ATHENS — Deeply indebted and nearly bankrupt, this Mediterranean nation was forced to adopt tough austerity measures to slash its deficit and secure an international bailout. But as Greece’s economy slides into free fall, critics are scanning the devastated landscape here and asking a probing question: Does austerity really work?
Unemployment has surged to 18.8 percent from 13.3 percent only a year ago. Overburdened public hospitals are facing acute shortages of everything from syringes to bandages because of budget cuts, with hiring freezes forcing the mothballing of operating rooms even as more unemployed are relying on the public health system. Rates of homelessness, suicide, crime and HIV cases from intravenous drug use are jumping.
Greece has been forced to cut spending and raise taxes in the middle of a severe downturn, slashing pensions as well as state salaries, jobs and services. As public confidence has evaporated, consumer spending — the biggest driver of the economy — has plunged, generating cascading losses at private firms. The result is a dizzying economic plummet and social crisis that is bringing the cradle of Western civilization to its knees.
“Conditions have deteriorated so dramatically that doctors in this country now believe that the Greek crisis is no longer just a financial crisis but a humanitarian crisis,” said Dimitris Varnavas, the president of the Federation of Greek Hospital Doctors’ Unions.
The economic pain here is intensifying the debate over how to fix Europe’s fiscal woes, potentially influencing U.S. policymakers as they chart their own course to cut the deficit.
On Monday, German Chancellor Angela Merkel and French President Nicolas Sarkozy turned up the heat on Greece, suggesting that its bailout deal is in danger of unraveling if Athens does not press ahead quicker with pledged budget reforms and seal a deal with bondholders to voluntarily restructure its massive debt. But they also acknowledged that new steps are needed to combat slowing growth in the euro zone, where economists fear a looming regional recession as other indebted nations from Italy to Spain to Ireland also make deep spending cuts to reassure worried investors.
Greece, proponents of austerity say, has no one to blame but itself. After a decade of excessive borrowing and spending, evidence emerged in late 2009 that Greek officials had lied about the extent of the country’s whopping deficit. That lighted the first sparks of the European debt crisis, touching off a firestorm of investor panic that spread across Europe and is jeopardizing the global economy.
European powers, led by fiscally conservative Germany, have been insisting that Greece correct years of mismanagement by enacting swift waves of cuts and other major economic reforms to regain the confidence of investors and ensure the integrity of the euro. Slashing the deficit quickly is essential to ushering in a sustainable future, they have argued, and the resulting social pain is necessary to impress on Greek politicians and society that such excesses should never happen again.
Fueled by borrowing and overly generous government handouts, Greek living standards, they argue, became artificially high. As the standard of living and average wages here shrink dramatically, supporters of quick cuts say, Greece will also become more globally competitive. This month, Greece is set to negotiate a second, more sweeping bailout — valued at $175 billion — that could bring more cuts, force a reduction of wages in the private sector and compel the country to make good on promises to slash tens of thousands of public-
But increasingly, critics of the quick-cuts theory are pointing to the worsening recession here as evidence that the medicine is killing the patient, with the nation’s sharp, sustained decline leading some economists to suggest that the country has entered a more serious depression. Some are calling for more-staggered cuts, an increased focus on modernizing the economy, and tax incentives — as opposed to recent tax increases — that could spur growth or at least ease the downturn.
“This idea of cut, cut, cut and tax, tax, tax is not going to work,” said Andonis Papagiannides, an economist and editor of Greece’s Economic Review. “It has sent Greece into a depression with no end in sight. They want milk, but you don’t get milk by killing the cow.”
Athens’s ‘new poor’
To glimpse Greece’s spiral, step inside the Klimaka homeless shelter and soup kitchen in the center of this ancient capital. Here, the proprietors say, you can tell the newcomers by their clothes.