Italy inches away from Greece's cliff

By John Rapley

Take heart, Jamaica, it could be a lot worse. As painful as this season of austerity is for everyone, the country still isn't Greece. There, amid an economic implosion that has seen unemployment soar above 20 per cent, public-sector workers are being asked to take a 25 per cent cut in pay. And that's just to get things started.

Think about what it would be like to cut your pay cheque by a fourth at the end of the next month. Think of what it would be like if you couldn't even get a job at all. Think of a debt that has reached the point that the country is about to collapse under its weight. Think about a massive currency devaluation in the wings. Think of all that, and you would probably reckon the country is in crisis.

Well, yes. And no. The country is restive and Greeks are miserable. But there are still politicians carrying along like it's business as usual - which for Greece amounts to brinkmanship with its European partners. They have been here before, and have reason to believe that by continually buying time, foreigners will step in and meet them halfway.

Impossible bill to pay

It's not that the government isn't trying. It's that parliamentarians are gearing up for elections, and don't want to be tagged with unpopular policies. Besides, Greece has been engaging in shady bookkeeping for so long that the bill, now due, is all but impossible to pay anyhow. Even if the drastic austerity plan goes ahead, the country will probably not be able to get back on to a sustainable debt path.

Within weeks, the country will have to make a large payment on its debt. Should it fail to get the bailout funds its austerity programme is to unleash, it will miss the payment. It will then be in default, and exit from the euro may result. The ace up Greece's sleeve is that if it defaults, markets will panic and think Italy is next. Italy is too big to fail, and a run on its bonds could set off the next round of financial crisis.

But a game of chicken, backed by the threat of an Italian default, may not work this time. It wasn't just the Greeks who were buying time with these months of negotiations over a rescue package. So was the rest of Europe, which is to provide the rescue funding. By giving the Italians time to put their house in order, Europe's leaders may have created a situation in which, should the Greek bailout fall through, they can cut the country adrift.

When Silvio Berlusconi resigned as Italian prime minister, a short-term government of technocrats, with a mandate for sweeping reform, took office. To his credit, Berlusconi, who could have frustrated their progress, has stood by them. Italy's finances are improving. In the last few months, Greek bond prices have dropped so low, most investors have set aside the funds to cover their losses. And if Europe can let Greece go while Italy looks restored to health, markets may just be ready for a Greek collapse.

Who really holds the blade?

The Greeks are facing up to the old wisdom, made famous by John Maynard Keynes, that if you owe the bank a hundred pounds, you have a problem; but if you owe it a million, it has a problem. Greece is not too big to fail. Its power lay in its contagion, and if the Europeans have managed to quarantine the country, they may just cut it loose.

Being small has its advantages. But it has its drawbacks too. There is, of course, a better way to bailouts and endless austerity. Last week, London's Economist magazine cited the example of Jumbo, the Greek retailer. Faced with a collapse in sales, it had to cut costs by 20 per cent. Mass layoffs loomed.

Instead, in return for a pledge not to cut wages or jobs, Jumbo's employees agreed to work 20 per cent harder. Each store now operates with less staff, enabling the firm to open new branches and boost sales.

It works for governments as well. To date, though, Greece's unions are saying they have had enough of austerity.

John Rapley is a research associate at the International Growth Centre, London School of Economics and Political Science. Email feedback to columns@gleanerjm.com and rapley.john@gmail.com.