Hamish McRae: The real question now is what will happen to Italy and Spain

Economic Life: Unless and until Europe accepts that what is happening is not just the fault of Greece, then it too will remain in trouble

It goes on, doesn't it? And the longer it goes on, the greater the danger to the European economy and maybe beyond. Anyone running a business in the eurozone has now to accept that there are huge uncertainties about the future of the euro and plan for a range of outcomes to the present crisis. For this is not just about Greece; it is, more than anything else, about Italy.

Click HERE to view graphic

The Greek political story changes by the hour but the fundamental economic situation has not changed for months. None of the three rescue packages that the poor Greeks have been asked to accept is viable. None of them creates a pathway that the country can march along and find itself a solvent successful economy in five years' time. The present plan, presumably reinstated now that the referendum is off, leaves the country with debts that cannot be serviced. No amount of bullying by creditors (and there has been a deal of that in the past 24 hours) can make people repay money they do not have. So there will at some stage be a further acknowledgement that this bailout has failed. I presume this will be sometime in the first half of next year, if not before.

The greater issue will be what happens to Italy, and to some extent Spain. Neither has yet had to accept a formal bailout, though each is being supported informally by purchases of its debt by the European Central Bank. Nevertheless, Italian 10-year debt is now trading at 6.3 per cent, a level the country could not sustain, given its high public debt of some 120 per cent of GDP, the short maturity of that debt, and Italy's adverse demographic projections.

So the central issue facing eurozone authorities is not so much whether Greece keeps the euro or not (my own judgement is that it is likely to keep the euro for another few years) but rather whether Italy can regain access to the markets so that it can finance itself. You can have two reactions to this. One is to say that it is intolerable and irrational that a country that has carried high national debts for a long time, and which does not have a particularly serious running deficit, should suddenly be affected in this way. Italian personal debt is low by European standards and much of its national debt is held domestically. What has happened is that there has been a change in perception that is not matched by reality.

The other reaction is that Italy, like any other country, has to live in the world as it is, not as some people would like it to be. Investors have become progressively more risk averse and many asset-holders now would prefer to accept a lower return rather than accept those risks. It is a fiduciary thing. Can anyone handling other people's savings justify the possibility that they might find those savings subjected to a 50 per cent "haircut", as is happening in the case of Greece? You cannot say bankers were stupid to buy Greek debt three years ago and then expect them to buy the Italian equivalent now. To judge by the premium over German interest rates, buying Italian debt now is perceived as more risky than buying Greek debt was seen then.

So how bad is it? In the short-term the European Central Bank can puff things up and the modest cut in interest rates yesterday is helpful. But businesses, like everyone else, have also to plan for extreme outcomes, however unlikely they think these might be. One of those outcomes is the break-up of the eurozone; another is prolonged recession in southern Europe; still another is a wider recession across continental Europe.

What we do know is that a modest but apparently secure recovery in Europe is faltering. Several of the forecasts now coming through for 2012 show some growth is still expected in the eurozone as a whole, but both Italy and Spain will show minus numbers, France will do well to show any growth and German growth will be less than 1 per cent. The OECD numbers are slightly better than this and the new ECB data may also be a bit better, but the general perception is of a mild recession – remember you can have a technical recession of two successive quarters of negative growth, while still showing a positive number for the year as a whole.

Only a mild recession? The forward-looking indicator calculated by Goldman Sachs suggests yes: things will dip below the waterline in the fourth quarter this year (see graph) but there is as yet no sign of grave distress. The world economy as a whole will continue to grow, of course, while the US continues to manage some growth. The rising tide will pull up Germany and other export-oriented European economies and that, in turn, will give stability to the continental economy. Not great; but not dreadful, at least not yet.

The question that leads on from this is what, if anything, the G20 can do about this. Here, I think, we have to accept that the G20 is a different animal from the G7 or G8. A world where leadership comes from a variety of nations at different stages of their development and with different forms of governance is a different world from one dominated by a small group of developed countries. So leaders at previous economic summits could act in a cohesive way, not that they often did. But now they can't. At the height of the post-Lehman collapse they gave the impression of cohesive leadership but, in practice, nothing was happening collectively that would not have happened on a piecemeal basis. I don't think we should dismiss the smoke-and-mirrors element of economic summits because impressions do matter. Nor should we exclude the possibility of cohesive action should the developed world plunge into another recession. But the mood at the G20 seems to be that this is a European problem, and specifically a eurozone problem, so it is up to the eurozone high command to fix it.

Our Prime Minister went into rhetorical overdrive yesterday, saying: "We face profound difficulties – unprecedented in our lifetimes – which have cast a pall over the advanced and emerging economies alike."

Well, no. I don't know who wrote that stuff for him but it is demonstrably wrong. China and India are both expected to grow at 8 per cent a year or more this year and do not face recession at all. Both countries have experienced much more serious economic problems during Mr Cameron's lifetime, youthful though he may be. Ditto Brazil; ditto Russia. Unless and until we in the developed world accept that we created these problems for ourselves it will be hard to fix them. And unless and until Europe accepts that what is happening is not just the fault of Greece, then it too will remain in trouble. As for the UK, we may well scramble through the coming months without tumbling into recession, but this "unprecedented in our lifetimes" business does not help.

Start your day with The Independent, sign up for daily news emails
Nick Clegg on the campaign trail in Glasgow on Wednesday; he says education is his top priority
peopleNick Clegg remains optimistic despite dismal Lib Dem poll ratings
Arts and Entertainment
Buttoned up: Ryan Reynolds with Helen Mirren in ‘Woman in Gold’
filmFor every box-office smash in his Hollywood career, there's always been a misconceived let-down. Now he says it's time for a reboot
Actress Julianne Moore wins the Best Actress in a Leading Role Award for 'Still Alice' during the 87th Annual Academy Awards in Hollywood, California
Ross Barkley
footballPaul Scholes says it's time for the Everton playmaker to step up and seize the England No 10 shirt
'We will fix it': mice in the 1970s children’s programme Bagpuss
Life and Style
2 Karl Lagerfeld and Choupette
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Graduate Recruitment Resourcer

£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

Recruitment Genius: Telesales Executive - OTE £32,000+

£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Day In a Page

War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

War with Isis

Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
Scientists develop mechanical spring-loaded leg brace to improve walking

A spring in your step?

Scientists develop mechanical leg brace to help take a load off
Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

Peter Ackroyd on Alfred Hitchcock

Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

Ryan Reynolds branches out in Woman in Gold

For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
Why Robin Williams safeguarded himself against a morbid trend in advertising

Stars safeguard against morbid advertising

As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

UK horticulture industry facing skills crisis

Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
Hack Circus aims to turn the rule-abiding approach of TED talks on its head

Hack Circus: Technology, art and learning

Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
Sevenoaks is split over much-delayed decision on controversial grammar school annexe

Sevenoaks split over grammar school annexe

If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
10 best compact cameras

A look through the lens: 10 best compact cameras

If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

Paul Scholes column

Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
Why Michael Carrick is still proving an enigma for England

Why Carrick is still proving an enigma for England

Manchester United's talented midfielder has played international football for almost 14 years yet, frustratingly, has won only 32 caps, says Sam Wallace
Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

Tracey Neville is just as busy as her brothers, Gary and Phil

The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?