This week markets took fright at the mountain of money Greece wants to borrow to pay its government bills. It needs to borrow about the same relative to its National Income as the UK. The markets have pushed the price of Greek government bonds down, so Greece now has to pay twice as much interest as Germany to borrow the same number of Euros for ten years.
Greece cannot devalue within the Euro. The UK has already knocked one fifth off the amount it has to repay foreigners who lent it cash by devaluing by a fifth over the last couple of years. Greece is saddled with paying back Euros, which have been more stable against the strong currencies of the lending nations. There are five possible options for Greece from here:
1. Leave the Euro and devalue. That cuts the amount of real money they would need to pay back, would make their exports more competitive and their imports dearer, leading to a shift from consuming too much at home to working harder for foreigners abroad. They would still need to cut their deficit by cutting spending, as they would still need to borrow to pay some of the bills and they would no longer be able to offer Euros for repayment.
2. Stay in the Euro and accept the discipline of the club. They are meant to keep borrowing down to 3% of their income. Instead it has soared to 12.7%. They could cut their spending substantially, restoring confidence and limiting the amount they need to borrow.
3. The strong countries within the Euro zone could lend them the money they want to borrow on better terms than the market, or give them grants to see them through this bad patch. London sends grants and loans to Liverpool so they can stay in the same currency union, so why shouldn’t Munich send cash to Athens, say some single currency single Europe exponents.
4. There could be a deal. Germany and her friends within the Euro zone could agree a package, where Greece cuts her deficit by spending cuts and then is eligible for some grants, loans or subsidies to make up the rest.
5. They could all decide to do nothing. Greece would have to pay more to borrow internationally, and would gradually have to take action to curb the deficit. Otherwise the interest rate she had to pay might become so penal the markets forced a crisis, requiring action under one of the four options above.
I think Option one, leaving the Euro, is unlikely. Greece is keen to stay in, probably hoping for protection from her own folly by belonging to the larger club, and hoping against hope for more loans and subsidies from within. Whilst some in Germany and France might see going back to a core Euro as an attractive and more stable option, the overall balance of opinion in the EU is likely to want to keep Greece in. If Greece left, the positions of Spain, Portugal and some others would also be in question. It could lead to a messy unravelling of the wider Euro project.
I suspect Option 5 is also running out of room, as the markets are close now to forcing action to correct the deficit or to force a bail out for Greece.
I would think Germany unlikely to simply offer to fund the excessive Greek deficit. It would be an open invitation to all the other ill disciplined Euro members to run up big debts and ask the centre for easy money to pay the bills. It would also start to place too much strain on Germany herself, as Germany is not without her own economic problems.
So that leaves the two options of tackling the deficit herself or doing so with European help and assistance for meeting various targets.
The whole saga shows the folly of premature currency union without proper arragements in place for transfer payments and common fiscal policy. The Euro is becoming a system to try to impose discplined policies on the periphery, as Ireland, Greece, Spain, Portugal and even Italy have to keep reining in their excesses to live within the Euro scheme. Their reluctance to do so creates unemployment and lower incomes in each of them, and will generate a series of debt crises and economic crises as they push against the need to control spending.
Greece has a simnple choice. Either live with German discipline, or run a shambolic fiscal and economic policy and be at the mercy of markets. The Euro is not the frree lunch some members thought it was going to be. It does not give a right to badly run countries to borrow at German rates of interest. You cannot run a single currency successfully unless you first create a single country and gain acceptance for the fiscal and other economic policies from all the voters of the enlarged area. The fact that we kept the UK out of it will mean the Euro is spared the bigger crisis of containing within it a large unruly subject with very different economic characteristics from the rest. It has also spared us in the UK major steps on the road to being subsumed into a European country.I helped oppose the Euro for the UK as a believer in an independent Britain, but one of the arguments I used was our actions would also spare the Euro a massive problem.
All past European currency unions have failed. All past attempts to create a large country or bloc of countries out of smaller European states have also ultimately failed. The plight of Greece a small chapter in the stpry of this latest project. If Germany and France are serious about a country called Europe they need to come up with deal quickly to keep Greece in on tolerable terms to both sides. If they are not, the sore will fester and the markes will dictate answers. Watch this space, and expect some messy compromises.