There is not much that unites Eurozone politicians and the financial markets. But it is undeniably the case that neither trusts the Greek government or its people to stick to their latest bailout deal.
This matters because the real impact of the ongoing Eurozone saga is that the opportunity to erect a firewall around the Greek economy is fast fading. Contagion, which by rights should be a pure matter of economics, has now become a product of political interference.
When – and it really is no longer "if" – Greece eventually defaults on its debts and leaves the Euro the real risk is that by then (probably early in 2013) the outlook in Portugal, Ireland, Spain and Italy will have so deteriorated that the markets will turn on these nations, rather than regarding Greece as exceptional.
For several years after joining the Euro, the Greek people were to a large extent masters of their own destiny, and this should temper instinctive, natural sympathy for their current plight. However, the stifling austerity now being imposed upon Greece calls to mind the impossible demands made at the Treaty of Versailles of the defeated Germans over reparations following the First World War. What is being proposed for the Greeks today will also assuredly end in tears. Worse still, the resentment as this latest Eurozone ‘rescue’ precipitates a worsening Greek recession, threatens the doing of untold damage to multilateral continental relations.
The most surprising thing to most Eurozone watchers has been the vehemence with which German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, have recently addressed Greek politicians. Ever since the creation of the Federal Republic it has been an article of faith that German governments would present themselves as ‘good Europeans’, promoting the EU ideal often at great (financial) cost to itself. It would have been unimaginable that Adenauer, Brandt, Schmidt or even Helmut Kohl would have thrown away patient decades of diplomacy towards European neighbours, especially those with which Germany had been at war in the first half of the twentieth century.
Angela Merkel spent the first quarter century of her life living under communist rule; what is perhaps less well understood here in the UK is that her politics are far more free-market, low-tax orientated than the typical corporatist outlook of the German centre-right. We should not underestimate the resentment that this hard line will have in Greece for now, but also potentially in other parts of the Eurozone if, as I fear, the prolonged crisis cannot be quarantined. Indeed one of the biggest future risks is that any sign of short term Greek recovery will in all likelihood embolden Portugal, Ireland and Spain (for starters) to attempt to cut their own more favourable bailout deal rather than faithfully repay their debts.
It is worth spelling out just how unfeasibly tough are the terms of this latest Greek deal. Public debt will be capped at 120% of GDP in 2020 after a further eight years of austere recession (the Greek economy has already been in freefall for five years). However, as all previous EU imposed plans have failed in recent years we should not hold our breath. Under the terms of the June 2010 ‘definitive’ bailout deal the Greek economy had been anticipated to contract in 2011 by 3%. In the event it shrank at double that rate with unemployment now at a ruinous 20.9%. Meanwhile manufacturing output has collapsed by 15% over the past year alone. VAT receipts are down by a fifth as a result of 60,000 small businesses going to the wall in Greece since last summer. To make things worse (as they assuredly will) the latest plan involves cutting back 150,000 public sector jobs by 2015 – no risk of the famed automatic stabilisers applying here.
Even though there has been agreement, for now, in Greece, to delay elections, it is difficult to see how the latest EU programme can possibly command democratic consent. The next government to be elected by the Greek people will almost certainly contain large numbers of MPs from the extreme left and far right, whose first action will be an attempt to repudiate the latest bailout. It is quite impossible to see where the economic growth that Greece so desperately needs will come from. Any default from inside the Eurozone will self-evidently do nothing to promote its competitiveness. As a result, Greek departure from the single currency must surely only be a matter of time. The interim will be painful for Greece and grim for both the Eurozone and the EU. Whilst it is true that UK banks may not be directly on the line for much of the Greek debt, the interconnectedness of the global financial system means that indirectly UK banks are very much at risk.
Do not be fooled by the present lull – the next few weeks or months of relative calm in the financial markets will most likely be followed by a storm of a ferocity that we have not anticipated.