Vicky Pryce: Greece's agony and now Spain's

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The Independent Online

General strikes, violent protests in the streets –Greece is in turmoil again. And yet a lot has changed since the last serious riots which the whole world followed anxiously on their television screens. The fall of a well-known charismatic and urbane, Socialist prime minister George Papandreou, scion of a dynastic family that had dominated Greek politics for decades. Then a technocratic government for a while that negotiated Greece's second bailout, and two elections.

The first was inconclusive, reflecting the strength of feeling after many years of hardship. So in May the people voted in protest, leading to a rise in popularity of extreme left and extreme right-wing parties but managed second-time round in June to end up with a coalition of the centre. The result was a strange alliance, involving what had been, until recently, the two leading parties of centre left and centre right that had ruled Greece practically uninterrupted for decades. But by voting the way they did, the Greeks had given a signal that, though they were overwhelmingly in favour of staying in the euro, they wanted the harsh austerity medicine to be eased. Five years of economic decline had left the country riven with serious social and political tensions.

The new centre right-led government was given the mandate to renegotiate the terms of the austerity package, but the men in charge, particularly the new Prime Minister, Antonis Samaras, and his technocratic Finance Minister, the respected Yannis Stournaras, have been trying to convince other European governments and the International Monetary Fund that they can effect change.

The Greeks have not been the most straightforward negotiators, which has caused a lot of frustration. But even if the will were there it is a sad truth that the Greek administrative system is very inefficient and in need of a substantial shake-up to move into the 20th, let alone the 21st century.

So little gets implemented. And this isn't helped by the fact that the Greeks have the reputation of being lazy, enjoying huge perks and generally not keen to pay their taxes. Yet people forget that (if one believes the statistics) Greece has the longest working hours in Europe and the Germans – whose population by and large believe that the Greeks should get no more financial help – have among the shortest working hours, though obviously are hugely more productive. It is also true that tax revenues are low as the culture of not trusting the state to spend your money is rife – as is a general dislike of politicians who are believed to have long-exploited the system to line their pockets. This type of inherent mistrust will take time to change.

And yet there is a positive side: the country achieved a very substantial cut in its deficit in year one of the crisis. This fell from 15 per cent of GDP to 10 per cent between 2009 and 2010 before the markets started worrying about the debt level and then Greece was no longer able to borrow in the international bond markets. And it is now likely to move to a primary surplus next year – in other words current spending and revenues may well move into balance in 2013.

Some progress indeed, but not much to cheer about as it will be achieved mainly through further cuts in wages and salaries and by not paying contractors. In an economy that is declining very rapidly – by 17 per cent in the last four years, probably contracting by a further 6 per cent in 2012 – raising enough tax revenue is difficult as companies are going bankrupt with the unemployment rate standing at around 25 per cent, a trebling over four years. Youth unemployment is over 50 per cent.

A lot can be said against Greece and its politicians. But it is clear that the country is not unique within the eurozone in the problems it is facing. Spain, the fourth-largest European economy, is currently trapped in a major banking crisis and possibly about to ask for a proper bailout and not just for its banking sector. It has a similar unemployment rate to Greece and has also been hit by strikes and demonstrations as it unveils further cuts on top of the €60bn announced in the summer. Both countries are in recession and facing drops in GDP this year and next – and both need to restructure and liberate their economy.

Spain is only just now beginning to impose austerity measures that are raising taxes, hitting welfare, unemployment benefits, pensions and public-sector wages. Greece has already seen cuts of between 25 and 30 per cent in public-sector wages and in pensions, trends which are now being mirrored increasingly in the private sector. There will be even more hardship to come if the further €11.6bn cuts that the "Troika" is demanding materialise. Spain has done little of that so far and the pain will be felt increasingly in a country which has had one of the most generous welfare and unemployment benefits in the developed world.

So developments in Greece will remain important despite the country only accounting for some 2 per cent of Europe's GDP. What happens in Athens moves the markets globally. The heads of the various parties are now household names in most parts of Europe. But we also now know clearly why Greece mattered so much. It is not because it is just such a thorn in the side of the Europeans. It is because Greece is a symptom of what was wrong with the original concept of the single currency, which was one of joining together countries under in a monetary union which were not in an "optimal currency area".

Since the introduction of the euro, the southern Europeans basked in a sea of cheap credit financed by banks in northern Europe. This allowed them to purchase at will from their neighbours, ignoring the need to improve their own productive capacity and competitiveness. While the going was good the need for structural reforms to ensure sustainable growth was forgotten and when the financial crisis hit there was little to fall back on.

The sad truth is that with the eurozone malaise spreading, the measures so far to contain contagion have been inadequate. The enormity of the task has been consistently underestimated. By imposing more austerity, prevaricating and going back on decisions already made, European leaders are in danger of sowing the seeds of the eurozone's destruction.