At the end of last week a wide ranging discussion about how to tackle the Greek debt crisis again led to German speculation that Greece was about to leave the Euro zone. The EU authorities moved quickly to deny that strongly.
Given that leaving the Euro and devaluing is not an option contemplated in EU circles, they are left with two other options. The first is to give or lend more money to Greece, in the hope that this will allow Greece to sort out her finances so that in due course she can carry on without access to extra EU money. The second is to find a way of allowing Greece to renege on part of her debt or to delay its repayment. The first route entails EU taxpayers paying more to keep Greece going. The second course involves bondholders, savers and banks who have lent Greece money, giving her relief at their expense.
Both of these approaches are based on a heroic assumpiton that this time round tiding Greece over for a bit longer would make all the difference, and she will then miraculously sort out her deficit after a long period when it simply got worse. It was this assumption that was behind the Spring 2010 EU loans to Greece.They were you may remember going to draw a line under the Euro debt crisis and solve the problems. This assumption was beind the agreement to extend the length of the loans in the autumn of 2010 when the package was renegotiated for the first time. Now it falls to be renegotiated yet again.
The truth is this model of financing a country and keeping it tied into the Euro system does not work. It threatens losses for the banking system of the whole Euro area, as European banks have been told by regulators to own more sovereign debt of Euroland countries. It is this very debt, thought to be a high class safe asset, that now is being buffetted by the markets and may not be repaid in full on time in the case of the weakest countries.
The UK should make it clear that any new Greek package is a matter for the Euroland zone alone, and should not allow general EU money to be used to perpetuate a myth that fiddling around with the terms and size of the borrowing is the answer to this problem. The answer for Greece is an economic policy that delivers growth, and more realistic levels of state spending.
We read that France is not keen to be more generous on the loans, whilet Germany seems to think tougher conditions on the very loans Greece wishes to relax would do the job for the third time of asking. There are limits to how long they can carry on trying to muddle through. The markets are not impressed, because they know the weaker countries of Euroland have to grow faster, generate more tax revenue, and cut spending sensibly. These countries need a work out, not a bail out. Being in the Euro makes their recovery more difficult. Having weak players in the Euro also makes the position of the stronger members of the Euro weaker. The richer countries will have to pay more of the bills of the weaker members if they are to keep everyone in the currency.