greece. However, the current policy mix implemented by the Socialist government calls for more taxes to an economy in an unprecedented depression.

We need corrective measures to ensure that the Greek economy recovers and pays back its debts.” When the vote was taken only one Conservative MP voted with the government.

The Greek crisis is proving to be the eurozone’s biggest test since monetary union came into effect. The EU is doing everything possible to prevent Greece becoming the eurozone’s first sovereign member to default, but of course the EU can only do so much.

It is up to Greece to save itself, naturally with outside financial help, and this means fully implementing the austerity measures and bringing about a culture change in the country – which is the most difficult thing to do.

One major problem is nobody really knows how much longer the ruling Socialist government can last. Prior to the vote it had a five seat parliamentary majority, but this has now been reduced to four, after one Socialist MP who voted against the measures was expelled from the party. Should a few other government MPs get cold feet and vote against their party as the austerity measures really start to bite this could cause the government to collapse.

Political instability is the worst possible outcome in such an economic climate as it could well make a default seem inevitable. This could well lead the IMF and EU to freeze any further lending to Greece, and then we’ll be back to square one.

A default would have massive consequences and would be felt by the whole eurozone, especially the big countries that have lent massively to Greece. German and French banks hold up to 70 per cent of Greek debt and would be severely hit.

Greek banks could well go bankrupt and it would become more expensive for the weaker eurozone countries to borrow money. In such a scenario Greece could very well leave – or be thrown out of – the eurozone, and the whole single currency project will have to be reviewed.

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