Deflation_Could_Stall_Efforts_to_Revive_Greece_in_Debt_Crisis

Deflation_Could_Stall_Efforts_to_Revive_Greece_in_Debt_Crisis

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Deflation Could Stall Efforts to Revive Greece in Debt Crisis By STEVEN ERLANGER Published: May 2, 2010 PARIS — Greece , effectively bankrupt and with a European gun to its head, committed itself to years of austerity on Sunday when it signed a financial bailout deal with the European Union and the International Monetary Fund . But there are serious questions about whether the deep cuts in salaries and benefits the agreement calls for are politically sustainable over time, even as deflation will make it impossible for Greece to grow its way out of debt. There is a consensus that the Greek economy is broken and needs major structural reform, and the deal done on Sunday is intended to give Athens a couple of years of breathing room to change the fundamental pattern of Greek behavior. The government is now committed to whack back the public sector, including pensions and popular social benefits; to raise consumption taxes to record highs; and to promote tax reform, in an effort to shrink the enormous black market, reduce tax evasion and increase government receipts. Some influential economists, however, fear that such harsh measures risk killing the patient, even as they see the intensity of Greek pain as a serious warning to other countries that use the euro to get their own economies in order before the currency union itself is undermined by rampaging market speculation. This new wave of austerity also risks pushing the entire European Union into a period of artificially low growth just as economies are trying to recover from the recession of last year, caused by the huge housing and banking crisis that started in the United States. Negative or low growth will increase already sizable unemployment and put new pressure on government spending, as well as on the banks themselves, and make it harder for everybody to reduce their
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Deflation_Could_Stall_Efforts_to_Revive_Greece_in_Debt_Crisis

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