Today’s meeting of the EU’s heads of government was supposed to be a fairly relaxed affair. The leaders were to ponder the future of the European economy over the next decade or so and work out strategies for improving the prospects. But, as so often, the meeting has been hijacked by a more immediate crisis: what to do about Greece.
The parlous state of the Greek economy and especially of the finances of its government is not really news. The country has long been a byword for wasteful public spending, lax tax collection, economic inefficiency and corruption. But when the new socialist government, elected last autumn, raised its hands and confessed that things were far worse than previous governments had been prepared to admit, the world started to take serious notice. Greece became a crisis.
In short, the Greek government is facing a financial deficit this year amounting to nearly 13% of national income. The total weight of its debt is likely to be around 120% of annual national income. Its credit rating has collapsed and the interest rate it has to offer to persuade the money markets to lend it the necessary funds has soared. There are fears that if Greece cannot find lenders to refinance its existing debts it might even default on those debts.
It is, of course, hardly the first time that a government has found itself facing such problems. And there is an established way of handling them – call in the International Monetary Fund (of which Greece is a member). The way it works is simple enough to explain, though far harder to execute. The IMF provides a long-term loan, so stabilising the economy in question and protecting it from speculation. In return, the IMF insists the errant country takes measures to get its house in order so that the economy can strengthen again, allowing the loan ultimately to be paid off.
The necessary measurers are essentially threefold. First, the government has to get its own finances under control. That usually means swingeing cuts in government spending and tax rises – just what Britain had to do when it was bailed out by the IMF in 1976. In Greece’s case, even before any suggestion of applying to the IMF has been made, the government has started to go down this road. It has announced its own plan to get its deficit down to 3% by 2012. This is so ambitious that eyebrows have been raised as to whether the government can actually achieve it, but it is already setting about axing public spending.
The second measure is to make the economy more efficient and competitive. Bluntly that means, among other things, cutting costs and that in turn means cutting wages and getting workers to work harder.
It is hardly surprising that the combination of spending cuts, tax rises and lower wages is causing outrage among the Greek population. This week’s public sector strikes and the angry demonstrations on the streets of Athens seem likely to be only the beginning of a period of protest and even, perhaps, political upheaval. People ask why it is that they should be having to pay the price for economic and political failure for which they do not see themselves as being responsible.
But there is a third measure which the IMF usually insists on when bailing out a country in trouble: it must devalue its currency. The reason is simple: devaluation discourages imports by raising their price and, even more importantly, helps a country to increase its exports by making them cheaper abroad. And by exporting more the country is able to get back on its feet.
In the case of Greece, however, devaluation is not possible because the country gave up the drachma when it joined the eurozone and adopted the euro. Only by leaving the eurozone could it devalue and that would be fraught with so many risks of its own that it is virtually unthinkable.
But it is because it is tied into the eurozone that Greece’s problems have become the EU’s. Hence the emergency of today’s meeting. What should the EU, and especially the eurozone, do about Greece?
It seems that other members of the eurozone have already decided that one thing that shouldn’t happen is for Greece to go and seek the help of the IMF. It would be tantamount to the eurozone itself having to be bailed out by the IMF, they say, and that is too humiliating to imagine. So if any bailing out has to be done it has to be done by other members of the eurozone. Ultimately that means Germany and France, the two biggest economies in the zone.
They may want to do this anyway since their own banks would get hit if Greece did end up having to default. But the problems entailed in such a bailout are many. In the first place, it would be Germany rather than the IMF which would become the focus of Greek public anger, as the author of the hardships being forced on the country. Secondly, bailing out Greece would probably not be the end of the story. Portugal and Spain also face daunting financial problems: helping Greece would create a precedent for helping them.
But most of all, a eurozone bailout of Greece would not solve the problem of how Greece could then grow its way back to prosperity when the devaluation weapon is not available to it. Most of Greece’s trade is within the eurozone itself and it is there that it is becoming increasingly uncompetitive. Without devaluation it can cut its costs only by reducing domestic wage bills even more savagely. And in any case the more prosperous parts of the eurozone, such as Germany, show no signs of increasing their levels of demand as would be necessary if Greece were to have any chance of increasing its exports.
In short, then, an EU bailout of Greece seems unlikely to be sufficient really to help Greece out of its difficulties. Some commentators are arguing that the only solution is for the eurozone to go beyond its current merely monetary union and become a full economic and political union in which the main economic policies are decided at the centre and small, peripheral economies such as Greece become much more dependent on subsidy by a centralised European government, rather as less productive parts of the British economy, such as the north east and Wales, are provided with proportionately higher levels of public spending than other parts. But that essentially turns the eurozone into a single country.
Where does Britain fit in all this? Gordon Brown has said that Greece’s problems are not ours because we did not join the euro. They are for the eurozone to sort out and that the IMF option should not be ruled out. But though these problems may not be ours we could well have our own before long. The British government’s own deficit this year is likely to be 12% of national income, only just less than Greece’s. And many economists are arguing that if this or the next British government does not get the deficit under control soon we could find ourselves in the spotlight just as Greece is now. The Greeks are certainly not alone in facing pain.
What’s your view? How do you think Greece should deal with its problem? Do you think its plans to cut its deficit are realistic are do you think they will founder in the face of public protest? Do you think such protests are justified or not? Should Greece seek an IMF loan or not? Should it stay in the eurozone or not? Should other members of the eurozone bail it out or not? Should other members of the EU, such as Britain, help out too? Do you think the eurozone should turn itself into a fully integrated economy with a centralised economic as well as monetary policy, or not? And how worried are you that Britain may be facing similar problems to those confronting Greece already?
