EU bailout leaves Greece's structural problems unsolved

The European Union will lend Greece €110bn during the next three years, increasing the tax burden on ordinary workers instead of tackling the Greek economy's structural problems. By Eoin Ó Broin.

Greece is in trouble: on May 19, its government must pay an €8.5bn bill for money borrowed on the private markets 10 years ago.

But the Greek government is broke and can’t borrow any more from the private sector to pay its debts. It runs the risk of being the first developed capitalist economy to default on its debts in the current economic crisis.

As it is a member of the Eurozone, what happens in Greece will affect all member states using the Euro. Though Greek debt default will damage the Eurozone in general, it will have a particular impact on economies such as Ireland's, which have both higher levels of debt and weaker signs of recovery.

If Greece defaults, it could create a chain reaction that prompts market confidence in Ireland, Spain and Portugal to collapse. This would increase the cost of those governments' debts, making it more difficult for to pay the bills on time and increasing the likelihood of those nations defaulting, too.

So what has the EU decided to do?

In conjunction with the International Monetary Fund (IMF), the EU will lend Greece €110bn over the course of three years. In return, the Greek government will make significant changes in taxation, public spending and public sector employment.

The EU/IMF wants the Greek government to reduce its spending by 6.5% per year until 2014. With a GDP currently at -2.5% and no sign of recovery, this means a probable 9% contraction in the Greek economy during the next three years.

The EU/IMF also wants the government to reduce the size of the public sector by replacing only 1 out of every 5 jobs vacated by retirees.

The EU/IMF is insisting on across-the-board tax increases, as Greece has a very low tax take as a percentage of GDP.

Many commentators are blaming widespread tax evasion and reckless government spending for the Greek debt crisis. The only solution, they argue, is to raise taxes and cut spending. The EU/IMF agrees.

Another view is that government spending was not the cause of the budget deficit, but rather tax avoidance among Greek businesses and wealthy citizens.

Cutting public spending, reducing the public sector workforce and increasing the tax burden on ordinary workers will deepen the recession.

It will also punish low- and middle-income earners for the actions of political, banking and business elites.

While the Greek tax take needs to increase, as in the southern Irish economy, it should be done by ending avoidance and making wealthy citizens and business owners pay their fair share.

Long-term recovery, in Greece as in Ireland, can only come through government investment in job creation and in retraining the workforce.

This is what all the major European economies are currently doing, with stimulus packages being implemented by Governments in Britain, France and Germany.

Of course, the EU/IMF package for Greece is not about tackling the structural problems of the Greek economy. Rather, the Greeks are being sacrificed in an attempt to prevent contagion to the rest of the Eurozone.