Margareta Pagano: Merkel is caught on the horns of a Greek dilemma

Chancellor faces an imminent election – and an unpopular bail-out decision

In Rochdale, the 66-year-old grandmother who infuriated the Prime Minister by asking what his plans are for controlling our national debt, as well as a spicier question about the flow of east European immigrants, spoke for much of Europe when she expressed her fears about the country's growing tax bill.

Taxpayers further south in Berlin are even more worried as they react with fury to Germany's proposed bail-out of Greece, which now looks as if could be tied up any day now. Chancellor Angela Merkel is under great pressure because she faces her own critical local election – next Sunday – in North Rhine-Westphalia, one of the richest, most industrial areas of Germany. Germans are furious that Merkel wants to use public money to pay out billions for Greek pensioners – on better pensions than the ones they themselves get – and welfare payments, while all the German political parties, including her own Christian Democratic Union party, are arguing that Merkel must force the banks to take their share of the pain.

Then there is continued unrest in Athens itself. There, workers are still striking, not so much about tax rises, but about the huge cuts in jobs and pensions which are inevitable if the bailout is to be agreed, and go through.

And further west, across the Mediterranean, there are storms brewing in Spain and Portugal, which both had their debt downgraded last week. Unemployment in Spain hit 20 per cent last week, triggering worries of social unrest, particularly in the poorer south, to levels not seen for decades.

It seems the peoples of Europe have more in common than they think. They are all sitting uncomfortably on this fault line of debt travelling from Rochdale down to the Med and which could, at any moment, blow up into a new sovereign debt crisis every bit as dangerous as the sub-prime one which erupted two years ago.

Professor Nouriel Roubini is one of the few economists who really did spot the financial crisis, and who is now warning that Greece is the tip of the iceberg, and that the contagion could spread down to its southern partners, Spain and Portugal, as the sovereign debt builds up its own head of steam. Roubini is right to warn of the dangers, but Merkel can't afford to let Greece be the Bear Stearns of Europe – and certainly not the Lehman – as that would pull the plug.

It's going to be tricky for her because a big chunk of the Greek debt held by German banks is held by the very same banks which have already been bailed out by the state, and now belong to the taxpayer anyway. So, either way, it's the taxpayer who pays.

Merkel's critics say that she has been holding out, prevaricating about the Greek rescue package, because she wants the election out of the way first. It's an important one, because if her coalition parties fail to win, they could lose control of Germany's second chamber. But the reality is that, despite the media frenzy in Germany, it looks much more likely that Merkel will risk more anger as voters go to the polls, and push through the Greek package, assuming the Greeks agree to the austerity measures as part of the rescue plan. The crisis is all the more hairy because there is only a small window of opportunity as the first Greek bond repayment is due on 19 May. The risk of Greece defaulting is perhaps a greater one than the risk of the eurozone falling apart.

Greece only has three options – a default, deflation or devaluing, none of which it can do within monetary union. That's why Merkel, and ultimately the German public, will have to sign off a Greek bailout; their own future depends on it. However, what this latest crisis shows once again is the fragility of monetary union. When the architects dreamt their European dream, they forgot a vital part of the infrastructure: the power to tax. You can't have countries bound into one currency zone without their spending and taxation also being controlled; it's like a house without electricity, and a move which no voters would stomach from Berlin to Madrid.

The Greek crisis is not likely to see the end of the euro, for now, but when the future Homers come to write their epic stories, they will show that this is where the end began. As with Gordon Brown and Gillian Duffy, perhaps.

Goldman Sachs is burning, and the politicians want to build more bonfires

Goldman Sachs is being tossed onto the fire like a medieval witch.

Even more fuel was thrown on the flames when seven Goldman bankers were toasted by the Senate sub-committee for their part in the selling of mortgage securities. It wasn't a pretty sight, watching the Goldman bankers squirm as they tried to defend themselves against betting against their clients, selling them packages of sub-prime mortgages and then going short.

Whether Goldman told those investors it was going short is at the centre of the fraud action by the Securities and Exchange Commission. It's difficult to believe that the investors, ACA or IKB, didn't know what the bank was doing, and if they didn't, then they probably should. There's another point – Goldman was also only doing what every other bank on Wall Street was doing. In fact, Goldman was a tiddler compared to the big mortgage players, such as Bank of America.

This doesn't excuse what Goldman got up to, but it does put last week's Senate grilling into some sort of context. Neither side comes out of this well; Goldman failed to get across its basic message that market-makers don't have a fiduciary duty to tell clients how they are trading, while the inquisitors got themselves muddled over what banks can and can't do. But, even if Goldmans had managed to explain this it wouldn't have washed with the people on Main Street. They prefer the analysis made by Phil Angelides, chairman of the Financial Crisis Inquiry Commission, who compared it to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars". This is not correct, as selling financial products is different to cars as there is always a risk, and you can't blame the seller if the stock doesn't go where you want it to. No one wants to hear this as the politicians want their bonfires, and Goldman is just the first.

I bet it won't be long before the SEC gets all banks involved in mortgage selling to agree a big settlement, just as Eliot Spitzer did over research; that's why US bank shares collapsed with Goldman's on Friday.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
Phillips Idowu, Stella McCartney and Jessica Ennis
fashionMcCartney to continue designing Team GB Olympics kit until 2016
Sport
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
football
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
Farah returns to the track with something to prove
Commonwealth games
Life and Style
fashion Designs are part of feminist art project by a British student
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

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game