Over the last year Greek Prime Minister George Papandreou made bold efforts to persuade the European Union and the global financial markets that his government is determined to take tough austerity measures to fight the huge budget deficit and restore the credibility of Greek economy. It's an historic task that Mr. Papandreou has taken on, since there was no other option for Greek people but to sacrifice a large part of their privileges and change their usual manner of life. The Greek Prime Minister has many times highlighted that his country is "at war" while financial markets are currently continuing to "shoot" against Greek bond holdings. It's a war that nobody knows when it will end and, furthermore, it's not predictable for how much longer the Greek society will have the power to withstand these extremely painful circumstances caused by the unprecedented austerity policy imposed.
Despite the good intentions of the Greek government and Mr. Papandreou's considerable personal efforts not to default Greece on its debt, the crucial point now is not only how the Greek economy will be rescued but, also, how the Greek society will remain alive after the storm of pensions and wage cutting in the public sector and increasingly rising unemployment rates in the private sector. It would not be an exaggeration to describe what's now occurring in the Greek economy like an area where there is a lack of the fresh air of growth. That's the result of the government's failure to launch an effective policy to promote growth and lead the country out of the recession as soon as possible with the least casualties in the level of social coherence.
During the last year many things seem to have changed. On the one hand, Greece has proved its unexceptionable decisiveness to put in order its messy fiscal affairs, and on the other the European partners have gradually formed a new perception of the debt crisis as a challenge which they should all together deal with in order to ensure the Euro zone's stability. In the last economic forum of Davos, Greek Prime Minister, Mr. Papandreou and Greek Minister of Finance, Mr. Papakonstantinou encountered much less suspicious behaviors by the other countries' leaders and market representatives than the previous time one year ago.
However, markets' speculations for a potential restructuring of the Greek debt remain, as well as the fears of an imminent bankruptcy of the Euro zone's economy with Greece having the higher odds. The more the European Union and the Euro group delay taking collectively a clear and irreversible decision regarding how Europe will manage the problem of high government debt, the more such speculations will spread. The idea that EFSF may borrow from the international markets and lend money to Greece or any other country to buy back its debt would be a solution to the Greek giant debt burden expected to peak at 158% of GDP by 2013. In any case what is obvious is that Europe is being prepared for a far-reaching solution, which was an optimistic signal during the recent economic forum in Davos.
Nevertheless, Greece is continuing to be at the edge of the cliff. According to what one of the IMF's senior members recently told me, Greece is unlikely to re-enter the bond markets in 2011 and maybe it's unlikely to do so in 2012 as well. That means Greece has a long distance ahead of it until bond markets are willing to drive down borrowing costs. Although Greek people have showed, throughout this period of time, a responsible stance and a lot of discipline towards government's austerity measures, Greek society has not unlimited endurance. One in five people in Greece live below the poverty line, more and more households feel unable to pay off their loans and their credit card debts to the banks, unemployment rate is reaching unprecedented levels of15% and hundreds of companies are shutting down every day. Mr. Papandreou's government succeeded in an unprecedented reduction of the budget deficit last year, however, the Greek economy, has moved into a tunnel of recession and it's unpredictable when it will get out of that. Government's assertions that the Greek economy will turn back to growth in 2012 are not sufficient to persuade people that a better future lies ahead for their country and their families.
What's now important for the Greek government is to provide people with evidence that their sacrifices are not in vain. And, furthermore, that people are paying for the crisis equally. Unfortunately, none of these two conditions are currently met. Even if Greece avoids a sovereign default, the crucial challenge that Mr. Papandreou confronts is whether, alongside with the economy, he can deter a probable social bankruptcy. Financial markets and current lenders of Greece such as the International Monetary Fund, care not to lose their money. Mr. Papandreou is the one who should care that Greece not only pays back its debt but that Greek society does not become a society of decline where young people cannot dream and win the future.