Greece’s deferred crisis

I am sitting in a busy café in Athens’s fancy Kolonaki district, watching the city’s elite stroll by in their well-fitting couture jeans, as the afternoon sun shimmers off the dusty streets. The women are weighed down by that most delightful of burdens — shopping bags from the local FENDI shop — and the latte I have just ordered comes at the recession-defying price of five euros.  

The regular demonstrations, which block the city centre and bring the police out in force, are now greeted with resignation rather than concern. It may take a little longer to travel home when the shops close -– which they do mid-day on Mondays, Wednesdays, and Saturdays (on Sundays they are closed all day) — but summer is on its way. If this is a city in crisis I am sorry that I did not visit in earlier Dionysian times.

Yet at the same time most people know the country is heading towards a severe crisis. Everyone I speak to have friends or relatives who have lost jobs and I am told shops are closing down everywhere. They will have to get used to it, because times will become a lot harder for Greece. Harder, I suspect, than many seem to understand.

Even after European ministers agreed to provide emergency loans to Greece, the situation is fragile. The deal will see €30 billion in loans. The Greek government is taking action to reduce its public deficit from 12 percent to 8 percent of GDP this year. Next week a team from the IMF arrives to examine the options for assistance under a multi-year program. But the country needs to raise about €11 billion by the end of next month to refinance maturing debt and interest charges. Its overall borrowing need for 2010 is €53 billion. Then there is the question of long-term recovery.

The problem is not just a one debt. Other countries have battled debt and lived to tell the tale, including post-World War America (which saw debt equal to 122 percent of GDP). But unlike the US, which dealt with its debt through growth and inflation, this is not an option for Greece because of the Euro. Greece’s costs and prices are out of kilter with the rest of the Eurozone and will have to come down.

But as Paul Krugman has written, that means “unlike postwar America, which inflated away part of its debt, Greece will see its debt burden worsened by deflation.” Deflation undermines any recovery – because the price of goods plummets, consumers delay purchases and consumption until prices fall further, which reduces economic activity – thus causing unemployment and potentially creating a deflationary spiral.

So, says the Nobel prize-wining economist, Greece “will have to deal with its debt in the face of an economy that’s stagnant at best.” That means the Greek government will have to cut spending, increase taxes and see the unemployment rate rise – exactly as the welfare net is hollowed out. In other words: the situation will become a lot worse. But here in Café La Vie, life, appropriately, goes on. The summer is coming and everyone seems content to postpone the crisis until at least autumn, preferably winter.