Greek Lawmakers Pass Austerity Deal

TWSJ: ATHENS—Greek lawmakers narrowly approved a multibillion-euro austerity package early Thursday in an effort to win more bailout funds, but the measures also threaten to deepen the country's brutal recession and destabilize its fragile politics.

In the hours leading up to the vote, violent clashes erupted between riot police and protesters as tens of thousands gathered in the square outside Parliament to voice their opposition as politicians inside debated legislation that would impose deep cuts in pensions and public-sector wages and clear the way for laying off thousands of civil servants.

 

The package, approved by a 153-128 vote, will deal a fresh blow to an economy whose output has shrunk by more than a fifth since the country's debt crisis began. The government says the cutbacks will contribute to a 4.5% contraction next year, but many economists argue the damage could be much greater.

 

Wednesday's measures are part of a deal struck between the Greek government and a troika of international creditors, and their passage is a critical step toward unlocking a long-delayed and desperately needed cash infusion of €31.5 billion ($40.2 billion).

 

Before the vote, Prime Minister Antonis Samaras admonished Parliament, saying Greece had no choice but to approve the conditions the European Commission, International Monetary Fund and European Central Bank demanded in exchange for further help.

 

"We are voting on whether we will continue to maintain our presence in the euro zone," Mr. Samaras said, promising that the cutbacks would be the last. "We should not play with our future in Europe."

 

Despite his call, more than a dozen lawmakers from Mr. Samaras's three-party coalition refused to back the measures in the vote just after midnight—a worrying sign for the coalition's future.

 

Passage of the €13.5 billion austerity package is a critical step, but not the only one needed to secure funding for the cash-strapped government. Greece's parliament must also approve a troika-approved 2013 national budget in a separate vote set for Sunday.

 

Bigger questions loom. Greece's creditors are arguing among themselves over whether more of the country's massive debt load must be written off for the rescue plan to be successful and over how to bridge a financing gap if Athens gets two extra years to meet its budget targets.

 

Euro-zone finance ministers are to meet in Brussels Monday to discuss the issues, but they are unlikely to reach a final decision, amid continuing divisions between the commission, the IMF and the European Central Bank.

 

Prices of Greek government bonds have been relatively stable, as investors bet that the country's new austerity measures will pass, easing fears of a renewed standoff between Greece and the EU of the sort that prompted fears this year that Greece would leave the euro.

 

But that confidence could wane. "Inevitably, more austerity will hit the economy hard," said Ben May, an economist at Capital Economics in London. "The economy will probably contract by more than the government expects."

 

How much more has become the subject of heated debate among experts at the IMF, the Commission and private-sector economists. On Wednesday, the Commission issued a report admitting it had misjudged the extent of the recessionary impact of past austerity measures, following a similar mea culpa by the IMF this year.

 

At issue is what economists call the fiscal multiplier: in this case, how much an economy will contract for every euro in spending cuts or tax increases. The issue has once again called into question whether the draconian austerity programs prescribed for Europe's vulnerable states—from Greece to Spain and Portugal—are the right recipe for getting ailing economies up and running again. Some economists said Greece's economy could shrink by between 6% and 9% next year after the new measures are implemented.

 

"In trying to fix the economy we are severely damaging society and causing political instability," said Panagiotis Petrakis, an economist at the University of Athens. That instability, in turn, "further weighs on the economy."

 

In a sign of the fragility of the current coalition government, the austerity package passed with a slim majority amid defections by coalition lawmakers who refused to support the plan.

 

Outside Parliament, police battled hundreds of hooded, self-styled anarchist youths in and around the square, firing tear gas and stun grenades as the protesters hurled rocks and Molotov cocktails. But the protests fizzled out as a driving rain soaked the Greek capital.

 

Meanwhile, inside Parliament, a stormy, all-day debate was interrupted by an impromptu strike by parliament workers objecting to a last-minute amendment by the government to bring their wages in line with the rest of the public sector. The government was forced to withdraw the amendment.

 

Public protests since elections here in June have generally been muted, but analysts fear that could change as the latest round of cutbacks bites and winter sets in, increasing the strain on households that can no longer afford adequate heating and other basic services.

 

"It's a critical time. We may be approaching the limits of public tolerance," said Mark Mazower, a Columbia University historian specializing in modern Greece and the Balkans. The critical issue, Mr. Mazower said, is "the delegitimization of the political class" in Greece.

 

Public-opinion polls show waning support for Mr. Samaras's conservative New Democracy Party and other mainstream parties viewed as having led Greece into its current mess.

 

Compounding that is the widespread public belief that the political establishment is unwilling or unable to take on vested interests and crack down on tax evasion by the wealthy and well-connected.

 

The Greek government's failure so far to pursue tax inquiries against any of the hundreds of Greeks on a list of Swiss bank-account holders has been a recent source of public consternation.

 

All this has fueled the popularity of groups at the extreme ends of the political spectrum, including the radical leftist Syriza party, which rejects the austerity measures and advocates ripping up the bailout agreement. Polls show Syriza now has the most support of any political party in Greece, having edged ahead of New Democracy. The ultranationalist—and vehemently anti-immigrant—Golden Dawn party, is now the nation's third-most popular.

 

Mr. Samaras, who says Greece is staggering through its version of the Great Depression, has compared the political situation to the years that marked Germany's Weimar Republic in the years after World War I, when rival left- and right-wing groups fought in the streets.

 

In some neighborhoods in central Athens and other Greek cities, clashes between Golden Dawn members and self-styled anarchist groups are becoming increasingly common—an unsettling echo of the turmoil in postwar Germany that led to Hitler's rise.

 

—Stelios Bouras, Nektaria Stamouli and Phlip Pangalos in Athens and Jenny Paris in London contributed to this article.

Write to Alkman Granitsas at Alkman.