The euro has not brought Europe closer – it has ripped it apart


The scale of Greece's problem is simply stated: her national debt will approach 160 per cent of GDP on current trends. Here in the UK we are supposed to be in crisis because that ratio is heading for about 75 per cent.

Unless the Greek economy grows at an astonishing rate, the interest on that debt simply cannot be paid out of any conceivable tax take, while the spending cuts and austerity packages are conspiring to push the economy into depression (though official figures, viewed with some suspicion, suggest the Greek economy is managing to grow, despite everything).

In terms of timing, the end could come very rapidly. The IMF's acting managing director, John Lipsky, has threatened the eurozone (in reality that means Germany) with no further instalment of the soft existing agreed loan to Greece unless Germany guarantees it and the Greeks start to behave.

For a caretaker leader, Mr Lipsky is taking a surprisingly tough and decisive line in this crisis. Even with that threat gone there is no guarantee that the fresh loan now being discussed – a further €100bn on top of the €110bn settled last May – will actually happen. Beyond that, in 2013, the eurozone is supposed to bring in new rules about what happens when a country goes bust, requiring private bondholders to suffer losses they are not now. Again, though, the EU's leaders are yet to settle the principles, let alone the detail of this.

Beneath all this is a simple, brutal truth. Greece, like the other peripheral distressed economies, is an uncompetitive economy. She got into this mess because she joined the euro and was suddenly able to borrow at low "German" rates of interest. She consumed more than she produced and ran up enormous government debts.

This is only an outward and visible symptom of a deeper problem, however. Greece doesn't produce or export enough, and it is too feeble to remain in the same currency area as Germany. If Greece were as productive and fast-growing as China, say, there would be no euro crisis. Deep structural reforms to promote growth and higher productivity are the way to solve the Greek crisis for good, but then even they would take decades, as they did in the UK after the 1980s reforms. In Greece they are talked about, but these measures are seldom implemented.

Ireland and Spain are less competitively challenged, and more victims of their property and banking excesses; Portugal's issues are closer to Greece's; Belgium just seems unable to run its public finances or even form a government (a year after the general election). Italy and France have a less urgent need but no less serious competitive challenges in demographics and structurally high unemployment, especially among the young.

In all these cases it is hard to see how the euro is the answer to their problems. Far from bringing Europe's economies closer together, the euro seem to have magnified the differences.

Even now the European Central Bank is raising interest rates to restrain rising German inflation, though it is the last thing the poleaxed Spanish real estate market and banks need. When will the madness end?

What happens now?

1. Give the Greeks another loan

Who wants this?

The Greeks, obviously, and pragmatically minded well-wishers overseas.

What would happen?

This is usually referred to as "kicking the can down the road". Greece's fundamental problems would remain unresolved. The IMF would become increasingly restive, and make more and more demands for the EU to guarantee loans made to Greece. Time, and therefore hope, is bought; but the crisis never ends.

Winners and Losers

The German, Finnish and Dutch taxpayers lose, mainly. They are angered at having to lend money to pay private bondholders who can see a 25 per cent yield on Greek bonds. Investors, politicians and most others would sigh with relief that the evil day has been postponed. Again.

Likeliness Rating


2. 'Forgive' the debt and let them off

Who wants this?

Rioters in Athens, the head of the eurozone finance ministers, Jean-Claude Juncker, and the Irish and Portuguese.

What would happen?

One way or another Greece's debts are dissolved by having her neighbours take them on. Formally, the eurozone could replace its current debts issued by national treasuries with "Eurobonds" that are backed by all nations jointly. It would imply a European Treasury, control over national budgets and tax rates: a Europhiliac dream.

Winners and Losers

The peripherals – Portugal, Greece, Ireland – would see the cost of servicing their national debt slashed; but better risks such as Germany would lose their advantage. German households would pay more for their bank loans and mortgages.

Likeliness Rating


3. Allow a chaotic Greek default

Who wants this?

A few anarchists in Greece (which doesn't mean it couldn't happen).

What would happen?

If the IMF or, less likely, the eurozone decided to freeze the loans already agreed with Greece, it would be forced to say "can't pay won't pay" the next time any of its bonds fall due, usually a matter of a few weeks. In that case the value of Greek government bonds held by banks across Europe and the European Central Bank would shrink to nil, pushing the world into a Lehman-style crisis and "second credit crunch". Europe would probably sink into depression.

Winners and Losers

Everyone loses from this, and everyone knows it is the Greek government's ultimate bargaining chip, to plunge us all into a slump. Given that the eurozone takes half of the UK's exports, and our banks are intimately linked to those in Europe, Britain would hardly be immune.

Likeliness Rating


4. Arrange a more orderly new deal

Who wants this?

Germany, as it means private bondholders "share the pain". The ECB has suggested a voluntary postponement of bond payments.

What would happen?

If things go well, it would not be a proper default, or "credit event", at which point the "insurance" bondholders took out on the Greeks' defaulting would not have to be paid out. Such "credit default swaps" could be very costly for those banks or insurers who have written them. Even a mild "reprofiling" of debt would cost the already weakened banks dear.

Winners and Losers

A sort of "AV" solution that will probably emerge as a consensus. Everyone wins, if only in the sense that it might prove the least worst option. If mishandled, it might prove almost as destructive as a panic default.

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5. Greece exits the Euro

Who wants this?

No one much, though again it may prove inevitable. The French are probably the most resistant, on the political, almost emotional grounds of the "project".

What would happen?

Greece's unmanageably large debts would still be in euros even when she goes back to the drachma. Given the drachma is likely to be a very weak currency it will takes lots to buy a euro, so Greece's debts would actually get bigger. Her economy would collapse, just as Argentina's did when she broke her dollar link in 2001. Long term, though, it would allow Greece to rebalance her economy less painfully. Sets a humiliating precedent for the eurozone.

Winners and Losers

Greece would win in the longer term, but costs, political and economic, for all in the meantime.

Likeliness Rating


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