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Not just a Greek drama

The headline writers have been spoilt for choice this week: “Beware of Greeks taking gifts”; “What do the Greeks know about democracy?”; and, of course, “Another Greek tragedy”. Yet Athens’ economic woes are no laughing matter for the millions of Greeks who face a generation of hardship, debt repayment and sharply curtailed living standards. Hardly had the ink dried on the Eurozone’s latest bailout plan than Greek prime minister George Papandreou appeared to pull defeat out of the jaws of victory by calling for a referendum on the plan. Berlin and Paris promptly threatened to withhold the latest tranche of financial aid, forcing Papandreou to back down.

If Greece defaults, and it remains a big if, it would surely be forced to pull out of the Eurozone. As if this were not bad enough for the Eurozone, international attention would then turn to southern Europe’s other struggling economies. Few would argue with the fact that Greece should never have been allowed to enter the euro in the first place. It fabricated its application and has failed to impose either fiscal or revenue order ever since. Yet obsessing with such hindsight takes attention away from the Eurozone’s biggest problem: Italy. The markets are exacting a high price for Italian economic and political fragility: an annual bond return of 5.56% in October to be precise, and over 6% in the first week of November. This is well ahead of Germany’s 2.05%, although modest in comparison with Greece’s eye-watering 22.14%.

Italy’s hopes of salvation have been badly hit by the IMF’s description of its planned budget as “lacking credibility”. The IMF has now been invited to oversee its reforms and prime minister Silvio Berlusconi’s already shaky position has been undermined yet further. It now looks impossible for him to hang on to power, but he has defied the odds in the past. There is a great deal of logic in the German position that careless southern European governments should adopt a more disciplined fiscal strategy. Yet the only real means of imposing such discipline is to fine overspending governments; and piling more debt on already overburdened budgets surely cannot be the answer.

At the G20 meeting in Cannes, French President Nicolas Sarkozy insisted: “We will fight to defend Europe and the Euro”, but these are not necessarily the same thing. It is perfectly possible to strengthen the continent’s various economies without keeping the euro in its current form. In a nation state, economic decline in one area can be compensated by support from a neighbouring region. There may be some grumbling over the matter, but this is how Stuttgart helped fund reconstruction in Leipzig; and how income from London kept the Northern Irish economy afloat, although hardly buoyant, during the Troubles. The EU and the Eurozone simply do not have the mechanisms to achieve the same result.