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
Voices
Lucerne’s Hotel Château Gütsch, one of the lots in our Homeless Veterans appeal charity auction
charity appeal
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France
tv
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
PROMOTED VIDEO
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
News
i100
Travel
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
News
ebooksNow available in paperback
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Life and Style
tech
Sport
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Voices
Jimmy Mubenga died after being restrained on an aircraft by G4S escorts
voicesJonathan Cox: Tragedy of Jimmy Mubenga highlights lack of dignity shown to migrants
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

$125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Day In a Page

Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas
La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

Deaf community outraged by La Famille Bélier

The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
10 best high-end laptops

10 best high-end laptops

From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
Susie Wolff: A driving force in battle for equality behind the wheel

Susie Wolff: A driving force in battle for equality behind the wheel

The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

'No abs Adam' plans to muscle in on Usain Bolt's turf

After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
Calls for a military mental health 'quality mark'

Homeless Veterans campaign

Expert calls for military mental health 'quality mark'
Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

Meet Racton Man

Analysis shows famous skeleton was a 6ft Bronze Age superman
Garden Bridge: St Paul’s adds to £175m project’s troubled waters

Garden Bridge

St Paul’s adds to £175m project’s troubled waters
Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

Stuff your own Christmas mouse ornament

An evening class in taxidermy with a festive feel
Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

Joint Enterprise

The legal doctrine which critics say has caused hundreds of miscarriages of justice
Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

Freud and Eros

Love, Lust and Longing at the Freud Museum