The Eurozone Act 2

Mark Sandford - August 2011
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In a previous issue No 31, I highlighted Greece in an article on the Irish bank bailout. Events have turned full circle after the existing government under George Papandreou was forced not only to survive a vote of no confidence but also pass a second vote on further austerity measures. This happened despite very vocal and indeed nasty street protests in Athens and a general strike called by the main unions which nearly brought the capital to a standstill.

A general strike will not solve the economic problems faced by Greece and its people. The government has to accept some responsibility for allowing borrowing to soar to unsustainable levels. At least the European Union has now agreed to provide more assistance after the government voted in more spending cuts and release 12 billion Euros so that Greece can meet short term debt and also avoid a default.

Many commentators now believe that the private lenders will have to accept some restructuring of Greek debt although the markets might view this as another form of default. Should this happen, other countries within the Eurozone such as Spain or Portugal would find it much harder to borrow funds or raise more money by the sale of government bonds. Indeed finance ministers across Europe are discussing a second bailout package for Greece as many see this as inevitable.

The ongoing saga over Greece demonstrates what happens when any country loses complete control over its finances. While I do not claim to be the greatest fan of the current Chancellor of the Exchequer, he has been vindicated by recent events and the bailout of Portugal, another smaller economy within the Eurozone. We may dislike current spending cuts but the government was forced to do something over the structural deficit in the nation's balance sheet. However I still question the pace of cuts and what this may still do to projected economic growth.

The debate has now moved on as to whether Greece can ultimately remain within the Eurozone and if it would be in everyone's interest for Greece to implement an orderly withdrawal. If this were to occur, it would leave the bureaucrats in Brussels with total egg on their faces. This crisis highlights the weaknesses of the Eurozone and the basis on which the single currency was constituted. No two economies are the same and one framework can never fit all, a classic case being interest rates.

Unfortunately, we in the United Kingdom are unlikely to remain unscathed over this as the European Union is a major trading partner. A sizeable of British exports go into Europe and we do win considerable inward investment due to our membership of the European Union. The tragedy is that the problem of debt repayment by smaller economies such as Greece or Portugal is not liable to go away overnight and has already triggered recent volatility across the markets.

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