The latest developments indicate that Greece has had sufficient support from a combination of other EU Member States and the International Monetary Fund (IMF) to stave off default at least for the time being. A 45 billion euro bail out package has been negotiated, which the Greek government believes will stave off default this year, although at least 120 billion euros appears to be needed over the next two years. 30 billion euros is being provided by the EU and 15 billion euros by the IMF. The hope is that this will calm the markets down to a point where Greece can at least get through 2010 and beyond without reaching a stage where it can no longer finance its debt. The cost of doing this for the Greek government is, however, very high. Greek euro debt is now having to pay more than 4% more per annum than German bonds on the open market. The burden on the Greek economy of this debt burden is so substantial that it is very hard to see how total government borrowing can avoid rising to unsustainable levels. It is already expected to be 125% of Greek GDP by the end of 2010 and 140% by the end of 2012.
Bailing out the Greek economy is only being contemplated, however, with a very heavy price tag for Greek people. As both IMF and EU officials descend on Athens, it is becoming clear that the steps taken so far to reign in the government deficit and thus to try to stem the need for large scale further borrowing is going to involve draconian deflationary measures. Unemployment in Greece, already running at over 10% on average, and much higher for young people, is likely to rise sharply. Public expenditure is to be heavily constrained with heavily negative impacts on public services. There must, however, be serious doubts whether, even on their own terms, such policies will work. The problem is that the more the economy is deflated, the lower tax revenues become and the higher the claims on the government are from unemployment benefit and all the related costs involved in having millions of people with no income from employment. The harshness of the measures thus required is such that it is not at all clear that they are going to be politically sustainable. As doubts increase about the feasibility of the measures being undertaken, so the market pressure for even more drastic action is very likely to increase.
Heavily compounding the problems about whether the action now being taken to try to reduce Greek government's borrowing, however, is a much more intractable long term issue. The fundamental reason why Greece's finances are in such disarray is not the profligacy and dishonesty of previous administrations, although these have clearly been a very important contributory factor. The root problem is that the Greek economy is now hopelessly uncompetitive with that of other EU Member States, particularly Germany. As a result, Greece cannot sell enough abroad to pay for its imports. The consequence is a trade imbalance which mirrors the government's deficit. The only solution is to reduce the Greek cost base but - short of default and devaluation - this can only be done by the Greeks for many years having a much lower rate of inflation than countries like Germany. No-one believes that this is possible. The result is that the rescue operation being carried out at the moment provides absolutely no long term solution to Greece's problems. All it is doing is putting off the day when the markets - and the EU and the IMF - recognise that Greece's situation in the euro is hopeless.
It is also important to realise how much to blame Germany is for the Greek problems and also that of the other countries in potentially similar difficulties - Italy, Spain, Portugal and Ireland. The Germans have been extremely good at keeping their export costs down. The result is that Germany has a huge export surplus, much of which is generated by trade with other EU Member States. The problem is that German surpluses are then reflected in corresponding deficits with all Germany's trade partners and as long as German export prices remain as low as they are now, this is not going to change. One of the main reasons why the Greek economy cannot make ends meet, therefore, is because of the competiveness of German exports. The consequence is that to get the euro back on to any kind of even keel, it is essential for Germany to reduce its export surplus. The Germans, however, do not see things this way. In their view, because they have no problems paying their way in the world, they think that they should be allowed to run their economy the way they want. They do not want to be told to expand domestic demand, thus risking more inflation. German voters are also extremely reluctant to see their country's resources being used to rescue Greece from what they regard as the consequences of successive Greek governments' undisciplined and dishonest behaviour. The problem, however, is that as long as Germany continues to behave the way it does at the moment, Greece's financial problems, at least within the existing euro structure, have no solution.
