Greek rescue doesn’t solve anything

Allister Heath
HOW predictable. Yesterday’s supposed bail-out of Greece was short on details and long on feel-good verbiage, as the City soon came to understand. And even if a loan guarantee from EU countries does eventually materialise, it would merely stave off a temporary cash flow crisis, allowing Greece to meet its next few bond repayments.

For there to be any meaningful and sustainable improvement to its economic and fiscal policy, Brussels and Germany would have to seize extensive powers over Greece in a way for which there is no constitutional or legal precedent – deeply troubling for anybody who believes in democracy, self government and the rule of law. Instead of acknowledging this, the EU merely said that it will draw on the IMF for help in monitoring Greece’s progress and that eurozone members will take action to “safeguard financial stability in the euro area as a whole”, all useless waffle. More details may appear after finance ministers meet on Monday but nobody should hold their breath.

The only good news is that Britain doesn’t appear to be involved in the rescue package. Yet the trouble with the proposed bailout – if that is really what it was – is that it will further fuel moral hazard. Far from preventing contagion to other troubled Club Med countries, it will send a signal to governments everywhere that fiscal irresponsibility will be rewarded. What is most galling about the Greek rescue is that there is no way that such a tiny country could be viewed as too big to fail. The Bank for International Settlements has figures for public and private lending to Greece: France is owed $78.9bn, Switzerland $78.6bn, Germany $43.2bn and the U.K. $12.5bn. It would be tough for French and Swiss investors were 20 per cent or so of Greece’s bonds to be written off – but the systems would cope.

By contrast, an Italian or Spanish failure would be catastrophic, as would that of California, one of the most troubled US states. Yet yesterday’s shenanigans will merely reassure demagogic politicians and short-sighted voters everywhere that they can continue to spend freely, safe in the knowledge that they can always call in the cavalry to rescue them.

What is most worrying is that British voters are unaware of how bad the UK’s own fiscal situation has become. A PoliticsHome poll reveals that only 35 per cent of British voters believe that a Greek-style crisis in this country is a “real worry”. An overwhelming majority – 56 per cent – believe it to be a remote, theoretical possibility. Yet even a cursory look at the public finances suggests that we are indeed in deep trouble. We may struggle through without a disaster if spending is hacked back sufficiently; but even optimistic economists who believe we will be all right in the end are having sleepless nights worrying about parallels with Greece.

Tory supporters are much more likely to believe that a crisis is a real concern (58-35); the vast majority of Labour and LibDem supporters aren’t bothered. Such a division along partisan lines is unhealthy; voters are evidently unaware of their own parties’ views on the deficit. It seems that most people in the UK are deluded about the state of the economy and are unlikely to take kindly to the looming Greek-style public spending cuts that will be imposed regardless of who wins the election. Yet again, politicians have not been honest with the public; we can but hope the result won’t be Greek-style social unrest in Britain.