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Greece on the edge

Prime Minister George Papandreou is likely to win this week’s crucial parliamentary vote on his latest austerity measures – a key condition of Greece receiving a second bailout from its euro zone partners.

But there will be protests and possibly riots outside the Parliament and the vote will be tense and narrow. Thereafter, Greece can progress along the path agreed in Brussels last week, but it will do so in a weak position and in need of continued solidarity from its partners.

The parliamentary victory should be enough to abate the immediate crisis. But Greece’s vulnerability on the financial markets will continue and the talk of default will not go away. In the meantime, an uncertain, divided and weak country must implement the new austerity measures, undertake parallel institutional reforms and restore its international reputation. No euro zone or EU state has faced this kind of challenge in recent memory.

The Papandreou government must also contend with a political and social crisis. The main political parties remain poles apart and the prospects of reform by consensus appear close to zero. Opposition also comes from the powerful public-sector unions, an increasingly fearful public, and disparate political forces maintaining constant street protests. Within his own party, the Pan-Hellenic Socialist Movement, better known as Pasok, Papandreou has lost MPs and supporters and has never been more constrained. Socially, more and more Greeks appear despondent and unsure of the path being taken. Observing the protests just over a week ago, it was clear that there is a stratum of society ready for a radical and/or populist leader: either might provide a nationalist answer to a seemingly interminable crisis.

Added to these conflicts is an institutional weakness that questions the ability of any government in Athens to deliver serious reform. Many parts of the public bureaucracy verge on the dysfunctional. Their staffs are too big – the result of parties in power using public jobs as electoral favors – too unskilled, too rigid from confused and archaic legal procedures, too hierarchical, and lacking morale. Too often, the minister in charge lacks efficient means, information and technical know-how from those he or she seeks to direct. Such problems are all the more grave when policies are highly controversial and uncertain to be sustained.

Having brought the EU around to help Greece again, Papandreou’s euro zone partners must continue to support the reform effort in Athens. They have a shared interest in Greece not defaulting and thus not undermining the euro and destabilising the international financial markets. In any event, they cannot force Greece out of the euro and no Greek government will volunteer to withdraw. Even if Greece could be forced out, avoiding a catastrophe in the European banking system would require some kind of Greek bailout at least as great as that agreed to last week. Therefore, the test that must be imposed on Greece is not how much pain it is willing to accept via more austerity measures, but whether Athens can remain committed to putting her house in order with systemic reform. No one wins if Greece goes under; but the European project will survive over the long term if Greece achieves real reform. That is the proper lesson for other euro states in difficulty.

Politicians and the news media often focus on the drama of a political crisis – the street riots, the diplomatic squabbling. But serious debate and the decisions of investors should cut to the deeper realities. Is Greece, coordinated with Europe, getting down to the job of serious, long-term reform? That should be the focus of the elusive “confidence” the market seeks.

Kevin Featherstone is director of the Hellenic Observatory at the London School of Economics