Worse still, the problems currently being faced by Greece are only the visible tip of a much larger iceberg. It is not just the Greek economy which, within the eurozone, cannot cope with German competition. The same is certainly true for several others countries, particularly those with similarly uncompetitive economies, namely Italy, Spain, Portugal and Ireland. All of these countries, in varying degrees, have experienced unsustainable booms, fed by low euro interest rates. All of them now have cost bases which are far too high in relation to Germany. None of them can afford to expand their economies without running into unmanageable financial problems, as the standing of their debt is steadily downgraded. All of them, in consequence, are pursuing, with varying degrees of vigour, drastic deflationary policies. An important result, therefore, is that Germany's own export markets in the EU have weakened, with a cumulatively downward impact on economic activity right across the EU. Hardly surprisingly, unemployment in the eurozone has already risen to 10% and is almost certainly set to rise substantially further. This is then putting a double squeeze on all the weaker EU economies. Not only can they not compete with Germany, putting pressure on their balance of payments positions but - reflecting the same fundamental causes - they also have increasing government budget imbalances as a result of all the rising costs and falling tax revenues associated with faltering economic growth and increasing joblessness.
Faced with the prospect of rising unemployment, severe deflation and wholesale cuts in public services, it might be thought - and hoped - that the parties of the left in the EU would have developed an effective critique and strategy to contend with the problems which so many working people in the EU now face. In fact, however, almost nowhere is anything of the kind to be seen. There is a simple reason for this state of affairs. With few significant exceptions, the whole of the leadership of the left of centre parties in the EU has gone along with the EU project which has landed the EU with such unmanageable problems. In particular, it was clear from the outset that the establishment of the euro was all too likely to lead to exactly the sorts of problems which the EU now confronts. Because of their wholehearted support for Monetary Union when it was established, however, almost all the leaders of left of centre parties in the EU now feel unable to confront the inevitable consequences with any radical policies. As a result, we have socialist parties in government - not least in Greece and Spain - implementing highly reactionary and socially divisive policies to keep the euro from foundering. They are cutting public expenditure and presiding over mounting unemployment. They are making sure that the banks who have lent their governments money get paid back at the expense of those who voted them into power. They are allowing ever increasing inequality to prevail. If, in the end, there was a realistic prospect of such policies producing a stable foundation for future prosperity, there might be a case for such policies being adopted, despite the pain they are causing. The reality, however, is that all the current privations being heaped on working people in Greece, Spain and elsewhere are almost certainly in vain. All they are doing is putting off the time when inevitable painful adjustments have to take place, as it finally becomes apparent that maintaining both the weakest and the strongest EU economies in the same Single Currency is simply unworkable and the weaker ones have to give up the unequal struggle and default. It is hard to tell how much money will have been thrown at trying to avoid this happening before it occurs. The sum involved is likely to be massive - probably hundreds of billions of euros.
While Britain is not, of course, in the euro, it is inevitable that we will be adversely affected by the mounting crisis in the eurozone. The very poor performance of the eurozone economy at present is hurting our exports and delaying our recovery from the current economic downturn. We are going to be under pressure both through the EU and as a result of our obligations to the IMF to participate in the costs of bailing out Greece and other economies which are all too likely to experience similar problems to those Greece is currently exhibiting. If - or much more probably - when the euro does eventually cease to be the currency of the weaker eurozone members, as a result of default and devaluation, it is all too likely that our banks as well as those in many other countries will be severely hit. This will reduce their capital bases and thence their capacity to lend to companies and individuals, thus further depressing everyone's economic prospects. In these circumstances, it is surely almost past belief that there is still a significant minority of people in the UK - including the Liberal Democrats - who think it would be a good idea for Britain to join the euro at some stage. There will never be a time when it is right to do this. If we join the euro, we will give up all capacity to run our own economic affairs. We will get dragged into the same problems as are all too evident on the continent. At least we have managed to avoid the worst of the recession by allowing sterling to depreciate, with now evidently positive results for our exports. If we had been in the euro, we could never have done this. We need to be extremely thankful that we had the good sense to stay out of the euro when we did, and to avoid all the huge mistakes made when Monetary Union went ahead entirely for political rather than economic reasons. The whole of the EU and especially hard hit working people are now paying a very heavy price for all the misjudgements that Monetary Union entailed.