Greece is the shape of things to come. No, that is not to say that the rest of Europe, or indeed the UK, will have riots in the streets, though that may well happen. Nor is it to say that other countries will be pushed to the brink of default, though this too may well happen. Rather it is to point out that what is happening in Greece will shape how governments everywhere will have to behave. Greece is the canary in the mine.
This is not just about the future of the Eurozone, though it is certainly that. It is about a change in the relationship between governments, electorates and savers. Governments have been used to responding to the demands of the electorate by framing policies that appear attractive, fine-tuning them to create the basis of their support. Savers, at home and abroad, have not featured very much in this mix. Governments could borrow, within reason, on favourable terms. That is no longer the case.
Nor have the different interests between the age ranges played much of a role in practical politics. Political divisions have been between different income groups and between public and private sector workers. What Greece shows us, as much as the public/private sector clash, is a rupture between young and old. The young feel cheated. The old have stolen their futures and they will have to work to pay back the debts. The result will be a different sort of politics, though it is not yet possible to see this in more than its barest outlines.
The purest, most certain, element in the Greek message is that it is the first developed country to reach the limit of its borrowing capacity and as a result the government is no longer in control of its economic policy. It has to bring in policies that the International Monetary Fund and Eurozone members require, however unpalatable these might appear. In any case what has happened is only a patch. Greece has been bailed out for a couple of years and it is not at all clear that it will be able to make sufficient progress getting its debts under control to avoid some kind of default in a few years' time.
Because of what has happened here, the costs of borrowing will rise for other countries with large deficits and high debts. It has already happened to Portugal, Ireland and Spain – and to some extent to Italy. The effect is that a decent-sized multinational corporation can now borrow more cheaply than Spain, the tenth largest economy in the world. Savers trust companies to be able to repay their debts more than they trust sizable countries.
It is very hard for politicians to accept this. All three main parties in our own election assume that the deficit-cutting plans they set out will be sustainable. (The differences between the plans are minimal, by the way, notwithstanding what we are being told.) Actually they won't be sustainable. The path back to a surplus – not just a halved deficit – will have to be steeper. The reason is simply that the additional funds needed, some £500-600bn over the next five years, will not be provided by the global savers on the basis of the present plans. It is only because a new government is about to be elected that the UK has avoided a crisis of confidence already.
But this is not just us. It is every government seeking to borrow. A taboo has been shattered. Five years ago it never occurred to investors that a member of the Eurozone might be unable to repay its sovereign debts as they fell due. Now every calculation has to be recalibrated, for savers might reasonably ask why they should lend to countries that might not pay back when there are other countries that clearly can and will. The result will be faster spending cuts than at present envisaged.
Politicians with their backs to the wall adopt a different rhetoric than those with cash to spend. Listen to George Papandreou after the bail-out was announced: "A page in the country's history changed on Sunday. We decided to protect Greece from major dangers. We won the struggle to restore our credibility. The creation of the EU-IMF safety net is the proof. We will answer to all those who wonder if Greece will make it."
Now contrast that with Gordon Brown, presenting his Budget in 2006: "The British economy is strong and strengthening... The economy is growing at an annual rate of 2.5 per cent – on target, as we enter the tenth year of growth under this government, the only government in British history to be entering the tenth consecutive year of uninterrupted economic growth."
Yet we now know that it was back in 2006 or earlier that UK public finances were already going awry and that when the global recession came two years later they were in worse shape than those of any other major economy. Expect, in the next few years, politicians everywhere to sound more like Papandreou 2010 rather than Brown 2006.
We, the electorates, won't take well to this. So who will we blame? We have been encouraged to blame the bankers, though a thoughtful central banker I was talking with the other day made the point that ultimately the bank crash was a policy failure – of regulation and of monetary control. Some people blame finance more generally. But there is a problem with attacking "the City", saying it is socially useless. Where do you think countries will go to borrow that £500bn or whatever? The City. Investors there might conclude that they would be more likely to get savers money back if they lent it to someone else.
This sort of politics does not, in any case, get to the heart of the next problem, the fact that governments will be strapped for cash, year in, year out, for a generation. Demography will see to that. A shrinking workforce paying, through taxation, for a rising number of retirees, will redefine concepts of fairness and equality. Is it "fair" to tax hard-working young people to pay the pensions of people who have not been self-disciplined enough to save for their own retirement? Or pay for the health care of people who have undermined their health by smoking and not taking any exercise? You can see the anger of the young in Greece, an anger that will be replicated elsewhere as young workers realise what the baby-boomers have done.
For further reading
IFO Viewpoint 113, How to Save the Euro, IFO Institute, Munich; www.cesifo-group.de/link/05stpReuse content