Sean O'Grady: How to make the euro work

In the medium term, the best option would be for all the eurozone nations to hold themselves liable for each other's debts

Monday 27 June 2011 00:00
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Of the many dispiriting aspects to the crisis in the eurozone, the attitude of the Government to offering financial aid to Greece is one of the most depressing. Time and again we have been told by David Cameron, George Osborne and their allies in the press that it's none of our business that the Greeks and the continentals have got themselves into this fine mess and they can jolly well get themselves out of it – and anyway we're skint. All of which, to varying degrees, is true – but it ignores two things.

First is the fact we always contribute to the financial rescue of economies via our subscriptions to the International Monetary Fund (IMF), including the likes of Ukraine, where our direct economic interest must be judged scant. We will also be lending Greece money via the Fund, so whether we chip in to a Greek bailout out via the EU or the IMF seems less a matter of principle and more one of plumbing.

The second consideration is the vast financial damage that a worsening of the eurozone's financial situation would mean for us in Britain – a rapid return to recession. We really don't want that, do we? For as Sir Mervyn King said last Friday, it is not simply a matter of the fairly trivial (in the big scheme of things) sums the British banks lend to Greece and its government, but of their exposure, as they call it, to the French, German , Italian and other banks that have done so, directly or indirectly. After all, some of the French banks actually own Greek ones – a misguided strategy that makes Fred Goodwin look like a visionary. If it goes wrong it will mean another freeze-up in the international money markets of the kind that gave us the Lehman Brothers crisis in 2008.

The American and British banks which have insured Greek government bonds would be forced to pay out and the financial damage would spread still wider. That, in turn, would impact on the real economy, via collapsing stock markets and crumbling consumer and business confidence.

Spending and investment would collapse again, and world trade with it. We cannot be sure that every government would be able to rescue all of its banks, if the funds cannot be raised because so many governments (including our own) are almost bust. The nightmare would reopen. Britain, not even now back to the levels of national output we enjoyed in 2008, would be back into slump.

Our banks are in better shape than they were four years ago, but the rest of the economy is not. Gifting a few billions to Greece to prevent such a calamity seems cheap at the price, unjust as it is. Obviously they have been living beyond their means for years, and it is totally wrong that we should have to bail them out because they won't pay their taxes and insist on retiring early; they have spoiled themselves. But now we may have little choice but to indulge them a little longer. There may some great Greek classical allegory for all this, but it is best summarised for me by an old cliché: Greece is too big to fail.

That is why kicking the can down the road, to repeat the fashionable phrase of the moment, and "lending" them more funds is the right answer, for now, the best of many awful options, and why Britain should join in such a rescue. Just as we did with Ireland, for similar reasons. So that's the short term.

In the medium term, the best option would be for all the eurozone nations, jointly and severally, to hold themselves liable for each other's debts. It is, in effect, where we are going anyway, but it would end the selective market attacks on individual countries' debts because these would no longer exist. Subsumed into a vast eurozone-wide system of bonds, the debts of the peripheral nations should no longer look so big if Germany stands behind them. The most immediate and costly impact would be that Germany would have to pay more to borrow – say 6 per cent rather than 3 per cent – but it would allow the Greek, Portuguese and Irish governments to go back to something approaching normality.

This is not, I have to say, an original suggestion; many months ago it was put forward by the Italian finance minister, Giulio Tremonti, and the chair of the euro group of finance ministers, Jean-Claude Juncker, who runs Luxembourg's healthy economy. An elegant and straightforward solution, it has never gained the support it deserves.

That may be because it lays bare the choice facing Germany. For the German people can choose between having their own prosperity or having their European project, an historic mission and atonement. They cannot have both. They might end up with neither. Ordinary Germans, however, will have to pay more for a home or car loan, tolerate higher inflation and send their tax euros south. They will become a little more "Greek". Such is the price of European union.

Longer term, and in return for that, Europe needs a Treasury department able to "coordinate" – some degree of euphemism will be essential to protect national prides – national spending plans and tax policies. As in other vast single-currency areas, most obviously the United States, there will be a need for "fiscal transfers", money moved around the continent via structural funds and welfare payments across national boundaries.

When Greece joined the then European Community in 1981, she was poor and the beneficiary of substantial regional aid – as were Portugal, Ireland and Spain in those days, funnily enough. Even as we force the Greeks to live within their means and privatise their industries, Europe should take the strain off the Greek economy by launching a new Marshall Plan-style programme of investment in her infrastructure: roads, energy, public transport, anything that genuinely raises Greece's pitiful prospects of growing her way out of trouble. That would support growth while the austerity packages do their work on her public finances, and would help Greece catch up in competitiveness with her northern neighbours.

Britain, too, should invest in Greece (it isn't as mad as it sounds). We can't "defend Britain's national interest" by telling our partners to go hang. One of the most quoted of economic factoids is that half of British exports go to the eurozone. To be fair to ministers, they often do say that a healthy eurozone is in UK interests.

But what they will not do is put their money where their mouth is. The EU, even for a eurosceptic Prime Minister, should not be about individual nations "battling" for their own interests, but searching for the common interest.

The US, the IMF and even China all have a stake in the euro surviving in a workable form. So does the United Kingdom. We may have, wisely, opted out of the euro (for which, we should thank the neglected John Major), but we cannot opt out of our share of the financial and intellectual responsibility for helping our closest partners. We needn't gloat in our not-so-splendid isolation.

s.o'grady@independent.co.uk;

Mary Ann Sieghart is away

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