Crunchtime for Greece and the Euro

November 04, 2011, 12:53 PM UTC

Events are moving so fast in Greece and the Eurozone that there is no saying where we will all be a day from now, let alone a week or a month. For all I know, the Greek government may well have fallen by the time I finish writing this article. But what does the current dangerous turmoil in Europe mean for the long-term – for how its economies and its politics should be run? And what are the implications for Britain?

The outlines of the Greek crisis are well known. Greece cooked the books to get into the euro. It then exploited the very low interest rates that became available to it to go on a binge, stacking up enormous debts it now cannot pay. It has run out of money. Its European partners are prepared to bail it out, write off half its debts to European banks and lend it more money. But, in exchange, they demand that its government impose severe austerity on the country for years to come and install EU bureaucrats in all the important ministries in Athens to make sure the country is run properly, its taxes are collected and its people stop free-wheeling on others.

Unsurprisingly, this plan has come up against massive public opposition in Greece. Ordinary Greeks don’t see why they should have to pay such a heavy price to get out of a crisis they blame on politicians in whom few have little trust. The country that invented democracy jibs at the prospect of, in effect, being run by foreigners. And most of all, Greeks do not see why they should suffer yet more hardship, in terms of wages cut, jobs lost, pensions decimated and services axed when the only effect of these policies seems to be to send their economy into an even faster spiral of decline, with no realistic hope that it will ever get any better.

Earlier this week the Greek Prime Minister, George Papandreou, stunned the world by coming up with a plan to let the Greek people decide whether or not the bailout plan agreed between his government and the big boys in the EU and the International Monetary Fund should go ahead. He would hold a referendum on the plan early next month.

This caused apoplexy among the Eurozone’s leaders, notably President Sarkozy of France and Chancellor Merkel of Germany. They summoned Mr Papandreou to Cannes, where world leaders were gathering for the G20 summit, to give him a dressing down. How could he have the temerity to ask the Greek people to endorse a deal his own government had signed up to only a week before? It would cause delay, uncertainty, chaos and panic. The financial markets would go ballistic. Even if it was Greece’s sovereign right to hold a referendum on the issue, Greece would not get a single euro of help until the country had agreed to the deal and Greek voters should realise that any referendum was tantamount to choosing whether or not to stay in the euro at all.

The effect of this demarche was to get Mr Papandreou to back down and the main Greek opposition party, which had hitherto opposed the deal, to do a U-turn and promise to back it in a vote in the Greek parliament. Whether any government will survive to implement the deal remains to be seen.

But is the bailout a good deal that the Greeks should just swallow? It’s not just angry and desperate Greeks protesting on the streets of Athens who think it is not. Plenty of respectable commentators think it is bad economics and worse politics. The veteran Financial Times columnist, Sir Samuel Brittan, has written that were he to have a vote in such a referendum, he’d vote ‘No’.

The reason for this scepticism is that the deal, it’s argued, offers only austerity and persistent economic decline. There is no mechanism within it to restore Greece’s competitiveness. The country’s real problem is that it has become uncompetitive, especially with its fellow Eurozone members, notably Germany. Trying to cut its costs and reduce its debts provides an insufficient means to regain its competitiveness. When the IMF helps out countries that get into similar problems, it certainly demands such belt-tightening measures but it also requires such countries to devalue their currencies so that they can grow their way out of trouble through increased exports. But this is denied to Greece because it is within the euro.

That’s why such sceptics think there is no future for Greece unless it leaves the euro. No one denies that in the short term this would create mayhem: there would be a run on Greek banks, Greece’s new currency would collapse against the euro it had left, causing inflation to soar, and many businesses would go bust. But in the long-run, the argument goes, it’s the only way that offers any long-term hope.

