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

Account Manager (Junior)

Negotiable: Clearwater People Solutions Ltd: Account Manager (Junior) Account ...

Solar Business Development Manager – M&A

£50000 - £60000 Per Annum: The Green Recruitment Company: The Green Recruitmen...

Test Analyst

£20000 - £30000 Per Annum: Clearwater People Solutions Ltd: An experienced Tes...

Bookkeeper - Central London

£27000 - £30000 per annum: Ashdown Group: Bookkeeper - Central London A growi...

Day In a Page

Read Next
A Bengal tiger captured by a camera trap in Nepal  

Save the tiger: The success of the Bengal tiger in Nepal shows you can make a difference

Harvey Day
Ed Miliband, talks image politics with Andrew Marr  

Ed Miliband’s Question Time ripoff: Another proposal about style, not substance

Bobby Friedman
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on
It's the best of British art... but not all is on display

It's the best of British art... but not all is on display

Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
Critic claims 'I was the inspiration for Blanche DuBois'

Critic claims 'I was the inspiration for Blanche DuBois'

Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
Sometimes it's hard to be a literary novelist

Sometimes it's hard to be a literary novelist

Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

Edinburgh Fringe 2014

The comedy highlights, from Bridget Christie to Jack Dee
Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

The woman stepping down as chair of the Heritage Lottery Fund is worried