Andreas Whittam Smith: The Greeks have spoken and the eurozone's fate is sealed

Creditor countries have begun to see that the solutions would be impossible to implement

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The Independent Online

When the history of the slow collapse of the eurozone comes to be written, what happened in Athens last Sunday evening will probably be seen as one of the turning points. For the explosion of violence that took place while the Greek parliament was debating whether to accept draconian terms for securing a €130bn bailout wasn't just another demonstration. More than 80,000 turned out and among them were many middle-class people.

Moreover, the police launched a violent response soon after protesters had arrived. The forces of law and order weren't going to allow this to be a peaceful demonstration. The sounds of the struggle could be clearly heard within the parliament. Among the crowd was even a wartime resistance hero, Manolis Glezos. He is famous for having torn down the Nazi flag from the Acropolis following the German invasion in April 1941. Now 89 years old, he asked whether it was right to impose these measures "by tear gas".

The various demands made on behalf of the strong eurozone countries by officials from the European Commission, the International Monetary Fund and the European Central Bank are undoubtedly questionable. Take the notion of a 20 per cent reduction in the minimum wage. To international civil servants working through their files in Brussels, Washington and Frankfurt, this may seem like a perfectly good idea. Greece's costs are high compared with its competitors, so why not cut the minimum wage? Yes, except that had Greece not entered the eurozone and given up the drachma, it would have been able to reduce its prices vis-à-vis its neighbours by devaluing its currency. Everybody would have shared the pain. But in the eurozone, it seems, the poor alone must bear the burden of such adjustments.

Then there is the demand that numerous state-owned enterprises should be sold off to the highest bidder, who would often, it was assumed, be foreign-based. The proceeds would be used to pay off part of the Government's debts. In normal circumstances, this would be a perfectly good scheme. Britain's own privatisation programme, carried out 25 years ago, was a great success. But now, after a reassessment of obstacles to investing in Greece, the target for privatisation revenues has been revised downwards from €50bn to €15bn by 2015.

Why should this scaling back of expectations have been necessary? Doubtless some of the assets were not in good shape. But there is another reason that may have eluded the experts when they first began to devise the Greek cure. No foreigner would want to buy Greek assets when there is the remotest chance that the country would leave the euro and replace it with a heavily discounted drachma. A great part of the value of any investment could be lost. To take a domestic example, if you found a lovely holiday cottage for sale at an attractive price on a Greek Island, would you buy it in the present circumstances? I know I wouldn't.

Finally, there is the demand that the leaders of the main political parties must promise to back the deal, regardless of the outcome of the elections expected in April. What the requirement must surely mean is that the main parties will put the terms to the Greek electorate and ask for support to carry them out. The result is unlikely to be better than a weary acceptance, accompanied by low turnout. For it must be hard to elect the very political parties that have, through the years, led Greece into the abyss.

The importance of Sunday evening's riots in Athens arises from the negative impact they have had on sentiment in the leading creditor countries, such as Germany and the Netherlands. Government ministers in the two countries have finally begun to see that the purely bureaucratic solutions proposed by their officials and their counterparts in the international financial institutions would be impossible to put into practice as designed. Greek leaders may put their signatures to the relevant documents, but the Greek people are very far from being persuaded to go along with the plans. More effective than riots would be passive resistance.

This has led for the first time to a willingness by European leaders seriously to contemplate a Greek default and, with it, the country's exit from the euro. There are two matters here to consider: how would financial markets react and what would be the consequences for Greece herself? Under the first heading comes assessing whether bond holders would put other weaker members of the eurozone under renewed pressure, countries such as Italy, Spain, Portugal and Ireland. There is also the question of the solvency of banks that hold considerable amounts of Greek debt. Would they themselves require bailing out by their national authorities? On these issues, opinion has become more sanguine. The firewalls of the international monetary system have been considerably strengthened during the past two years. And banks themselves have increased their reserves against losses.

What default would mean for the Greeks themselves is that the government might not be able to pay pensions or salaries for approximately two months. All debts denominated in euros would have to be renegotiated. And as the new currency depreciated, prices in domestic markets would rise sharply. In sum, the country would first suffer financial chaos, and then a permanent loss of spending power. It would not be nice.

The Greek finance minister, Evangelos Venizelos, has quickly detected the change of atmosphere. He said yesterday that some eurozone countries were "playing with fire", and added: "There are many in the eurozone who don't want us any more." That is precisely what the riots in Athens on Sunday evening achieved.

At the same time, where power really lies becomes a little bit clearer. We see that whereas financial markets have all the influence in the early stages of a sovereign debt crisis, aided and abetted by the credit rating agencies, as Britain has just been reminded, when it come to solutions, there is a second strong force. This is public opinion magnified by street protest. While the politicians and their advisers give the impression of being in charge, they are not really. The financial markets and the street: when aroused, these are our masters.