Yesterday I joined in the Queen’s Speech debate on the economy. I wanted to draw attention to the gathering storms over the Euro. Time was limited, so let me add a few points.
Yesterday it seemed unlikely that Greece can form a government. New elections are likely to produce a government even more strongly against the current EU/IMF loan package and austerity requirements. If a government can be cobbled together at the last minute from the present Parliament, it will have to go to Brussels to request a change of policy.
There are three possible outcomes following the formation of a new Greek government demanding a change of tack. One is that the EU/IMF say they can give no more. They have twice negotiated this package, and have accepted one large write down of Greek state debt owned by banks and other private sector individuals, companies and funds. They could take the perfectly sensible view that allowing another lapse in conditions of the loan would simply lead to other countries demanding the same treatment. It would undermine the discipline the zone needs, and would send a signal to all that there is no need to meet solemn requirements entered into. Either Greece has to back down and try to do implement the agreement, or they need to move quickly to arrange an exit from the Euro on this option.
The second possibility is we have another temporary fix. The EU/IMF would heave a sigh and give Greece some formula to relax the demands a bit. Maybe more debt could be written off. Maybe the timetable for meeting the requirements for reform and budget deficit cuts could be extended. The ECB might issue yet more money to other worried banking systems to support other states in trouble. Just enough cash would be released for Greece to pay the basic bills and stave off full bankruptcy. It would remian a matter of time before we had the same crisis again.
The third possibility is the Euro area moves more swiftly to fiscal union, with the richer areas accepting their responsibility to send much more money by way of transfer payments to the poorer parts like Greece. It is difficult to believe Germany would be willing to do this. Mrs Merkel has just suffered a bad regional election defeat and is unlikely to want to have to tell her electors in the run up to the German General Election next year that they are going to have to pay a lot more tax to subsidise the weak parts of the Euro zone.
There is a paralysis in decision making at the heart of the zone. Just as this phase of the crisis blows up France is undergoing a major change at the top. The new central partnership of Merkel/Hollande is still to be developed. Mr Hollande will be pressing his domestic demands, fresh from the French election trail, at exactly the moment both need to concentrate on Greece. More people are now saying Greece has to leave the Euro, but there is still no clear sign that that has become the prevailing view of the main players. To do it they will need speed, confidentiality and united purpose. They will also need a Greek government to deliver the Greek end of it.
It seems most likely we are in for another round of brinkmanship and temporary expedients. The worry some commentators are now expressing is that talk of Greek exit could lead to yet more money being shifted out of Greek bank accounts. The more the political leadership of the problem drifts, the more damage the markets can do. The drain on Greek bank deposits so far has represented a further tightening of cash and credit for the Greek private sector, at a time when that sector needs more money to grow to start to ease the pain.