Leading article: A crisis in Athens and a looming disaster for Europe

European policymakers need to face up to some harsh realities

Share
Related Topics

The Greek government finds itself trapped between Scylla and Charybdis. The European Union and the International Monetary Fund are demanding drastic spending cuts and large tax rises in return for their emergency funding. But those austerity measures have brought tens of thousands of protesters on to the streets of Athens. And those protests have turned violent. The pressure from above and below is in danger of crushing George Papandreou's government to death. One attempt by Mr Papandreou to get his new budget through parliament has failed. With a revolt in his own Socialist party and a refusal from the opposition to co-operate, it is unclear whether a second will succeed.

The Greek state certainly needs to reduce its spending and to curb its borrowing. Successive governments overspent during the boom years. They also faked their national accounts in order to conceal the true level of public borrowing. There are also huge structural problems in the Greek economy (from excessively early retirement for state employees, to endemic tax evasion) that must be addressed.

But by demanding austerity on such a massive scale – and over such a short period of time – the IMF and EU leaders are playing with fire. The fiscal consolidation imposed over the past year has already pushed Greece back into a painful economic slump. Industrial production is down 11 per cent. Unemployment has risen to 16 per cent. It is this agony that has provoked the street-level opposition. And the EU/IMF wants to pile more austerity on top.

This is not only unreasonable; it is likely to prove self-defeating. Normally a relatively small economy in Greece's dire situation would see the value of its currency plummet. This depreciation would increase the cost of imports, but also give exporters a large boost. Thus the pain of the necessary economic correction would be muted. But since Greece is locked into the European single currency, this cushion is absent.

The more painful European policymakers contrive to make this necessary correction, the greater grows Greece's incentive to default on its sovereign debts and perhaps even to leave the single currency (which is the very last thing EU policymakers want). Default and a eurozone departure would certainly be painful for Greece. Athens would still have to cut spending and it would be shut out of international debt markets. Yet life in the single currency is looking still more painful at the moment. Mr Papandreou will stage a vote of confidence in his government on Sunday. But solutions to Greece's plight cannot only come from Greece. Europe needs to face up to some harsh realities too. Successive Greek governments were profligate. But so were the banks, from all around Europe, which lent to the Greek state on the idiotic assumption that its debt was as safe as that of Germany. Greece is heading for a level of debt – 160 per cent of its total annual output – that it cannot reasonably be expected to repay, and certainly not while its national growth prospects are so weak. Yet instead of working with European private banks to ease Greece's debt burden, the European Central Bank and the IMF are demanding that Athens repays in full, no matter the short-term impact on the Greek economy.

European leaders were far too slow to recognise the need for a Greek rescue last year. And now they are failing to recognise that the original rescue package is not working. They have set their face against a managed Greek default, but that means they are heading for a chaotic one. And that could easily lead to contagion across wider European debt markets. Ireland, Portugal and Spain are all in a similar boat to Greece. European leaders need to get up to speed with this crisis. Otherwise the single currency itself could come under unbearable pressure.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Telemarketing / Sales Co-ordinator - OTE £25,000+

£10000 - £25000 per annum: Recruitment Genius: This provider of staffing and r...

Recruitment Genius: Kitchen Porter

£19000 per annum: Recruitment Genius: One of the four inns of Court is seeking...

Recruitment Genius: Chef De Partie

£20000 - £24000 per annum: Recruitment Genius: One of the four inns of Court i...

Ashdown Group: Graduate IT Support - Surrey - £24,000

£20000 - £24000 per annum: Ashdown Group: Graduate IT Support Helpdesk / 1st L...

Day In a Page

Read Next
A memorial to the1982 war between Great Britain and Argentina in Buenos Aires  

Argentina poses no military threat to the Malvinas Islands. So why is the UK ratcheting up tension?

Alicia Castro
 

Daily catch-up: religion, politics and roads named after dictators

John Rentoul
War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

War with Isis

Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
Scientists develop mechanical spring-loaded leg brace to improve walking

A spring in your step?

Scientists develop mechanical leg brace to help take a load off
Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

Peter Ackroyd on Alfred Hitchcock

Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

Ryan Reynolds branches out in Woman in Gold

For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
Why Robin Williams safeguarded himself against a morbid trend in advertising

Stars safeguard against morbid advertising

As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

UK horticulture industry facing skills crisis

Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
Hack Circus aims to turn the rule-abiding approach of TED talks on its head

Hack Circus: Technology, art and learning

Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
Sevenoaks is split over much-delayed decision on controversial grammar school annexe

Sevenoaks split over grammar school annexe

If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
10 best compact cameras

A look through the lens: 10 best compact cameras

If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

Paul Scholes column

Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
Why Michael Carrick is still proving an enigma for England

Why Carrick is still proving an enigma for England

Manchester United's talented midfielder has played international football for almost 14 years yet, frustratingly, has won only 32 caps, says Sam Wallace
Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

Tracey Neville is just as busy as her brothers, Gary and Phil

The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?