Papandreou's first challenge will be to remain in power. His acceptance of the austerity measures has pleased EU officials and the IMF, but has left large segments of the Greek population angry. Public opposition is mounting rapidly, and riots have already
left three dead. Polls show that over 70 percent of Greeks oppose the government seeking help from the IMF. Moreover, 68 percent said they were not prepared to make "sacrifices" -- a huge increase from last month's 30 percent. Nationwide strikes organized by civil servants have already paralyzed the country this week, and more protests are expected to come.
Moreover, the prospect of IMF and EU intervention in the Greek economy has triggered the rise of nationalist sentiment. As a result, the Papandreou administration risks being perceived as controlled by "foreign forces," as one protestor put it. Such a view, if it takes root among the public opinion, could prove lethal to the government's resilience. Careless remarks from European leaders could help ignite these sentiments, even if IMF officials have learned to remain more circumspect.
At the party level, the governing socialist PASOK appears to be increasingly isolated. In previous weeks, it was expected that the opposition center-right party, New Democracy, would back the austerity measures advanced by the government. However, in the face of public resistance, New Democracy's leader, Antonis Samaras, has given hints that the party will oppose the deal, which is to be voted on in parliament later this week. So far, PASOK remains united in backing Papandreou. However, tensions within the party could increase as public opposition mounts. A drift within PASOK would prove a serious challenge for Papandreou's government.
The second major test will be to regain market confidence without, at the same time, choking the economy. The government's austerity program follows along the same lines as previous IMF rescue packages: an increase in taxes and efforts to curb tax-evasion, combined with generalized cuts in the public sector. The measures will reduce economic growth in the short term. Last year, Greece's GDP fell 2 percent, and a further decrease of 6 percent is expected between 2010 and 2011. Already, the government announced that no economic growth should be anticipated before 2012.
However, long-term stagnation could result from an austerity program that focuses on reducing the public deficit, but not necessarily on creating the conditions for economic recovery. With increased taxes and reduced salaries, Greeks will find it harder to save, which is one of the prerequisites for investment. Moreover, credit is likely to remain strapped as doubts continue over the long-term viability of the plan, as well as the EU economy as a whole. With a shortage of credit and savings, investments are likely to remain low, preventing economic recovery. In turn, a shrinking economy will impact tax collection, making it harder for the Greek government to reduce its deficit and make interest payments -- let alone reduce its debt, expected to reach 150 percent of GDP after the implementation of the plan.
On the bright side, if the Papandreou administration manages to convince the markets that it is serious about reaching the 2014 objective of reducing the deficit to less than 3 percent, interest rates may fall, easing the flow of credit and helping to revive the economy. Over-reliance on credit, however, has its risks, as demonstrated by Greece's trajectory over the past decade, when easy access to money allowed a spending spree that ultimately led to the current debt crisis. A sound economic recovery should be based on savings and credits being spent on investments, instead of on consumption. The Papandreou administration will have to tread a fine line: Raising taxes will lead to reduced saving and investment, while leaving them untouched will threaten the government's ability to reduce the public deficit and improve access to credit.
The middle path chosen by Papandreou will require considerable political skill, which so far has not been on display. In the early stages of the crisis, Papandreou showed naiveté regarding the functioning of the markets when he casually stated that the economy was "in a state of emergency" and the pension system was a "black hole." Unsurprisingly, markets did not welcome such an outburst of sincerity and punished Greece by downgrading its creditworthiness. Even though the statements were true, it would have been wiser to cut the deficit without attracting the attention of the markets and media. Other heavily indebted countries in the EU that handled their financial disciplinary measures more discretely have managed to avoid steep increases in their interest rates. Bluntness and sincerity are not necessarily virtues when dealing with a nation's financial problems.
A great deal hangs on Greece's fate. In a moment of looming fears about contagion to other countries such as Spain and Portugal, a successful management of the Greek crisis could set an example for the rest of Europe at a time when it is most needed.
**Nicolas Nagle is a freelance journalist based in Brussels. He has worked for a number of Latin American news outlets and for the International Crisis Group.
