Leading article: Europe's leaders need to rise to this challenge

Share
Related Topics

Greece's sovereign debt trap is the biggest crisis in the 11-year history of the eurozone. And it could soon become the most serious crisis in the history of the European Union.

The heads of eurozone nations this week unveiled their latest plan to aid Greece: a pledge to lend Athens €22bn (two-thirds from eurozone governments and a third from the International Monetary Fund) if it cannot roll over its debts on the open markets.

But it remains unclear whether this plan will be enough to calm the bond markets which have been desperately selling Greek government bonds, pushing up Athens' cost of borrowing this week to double that of Germany. Greek bond yields fell slightly yesterday, but the real test of the plan's credibility is likely to come when Greece has to refinance €20m in the coming weeks.

A more ambitious plan of assistance for Greece foundered on the resistance of Angela Merkel. The German Chancellor certainly cannot be accused of being out of touch with her domestic electorate. Recent surveys show that a majority of people in the eurozone's biggest economy oppose any form of bailout to Greece. But this is short sighted. It is in Germany's self-interest to ease the pressure on its southern neighbour. German banks hold a significant amount of Greek government debt. The lower the price of these bonds, the bigger the losses they face. The bigger the losses, the tighter the credit squeeze those banks will be forced to impose on the stuttering German economy.

Furthermore, if Greece falls, there is a risk of contagion among other eurozone members with weak public finances. Spain, Ireland, Portugal and Italy could be the bond markets' next target. This would certainly not be in Germany's economic interests. Southern European nations, including Greece, have been significant buyers of German manufactured goods in the past decade. Germany needs those customers to be solvent if it is to enjoy a healthy economic recovery itself. Incidentally, though Britain is not a eurozone member, a Greek rescue is also firmly in our national economic interest. Europe is our biggest trading partner by far. The chances of a strong recovery here in the UK are heavily dependent on a robust continent-wide rebound.

Ms Merkel spoke this week of a new treaty to ensure future eurozone stability. This is certainly needed given the manifest failure of the EU's Growth and Stability Pact to impose fiscal discipline on Greece in the boom years. But unless the present crisis is neutralised, there might very well be no future eurozone to stabilise. What is needed is a much clearer indication from Greece's neighbours that they will lend Athens whatever funds it needs to avoid default over the coming years. This will replace a vicious circle with a virtuous one as foreign investors bring down interest rates to reflect a lower sovereign default risk and Athens finds the cost of managing its debt burden less onerous. Such short-term guarantees must go hand in hand with a credible commitment to correct the continent's gaping economic imbalances which have contributed to this crisis.

Of course, there is an alternative: allow Athens to exit the eurozone, default on its debts and instantly boost its international competitiveness. But this would in all likelihood mean the end of the euro. Europe's leaders need to ask themselves a stark question: is this what they want? If the answer is no, they need to end the prevarication, hold their noses and do what is necessary to prevent it from happening.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Digital Communications Manager

£25000 per annum: Recruitment Genius: A 6-month part-time contract (24 hours a...

Recruitment Genius: Trainee Vehicle Inspectors / Purchasers

£20000 - £40000 per annum: Recruitment Genius: Trainee Vehicle Inspectors / Pu...

Recruitment Genius: Trainee Vehicle Broker

£12000 - £18000 per annum: Recruitment Genius: A Trainee Vehicle Broker is req...

Recruitment Genius: Customer Service / Data Capture / Telesales

£12000 - £18000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

Read Next
 

Daily catch-up: the Labour leadership election hasn’t yet got to grips with why the party lost

John Rentoul
Kennedy campaign for the Lib Dems earlier this year in Bearsden  

Charles Kennedy: A brilliant man whose talents were badly needed

Baroness Williams
Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific