Greece And Europe Face A Summer Filled With Unpleasant Choices

Greece's new coalition government faces growing calls at home to renegotiate the terms of the country's bailout package. Against this background are stern warnings by Brussels and Greece's euro zone neighbors that any deviation from the austerity plan could result in Greece's exit from the single currency.

The coalition government of Prime Minister Antonis Samaras once again on Wednesday publicly reiterated to the Greek people that the government would seek to renegotiate the austere terms of the bailout package. This follows a similar call in Samaras' first policy speech since taking office, this past Sunday, in which the prime minister indicated that Greece would seek to change the terms of the austerity measures worked out with the 'Troika' -- the European Union (EU), European Central Bank (ECB), and the International Monetary Fund (IMF). The prime minister warned then that the austerity conditions were smothering economic activity in the country.

Nonetheless, Samaras and his Finance Minister Yannis Stournaras were then publicly attacked this week, most notably by center-left coalition partner PASOK's leader Evangelos Venizelos, for failing to raise the renegotiation of the austerity conditions in discussions with Troika officials in Athens on Sunday and during Stournaras' visit to Brussels to meet his counterparts last Monday and Tuesday.

On Wednesday, following a tense meeting of the three coalition parties that support the government -- which include Samaras' New Democracy, the center-left PASOK, as well as another smaller left-wing group -- the government coalition's spokesman issued a statement that that government remained committed to renegotiating the austerity plan. The coalition, though, looks like it faces a rocky road ahead.

Most Greeks Want To Stay In Euro Zone, But On Less-Harsh Austerity Terms

Most Greeks do not want to exit the euro, but do want less-stringent conditions to allow for economic growth. A Greek exit from the single currency would be catastrophic for the country. In a recent study published by the National Bank of Greece estimated that an exit from the single currency would lead to a 22 percent decline in GDP, an increase in unemployment to 34 perent, a rise in annual inflation to 30 percent, and an initial devaluation of any new currency by 65 percent.

Europe however is in no position to maneuver given the financial fires it is putting out elsewhere. The arrangements widely applauded by markets and observers at the Brussels summit just two weeks ago, notably the decision to allow direct recapitalization of ailing banks, now seem to be inadequate. This week's successful approval of a bailout package for Spain -- and Spain's subsequent announcement on Wednesday of a €65 billion or $79.5 billion package of spending cuts and tax increases -- has been heralded, like previous agreements, by euro zone leaders and markets as a significant step. Yet, given how illusory past successes have proven, it is entirely possible that by next week financial markets may once again lose their confidence in Europe's ability to resolve the crisis.

Increasing Doubt About Euro Zone's Future

To make matters worse, euro-doubts are growing across the region. In Italy, former Prime Minister Silvio Berlusconi, who in late 2011 stepped down to allow a technocratic government led by Mario Monti to address the Italian crisis, is cleverly re-fashioning himself as an anti-euro nationalist candidate. He now promises to pull Italy out of the single currency. Support for the single currency is declining elsewhere, especially in Germany, where polls indicate that people do not support the euro if it means collective responsibility for the periphery countries' debt. Moreover, the direct bank recapitalization plan has prompted vociferous opposition on the part of many of Germany's influential academic economists and think tanks.

All this makes it that much harder for Greece's government to pursue renegotiation. On Thursday, the Greek government attempted to find an additional €11.5 billion in savings in order to strengthen its case for renegotiation. Nonetheless, there is still no guarantee that this will convince creditors.

The Greek government's unhappy dilemma remains. If Prime Minister Samaras is too insistent on the matter of renegotiating the austerity plan in order to promote economic growth, he runs the risk of inciting stronger calls for Greece to be shown the door. But if the Greek government again backpedals on renegotiation to avoid jeopardizing future bailout tranches and the Troika's goodwill, Samaras may risk a coalition collapse. Either way, Greece and Europe both face a summer of unpleasant choices.

Prof. David Felsen is a commentator and an Associate Professor of International Studies at Alliant International University in San Diego, Calif.

Felsen can be reached at: felsendavid@yahoo.com.

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