The eurozone's leaders have finally woken up to the fact that, in the Greek debt crisis, they have an existential challenge on their hands. Yet for all the drama of this week's plea by Angela Merkel for the German parliament to sanction the Greek financial rescue package and yesterday's vote in Athens on a new round of cuts, the signs are that Europe's leaders are still not on top of the situation.
The €110bn IMF-eurozone funding package to remove Greece from the international capital markets for three years is better than nothing – but it is still not enough. It is becoming increasingly clear that Greece will need some form of debt restructuring to ease the burden of its borrowings.
Spending cuts from Athens are needed to show that Greece is making some effort to put its fiscal house in order in return for its rescue. But these cuts will inevitably plunge the Greek economy deep into recession. This will mean lower tax revenues. And depressed revenues mean it will be harder for Greece to bring down its deficit. That means Greece will have little hope of stabilising its vast stock of debt. Greece needs cheap credit from neighbouring governments if it is to stay solvent. But it also needs some of its mountain of debt to be written off. Rather than crossing their fingers and hoping that this week's rescue will be enough to do the job, policy-makers in the eurozone and the International Monetary Fund should be engineering a debt restructuring package for Greece. They should also be preparing for the inevitable fallout in the credit markets that would result from such a drastic move.
One aspect of such a package would have to be a recapitalisation of those French and German banks which have invested heavily in Greek bonds and would register billions of euros of losses if Athens forced its creditors to accept less than they are owed. It will also probably necessitate still greater pledges of support from fiscally robust eurozone nations for those governments such as Spain and Portugal which are under pressure in the bond markets because investors fear they could be next to follow Athens into meltdown.
German taxpayers, who are already angry at the support they are being asked to provide Greece, are likely to be hugely resistant to such a package. Their outrage might be understandable, but the choice is now between a massive bailout and the total break-up of the eurozone.
If the eurozone does survive, it is going to need fundamental structural reform. First there will need to be tighter controls on sovereign borrowing to stop states such as Greece running irresponsible deficits. Second, there will need to be greater scrutiny of European banks. The role of these institutions in facilitating Greece's debt meltdown is one of the great scandals behind this crisis. Third, there needs to be clear institutional arrangements for when eurozone nations get into financial trouble so that investors will not go into panic as they have over Greece. Finally, there needs to be efforts to iron out the internal economic imbalances in the eurozone whereby southern nations run vast trade deficits, which pushes them into debt, while Germany accumulates large trade surpluses. Britain has a clear interest in seeing this mess cleared up. We might not be in the eurozone, but our banks hold considerable sums of vulnerable eurozone debt. And Europe is by far our largest trading partner. We need to be part of the effort to rebuild.
Yet, before any of that, this present crisis needs to be resolved. Otherwise there could be no eurozone left to reform. Europe's leaders need to act decisively and boldly in the coming weeks. Otherwise, the markets will resolve the crisis for them; and the results will not be pretty.