A country with a population of fewer than 11 million people says it will hold a referendum to seek support for its austerity programme – something you might think was a prudent democratic decision. Yet this sets markets plunging around the world, with the ratings agency Fitch warning it might lead to Greece defaulting and maybe dropping the euro. This, it said, "would have severe financial implications for the financial stability and viability of the eurozone".
Well, maybe. It is impossible to see how the next few weeks will pan out. When last week the latest Greek bail-out was agreed – and welcomed by the markets – some of us judged that it would buy between three months and three years of stability. I am afraid right now it looks more like three days. But the fundamental lesson is surely that the present world financial system is very fragile. It ought to be robust enough to have a small country default on its debts without threatening a new recession across continental Europe, maybe beyond.
Everyone knows there has been a weak collective response to the problem: an ill-designed currency union with several other members that will also struggle to service their sovereign debts.
But even if we cannot do more than guess the detail of the coming weeks, a couple of powerful messages are sweeping across Europe. The first is that economic policies have to have democratic support. There is a limit to the level of austerity that an elected government can sustain. If that means some countries choose, or are forced, to abandon the euro, so be it. The other message is that all governments will in future be more tightly constrained as to their ability to borrow. Far from running deficits, most will have to run surpluses for years to come.
This will change the nature of politics in ways that many will find uncomfortable. There will be no escape from the need to have sustainable national finances, whatever happens to the euro.
- More about: