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: Area Sales Manager - Midlands

£20000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: PHP Developer - 3-4 Month Fixed Contract - £30-£35k pro rata

£30000 - £35000 per annum: Recruitment Genius: This is a 3-4 month pro rata fi...

Recruitment Genius: Telesales Executive - OTE £26,000+

£16000 - £26000 per annum: Recruitment Genius: A Telesales Executive is requir...

Recruitment Genius: Area Sales Manager

£25000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Day In a Page

Read Next
 

Don’t pity me for eating alone, just give me a better table

Rosie Millard
Aerial view of planned third runway at Heathrow  

Heathrow expansion: This final 'conclusion' has simply fanned the airport flames

Chris Blackhurst
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

No grace of God for Katy Perry as sisters act to stop her buying convent

Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

Residents just want water and power in a city chosen to be a ‘smart’ metropolis

The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

Something wicked?

Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
10 best sun creams for body

10 best sun creams for body

Make sure you’re protected from head to toe in the heatwave
Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

Nick Bollettieri's Wimbledon files

Milos Raonic has ability to get to the top but he must learn to handle pressure in big games
Women's World Cup 2015: How England's semi-final success could do wonders for both sexes

There is more than a shiny trophy to be won by England’s World Cup women

The success of the decidedly non-famous females wearing the Three Lions could do wonders for a ‘man’s game’ riddled with cynicism and greed
How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map