Greek Prime Minister George Papandreou has agreed to step down and help form a coalition government that would be charged with implementing the draconian austerity measures agreed to between Greece and the EU in exchange for default-preventing bailouts. But will the bailouts work to stave off default and stabilize the precarious eurozone? Just as importantly, how much pain is yet in store for the Greeks and will these measures enable the country to overcome its economic morass?
The news of Papandreou’s departure broke late Sunday evening as talks between Papandreou’s socialist PASOK party and New Democracy leader Antonis Samaras, brokered by the country’s President Karolos Papoulias, achieved success in two main areas: Papandreou stepping down and an agreement to call for early elections. February 19, 2012 is the preferred date, but that detail, and other matters including who succeeds Papandreou, as well as the actual makeup of the new cabinet, remain to be decided.
Papandreou’s decision comes after his survival of a no confidence vote in parliament on Friday. But the writing was on the wall regarding his demise when several socialist deputies came out in favor of the prime minister’s resignation and the formation of a “government of national salvation” that would include members of Mr. Samaras’s New Democratic party, and other minor parties.
The major purpose of the coalition government will be to implement a series of tax increases, budget cuts, and drastic reductions in the government workforce passed last month that has infuriated Greek unions and ordinary citizens alike. It is the 5th time in a little more than two years that the Greek government has instituted austerity measures, all designed to get a handle on Greece’s out of control public spending.
In return for the cuts in spending and tax increases, the European Union and the International Monetary Fund, along with the European Central Bank, have agreed to implement the $178 billion dollar bailout package negotiated last month in Brussels. The package includes a deal with private holders of Greek government bonds that would give them 50 cents on the dollar for their holdings. The austerity measures and bondholder “haircut” is designed to bring Greece’s national debt from its current 180% of Gross Domestic Product down to 120% by 2020 while balancing the budget by 2015.
Papandreou almost blew the entire deal last Monday when, unexpectedly, he called for a nationwide referendum on the budget package. It proved to be a gigantic miscalculation and his eventual undoing. Not only was the plan for a vote on the austerity measures met with almost universal scorn in Greece and panic on European stock exchanges, it enraged German Chancellor Angela Merkel and French President Nicolas Sarkozy who had labored long and hard to seal the bailout deal with all parties involved. A “no” vote on the referendum would have led to Greece being denied the bailout funds, which would have resulted in an uncontrolled default and Greece leaving the euro for the drachma. Many analysts believe that a Greek default would start the dominoes falling of other nations experiencing debt crisis, including Portugal and Ireland. And it would threaten Italy, whose costs to borrow money has skyrocketed this past week with the political crisis in Greece.
By Thursday, with Papandreou facing a revolt of his own socialist deputies over the plan for a referendum, the prime minister withdrew it. After surviving the confidence vote on Friday and calls for his resignation coming from all quarters, Papandreou determined it was time to go. However, his ploy achieved something he may not have intended. In the end, it forced the opposition — including the New Democracy party — to also take responsibility for the austerity measures and see them through.
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