Italy Founders While Greece Subsides: Is Austerity Over? Not So Fast …
By Staff News & Analysis - March 01, 2013

Stalling for Time: Greek Reform Effort Slows to a Crawl … The troika is back in Athens this week and with all eyes on Italy, Greece feels it has little to fear. But important reforms have stalled and the government's belt-tightening efforts seem paralyzed. Politicians are playing for time and hoping for fresh money. The troika mission has returned to Greece, but this time things are different. No front page headlines are warning about new painful demands made by Greece's international creditors, no government officials are pleading for unity in the three-party coalition in support of unpopular measures. And there is no overhanging fear of a long drawn-out process of evaluation, full of innuendos about a catastrophic default or euro-zone exit. – Der Spiegel

Dominant Social Theme: Greece is in good shape now. People just have to pay their taxes and the politicians have to follow through.

Free-Market Analysis: We learn from Der Spiegel that austerity in Greece seems to be subsiding. This comes at the same time that Italy is rejecting Brussels-imposed austerity at the ballot box. Is austerity over?

The news is filled with reports about how the Italians have decisively rejected a form of EU technocracy that would have yielded considerable further misery for Italians already facing higher taxes and less government benefits. Renegotiations with Brussels and Germany are said to be in the offing following Italian results.

Given the apparent subsiding of austerity, several questions surge to the fore, the most compelling of which is that if austerity's conditions are not met, then who will take the haircut? If Greece and Italy do not pay, then someone else will … presumably the Germans.

This poses its own set of problems. It is not enough merely to report that austerity is failing in Italy and Greece. One must also consider the ramifications. Here's more from Der Spiegel:

The Greek government … is confident that the inspection started on Monday by the troika –comprised of officials from the European Central Bank (ECB), the European Union and the International Monetary Fund (IMF) — will be over by March 10 and will approve the release of the next two tranches of bailout aid €2.8 billion in March and a further €6 billion in April.

No one seems to fear a repetition of the drama of the previous troika inspection, which lasted a full five months … [Yet] it has become increasingly clear that the government in Athens is failing to implement promised reforms: Even the sale of those companies that have been dubbed the "crown jewels" of publicly owned enterprises and have attracted a lot of interest from foreign investors, is full of pitfalls …

The Greek economy remains mired in recession, and is expected to contract by another 4.5 percent of gross domestic product in 2013. The latest statistics show that 27 percent of Greeks are unemployed, and among those under the age of 24, that figure is 62 percent. Many are already fearful of the "Bulgarian syndrome," a reference to the street violence and anti-austerity protests that have shaken the government in Greece's northern neighbor.

Despite this, according to Der Spiegel, top Greek politicos are betting that a renewal of tourism will begin to lift the economy during the Greek summer that begins in September. There is also a belief that after September elections, a newly formed German government might renegotiate Greece's explosive debt provisions.

After Thoughts

Austerity is not merely a national condition but also a matter of mathematical solvency. If it does not work in Greece or Italy, then some other country or group of countries must provide compensation – or Europe's largest banks must undertake further haircuts. Europe's underlying financial equation doesn't change even if austerity does.

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