Greek MPs are reluctant to vote for latest austerity measures – but without them the government will be unable to pay its bills
It's easy to see why many Greek MPs are reluctant to vote for the latest austerity measures demanded by the International Monetary Fund, the European Union and the European Central Bank. The economy is still shrinking after a five-year slump, so the idea of further slashing demand hardly appeals. Yet without the austerity Greece will not get the next tranche of its bailout, leaving the government unable to pay its bills. The words rock and hard place spring to mind.
Despite mounting public unrest, Greece is trying to make itself more competitive by cutting wages, pensions and welfare benefits. This process, internal devaluation, is the only logical policy for countries that reject the traditional remedies: making the currency cheaper or defaulting on its debts.
This was the approach followed by Argentina just over a decade ago, when it found pegging the peso to the US dollar a crippling burden. South America's second biggest economy enjoyed several years of strong growth after it ended dollar convertibility and welched on its debts. Most of the country's creditors agreed to take a substantial haircut but a hardcore group held out for claims to be paid in full. Last week, their case was upheld in a New York court.
Even if Argentina has to pay the vulture funds in full – and it is currently expressing defiance – Buenos Aires might still argue that devaluation and default in 2002 was better than the alternative. Greece may eventually come to the same conclusion, but Argentina's experience shows that for Athens it is a question of choosing the least bad option. There are no unambiguously good ones.
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