Greek myth turns tragic for us all

If you’d asked me a few months back, I’d have said the problems in the Eurozone looked like they’d quietened down nicely.
Yes, some painful targets were being put in place to rein in spending deficits and pay back the absolute mountains of debt that Greece, Spain, Italy and Portugal racked up in the years of plenty, but provided they swallowed this deeply unpleasant hangover cure things wouldn’t get worse.
More importantly, a lull in the crisis would give the European economy time to get back on an even keel and start generating some growth.
Well, they’ve now spat the cure back out again. Or, to mix metaphors, they want to have their cake and eat it.
Last week, I watched a marvellous TV documentary about the eurozone crisis in Greece presented by former Tory minister Michael Portillo. Greece, you’ll remember, is the country where the government lied about its budget deficit to gain entry to the euro, where tax avoidance is a national sport, and where government borrowed squillions to host the 2004 Olympics, building a series of statement facilities which now lie unused (and unpaid for).
Portillo spoke to a handful of ordinary Greeks and asked them whether it might not be better to accept they had been living a lie, realise they could never pay back this towering debt and leave the euro. To a man, they said no. And anyway it was the government’s fault, not theirs. (To be fair, a similar attitude still surfaces here: we blame government for allowing the banking crash, and banks for irresponsible lending, we blame government now for cutbacks…even though it was us who borrowed all that money. But at least we’ve swallowed our medicine…so far).
Even in France – a big economy which lags Germany because of overblown public spending – voters decided they didn’t want austerity. With great respect to La France, they haven’t even sniffed it yet.
The European Union only has itself to blame here. It should never have allowed Greece into the euro when, deep down, everybody in Berlin and Brussels knew Athens’ accounting was just another Greek myth.
And the fundamental flaw in the whole euro project was that it assumed countries were willing to sacrifice a central part of their sovereignty – financial independence – for the greater good of Europe.
The politicians might have been, but the results of various elections in Greece, France and Italy have demonstrated that, when it comes to the crunch at least, voters are not.
The politicians made this assumption partly because they thought the Eurozone would always deliver reasonable growth and because the impact of a one-size-fits-all interest rate on a financial crisis in a range of economies had never been crash-tested.
It has now. And it looks to have failed.
May be it would have been different if voters across Europe weren’t feeling the pinch. But this isn’t the first time that European leaders have been caught running well ahead of the people they represent with hugely ambitious policies no one had voted on.
There is no clean and easy way out of this. Greek banks have been propped up by cash injections from the European Central Bank and from central banks in other countries. Banks across the continent are exposed to the Greek, Italian and Spanish economies.
If Greece goes back to the drachma it will trade at fractions of the value of the euro, the price Italian, Spanish and Portugese governments pay to borrow will rocket, and banks will hoard cash again.
So if Greece limps out of the euro with a default the losses will be felt by us all.
Holidays in in the Aegean will suddenly be very cheap. And by crikey we’ll need one…

A Nightmare on Euro Street

You don’t need to be a professor of political economics to get your head round the disaster area that is the Greek economy.
If you run your own business, then a few simple facts and figures should do the trick. So here they are (warning to any EU finance ministers: look away now).
Greece currently owes around £300 billion in debts. Yet its economy is worth only £200 billion a year (for the purposes of comparison, the UK economy is worth around £1.38 trillion). So it isn’t making enough money to pay.
It’s almost certain that the Greek government told creative fibs about the scale of its budget deficit (the shortfall between its tax income and its spending). We now know that, at times, it has been twice the stated level.
Greece ‘qualified’ to join the euro with a budget deficit supposedly amounting to 3.7% of its GDP. Before the credit crunch hit in 2007, the deficit was already 6.5% - well above any other Eurozone country. By 2009, it was just short of 16%. (We’re not short of budget deficit issues in the UK, of course, but our figure for 2009 was 11.5%, and that for an economy six times the size of Greece).
One of the reasons Greece runs up big budget deficits is that there is widespread tax dodging. In 2005, for example, 49 per cent of tax went unpaid in one three-month period. Overall, it’s thought the Greek government loses as much as £18 billion a year in unpaid tax.
The public sector accounts for around 40% of the Greek economy…which will, of course, needs to be fed a huge and steady stream of tax. Tax-and-spend government is fine - but only if you collect the tax.
In theory, then, Greece will routinely need to borrow supertankers full of money to make ends meet. But the bonds it tries to sell to raise that cash don’t even qualify for junk status now – the financial equivalent of scrap metal.
So, it’s bust.
Not a pretty picture for Greece, and now a Nightmare on Euro Street.
You can see from those numbers that Greece never really had the financial discipline to join a one-size-fits-all currency system where 17 different countries had to meet the same financial rules.
Greece has exploded out of the seams of it, and the rest of the Eurozone countries are now desperately trying to stitch those seams back together. It is a painful spectacle.
Italy is facing the same nightmare scenario for three reasons: it, too, engaged in creative accounting about its budget deficit, it has huge debts, and its prime minister, Silvio Berlusconi, is widely derided as a political clown who has lost control of the country’s finances. This in the third biggest economy in the Eurozone…
Financial markets haven’t just written Greece off. They think it exposes a flaw at the heart of the whole Eurozone project: that you can’t have one currency when there are 17 governments unable to agree on a way forward because their economies are operating at different speeds.
The Greek government’s decision to agree a debt restructuring deal one week but put it in doubt through a referendum the next illustrates the point. Markets won't wait; they will take their own decision.
And this is why the Greek dilemma is not some distant wrangle you can read about over your cornflakes and forget when you go to work (though the antics of some Conservative eurosceptics last week suggest some still think this is a playground knockabout).
The clear and present danger posed by the eurozone crisis is that banks, confronted by losses on loans to indebted countries, put the brakes on lending again, tipping the UK’s biggest export market back into recession - and us with it.
Beyond that, the big question beginning to loom over the whole Greek tragedy is this: is an EU with single currency heading towards a single treasury?