Hamish McRae: Rescue Greece and we help ourselves

The consequences of a Eurozone member not repaying its debt would be unthinkable

Share
Related Topics

What has been happening to the euro over the past few days is a stark warning to governments all over the world. No, the Eurozone will not break up in the coming months, though it may well do so at some later date. The problems that the Eurozone's weaker members – especially Greece but also Portugal, Spain, Ireland and Italy – have exposed is that governments of countries with weak finances are being put on notice. They must fix their finances swiftly or face the consequences of a sudden loss of confidence. Greece is the canary down the coal mine.

Those consequences include a sharp rise in the interest rate at which the government borrows, which in turn would lead to higher borrowing costs for everyone, companies and individuals alike. What Greece has taught us is that we have reached a situation where many governments, not just these weaker Eurozone members, are in a position where they cannot increase their budget deficits and actually have to start cutting them fast. The harsh truth is that if there is another dip in the world economy there is nothing governments can do about it. The financial markets won't let them.

To many people this will seem monstrous. Governments around the world have rescued the world's financial markets from their own folly. Now those very same markets are biting the hand that fed them. So in the past few days we have had strong words not just from the Greek, Portuguese and Spanish authorities defending their own policies but also attacking the morality of the markets. This is a theme familiar to Britons with any memory of the 1960s and 1970s. Harold Wilson used to attack the currency speculators, coining the famous expression "the gnomes of Zurich" to exemplify all that was evil about international finance.

The trouble is that there is a shortage of savings in the world, or at least in the Western world, and governments with heavy borrowing need to compete for those savings along with the rest of us. Borrowers want to know whether they will be repaid. Governments that are perceived to have been less than frank about their countries' finances go to the bottom of the queue. Greece is unfortunately in that category.

Over the past few days there has been a progressive loss of confidence in the willingness, and maybe even the ability, of the weaker Eurozone economies to service their National Debt. Greece, along with other Eurozone governments, has debt coming up for repayment in the next few months. To sell that debt – to persuade investors to lend the country money – it may have to offer much higher interest rates. Conceivably it might not be possible to sell the debt at all.

In either of those instances the country would have to be rescued either by the European Union or by the International Monetary Fund. It would have to be rescued because the idea of a member of the Eurozone simply being unable to repay its debts would have unthinkable consequences for the rest of the region. Greece has to be rescued not so much to protect Greece, but to protect Portugal, Spain, Italy, etc, from all having to pay higher rates for their debt.

You could almost say that if Greece is the national equivalent of Northern Rock at the head of the list of weak institutions, Portugal is the equivalent of Bradford & Bingley, Spain of Alliance & Leicester and Italy of the Royal Bank of Scotland.

There is a further reason for concern. A lot of Greek government debt is held by banks elsewhere in Europe, including the UK. So were Greece to default, it would weaken the entire European banking system.

So Greece will be rescued. But the terms on which this happens matters because they have to be credible. A botched rescue might be worse than a formal default. Suppose other Eurozone countries agree some form of emergency loan but failed to impose fiscal discipline. Then it would be assumed that Europe as a whole did not have the will to correct its deficits and that some way down the line there would be an even bigger collapse. Why lend to Eurozone countries at all when there are other countries around the world with better growth prospects and a less adverse demographic outlook? We have seen a bit of that fear in the past few days. Expect more.

All this has implications for the rest of us. The immediate reaction of the markets has been to mark down the euro and sterling against the dollar. There is a similar distrust of British financial policy as there is to that of many Eurozone countries, though we are not bracketed in the same league as Greece. Were the next British government unable or unwilling to correct the budget deficit, which relative to GDP is roughly the same as Greece's, then we too might find ourselves unable to sell government stock, except at much higher interest rates. We are not yet on trial because everyone knows that this cannot be fixed until after the election. What our politicians say means nothing. Everyone is waiting to see what they will do.

The even bigger issue will be what the US does. For the moment it has been the beneficiary of uncertainty elsewhere. When savers are troubled their first instinct is to go for investments that look safe. The US remains about 30 per cent of the world economy and for all its problems that sheer size makes US investments attractive. But even the US does not get a free run. It is easy to see a set of circumstances where there is distrust of the government debt of many countries and people instead choose to hold their savings in commodities or in the debt of the few countries, such as Germany, which still inspire trust.

We are starting to catch a glimpse of the post-recession world. It will obviously be one where there will be great pressure on governments to get their deficits down. That will be a drag on growth, so the recovery will be a dull and listless one here and elsewhere. Within Europe, the ability of governments to get deficits down will determine whether the euro has a long-term future. (My own view, for what it is worth, is that it will be through this crisis but not the next one, the one that comes along in another 10 years' time.) And beyond Europe, the pressure will be on other governments, including the US. Growth is better than recession, but it won't be great growth.

h.mcrae@independent.co.uk

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

C# .NET Software Developer (Client-Side, SQL, VB6, WinForms)

Negotiable: Harrington Starr: C# .NET Software Developer (Client-Side, SQL, VB...

C# Developer (Genetic Algorithms, .NET 4.5, TDD, SQL, AI)

£40000 - £60000 per annum + Benefits + Bonus: Harrington Starr: C# Developer (...

Day In a Page

Read Next
Jihadist militants leading away captured Iraqi soldiers in Tikrit, Iraq, in June  

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

Robert Fisk
India's philosopher, environmental activist, author and eco feminist Vandana Shiva arrives to give a press conference focused on genetically modified seeds on October 10, 2012  

Meet Vandana Shiva: The deserving heir to Mahatma Ghandi's legacy

Peter Popham
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home