Up to now, Eurozone leaders have resolutely refused to countenance the very idea that any member country should leave the euro. There is no legal mechanism for them to do so, they have argued, and any exit would threaten the future not only of the euro but the EU itself. That, however, has all changed this week. By airing the possibility of a Greek exit, Mr Sarkozy and Mrs Merkel have crossed a Rubicon. Being a member of the Eurozone need not be forever, after all.

But there is a big problem with this. If the idea of Greece leaving the Eurozone is now acknowledged as a real possibility, why should that possibility not also exist for other countries facing big financial and economic difficulties, like Italy? The very hint that this might now be an option is likely to have a huge impact in financial markets. Investors, for the first time, are going to think that it is no longer the case that an Italian euro, say, is the same as a German euro. The consequence is likely to be a run on countries thought vulnerable as investors switch their money to dependable Eurozone countries, like Germany. This could create even bigger turmoil than we have already seen.

The only way for this to be avoided is for Germany to bite the bullet. That means stating clearly that it will do everything needed to keep the Eurozone intact. In specific terms, it means accepting what it has so far resisted, that the European Central Bank should massively intervene to buy up the debt of vulnerable countries, such as Italy. And it means too that Germany should be willing to permanently subsidise countries within the Eurozone that are unable to make themselves competitive with the mighty Germany. Both require the German taxpayer to foot a hefty bill but, at least for the moment, German public opinion is overwhelmingly opposed to the idea.

So in essence the crisis comes down to this. There is a dangerous stand-off between two public opinions. On one hand are the Greeks, outraged that they are being offered a future of unremitting austerity and hardship as the price for being in the Eurozone club. On the other are the Germans, horrified at the idea that they should pick up the tab to allow what they regard as feckless countries to remain in the Eurozone. This is how a financial and economic crisis is turning into a very serious political one.

Eurosceptics in Britain perhaps understandably say: ‘We told you so’. In their eyes the whole euro project was always far too ambitious or, at the very least, premature – like building a house by starting with the roof, as one of them put it. It was an elite project that was always going to come unstuck in the face of public opinion.

Be that as it may, the Eurozone is now where it is. What does it mean for Britain, outside the euro? In the short-to-medium term, the unavoidable uncertainty and anxiety within Europe will hit our own prospects for economic growth, since Europe accounts for half of our export market and that market looks set on renewed recession.

In the longer term, it all depends on how the Eurozone deals with its crisis. If it breaks up, Britain will in one sense face the sort of Europe it has always preferred, a Europe of nation states rather than the embryonic United States of Europe it has tried to resist. But the economic cost of such a break up could be very harmful to Britain’s own economic prospects. If, on the other hand, the Eurozone steps back from the brink and resolves to turn itself into a much more centrally-controlled fiscal union, as well as a monetary one, then the economic consequences may be better for Britain, but it will find itself within a EU where more and more of the decisions are taken by a Eurozone from which it is excluded.

David Cameron’s Government clearly prefers the second option. The chancellor, George Osborne, has encouraged Eurozone leaders to opt for closer fiscal union as the ‘remorseless logic’ of monetary union. The Prime Minister hopes he can then counter the growing influence of the Eurozone by creating an equally influential group within the EU of those countries outside the EU. How much influence he, or any EU leader, can have on the course of events is a matter of some doubt, however. The events of the last week have led many commentators to conclude that political leaders and policy makers may be losing control of a very dangerous sequence of events.

What’s your view?

  • Do you think the Greeks should have been allowed their referendum?
  • Do you think the bailout deal is good or bad for Greece?
  • Do you think Greece should leave the euro or not?
  • Do you think the Eurozone should be allowed to break up, leaving only a core able to live with its disciplines, or not?
  • Should Germany bite the bullet and be ready to turn the Eurozone into a full fiscal and economic union ultimately underwritten by German taxpayers?
  • What should Britain be advocating?
  • And what do you think would be best on the long-term interests of Britain: a break-up of the Eurozone, a closer economic union with Britain outside, or a fully integrated Eurozone with Britain as a member?