The Greek tragedy

Greece has averted bankruptcy by approving EU austerity measures, but its bailout package won't solve the country's economic problems, says Lucy Mair

On 12 February the interim Greek government, an emergency coalition led by the Socialist Pasok party and the conservative New Democracy party, approved an austerity bill worth €3.3 billion (£2.8 billion) to secure a €130 billion rescue package from the European Union and International Monetary Fund - its second such bailout since May 2010. The Greek parliament came under pressure to approve the package because without it, the insolvent country would not be able to make debt repayments of €14.5 billion due on 20 March; this would lead to a disorderly default on its debts and bankruptcy - meaning that the country would be forced to leave the single currency.

Damned if they do

The austerity package has been met with fierce resistance, both in parliament and on the streets of Athens, due to the harsh measures it involves. Under the bill, all sections of Greek society will be affected as the minimum wage will be reduced by 22 per cent, from €750 to €600 per month; €300 million will be cut from state pensions; and the public sector workforce will be reduced by 150,000 by 2015. This comes on top of earlier austerity measures, including a VAT hike and other tax increases. Greece's unemployment figure is already extremely high, with one in five Greeks out of work, and half of 16-24 year-olds unemployed. Furthermore, EuroStat figures released in February claim that a third of Greeks are already living in poverty, which is likely to increase under the new austerity bill.

In return for Greece's commitment to austerity, the bailout aims to cut the country's debt from 160 per cent of GDP to 120 per cent by 2020. However, many commentators have argued that by making Greeks poorer, the country will only sink deeper into recession.

As parliament voted, Athens witnessed some of the worst political violence to affect the capital as protestors took a stand against further austerity. Six thousand riot police were deployed to control the uprising. Meanwhile, in parliament, six ministers resigned from the cabinet before the vote in protest at the measures, which could push Greece to the brink of collapse, and 43 politicians from the majority Pasok and New Democracy parties voted against the party line or abstained. All 43 MPs have since been expelled from parliament.

Damned if they don't

The parliamentary vote to approve the austerity measures has been billed more widely as a referendum on the euro, with Greece taking the decision to stay in the single currency union, despite the considerable cost. Conditions under the austerity package are bad, but the alternative - a default - would have been much worse.

If Greece were to default on its debts, exit the euro and return to the drachma, the process would be extremely costly and chaotic. In the long-term, the removal of Greece from the euro equation would benefit the single currency's stronger partners, such as Germany. However, other peripheral eurozone countries struggling with their debt burdens, such as Italy, Spain and Portugal, would come under increased pressure to leave and could also become unable to repay their debts. In the short-term, European banks would have to close in order to prevent a run on the single currency, and bank nationalisations would be likely to follow to help them cope with the losses on worthless Greek debt. Those banks able to continue to operate would be less likely to lend, resulting in a stagnant eurozone economy.

The EU and IMF will make a final decision on whether to grant the bailout funds at a summit on 1 March. The bailout will tide Greece over and allow the country to make its debt repayments in March, but it isn't the end of the eurozone's debt crisis or Greece's role in the tragedy. Employment and living standards will be depressed in Greece for years to come and, even if this second bailout is successful in reducing Greece's debt to 120 per cent of GDP by 2020, the country will still be insolvent. The measures agreed by parliament are irreversible, but with parliamentary elections timetabled for April, Greeks are likely to demand economic and social change.