A decisive step

On its tortuous path to avoiding national bankruptcy and saving the stability of the euro, the Greek government took a decisive step on Wednesday when it managed to get the parliament to approve the 2012-2015 austerity plan. This was the key step that had to be taken so that Brussels and the International Monetary Fund (IMF) would release the latest payment from the first rescue plan (an amount of around 12 billion euros).

The step is as significant as the ruin that it avoids. If the plan had been rejected, the European financial system would have suffered a profound crisis and the euro would have entered into a dynamic of dissolution. But the agreement of the parliament has averted the risk of catastrophe in Europe, allowing the Greek economy to avoid the risk of defaulting on its debts as least during 2011, and clearing the path for a new rescue plan that, this time, must be a factor in the growth of the Greek economy and not simply a string of punishing loans.

The political efforts of the Socialist government of Yorgos Papandreu to approve the austerity plan must be valued not just on the amount of the cuts that are going to be made (around 78 billion euros, between public spending cuts, tax rises and privatizations until 2015), but also due to the atmosphere of social hostility against the spending cuts, which has strained the political negotiation and the parliamentary vote. Wednesday's vote was cast amid a general strike on the streets of Athens. Papandreu is faced with tasks that are extremely complex in any country, such as reducing the size of the administration and dismantling a string of extremely onerous public companies that are highly unprofitable and inefficient.

Once Athens has accepted a painful fall in tax revenue, a loss of wealth equivalent to 15 percent of GDP, the European institutions (the Commission and the European Central Bank) must revise all of the criteria used until now to rescue a country. One of the pillars of the future bailout measures must be the voluntary deferral of the paying back of debt, in line with the plan accepted by the German and French banks last week. Complying with deficit objectives, in terms of the amount and timescale, must not become a handicap for economic growth, without which there can be no payback of debt, condemning the country to a spiral of indebtedness and depression.

Rescue models based on budgetary rigor do not work on their own. In a situation of economic asphyxiation, the rescued country usually ends up demanding more outside assistance, while the markets enter into an up-and-down phase of euphoria and depression, as the temporary problems are patched over. The second financing plan for Greece will be a good laboratory to experiment with more flexible formula that consolidate growth factors, not just for Greece but also for Portugal and Ireland; and what's more, consolidate the stability of Spain and Italy.