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

Ashdown Group: Helpdesk Analyst - Devon - £20,000

£18000 - £20000 per annum: Ashdown Group: Helpdesk Analyst - Devon - £20,000 ...

Ashdown Group: Data Scientist - London - £50,000 + bonus

£35000 - £50000 per annum + generous bonus: Ashdown Group: Business Analytics ...

Ashdown Group: IT Project Coordinator (Software Development) - Kingston

£45000 - £50000 per annum: Ashdown Group: IT Project Coordinator (Software Dev...

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Day In a Page

Read Next
 

If I were Prime Minister: I'd put the creative industries at the top of the agenda

Christopher Frayling
 

How I’ve backed the winner in every election since 1959

Andreas Whittam Smith
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power