Painful transition from an old world

Tuesday 19 June 2012

The eurozone crisis shows every sign of being a long, bloody economic and political battle of epic proportions.

Custom byline text:

So the words of Laocon in Book II of the Aeneid are worth applying to the current financial situation: Beware of Greeks, even when bearing gifts.

The gift of a breathing space following Sunday's election victory for Antonis Samaras's centre-right New Democracy party, committed to austerity measures to retain the bailout and remain in the euro is, in reality a challenge. How quickly and how effectively can Greece and its eurozone creditors agree a new deal that will enable them to meet the terms of the world's biggest bailout without their collapsing economy disintegrating into civil disorder is the least of it.

Leaders far beyond Greece's 16 partners in the eurozone can welcome the election result only because it is not the trigger for immediate chaos and contagion. The measure of the result was recorded by the financial markets which, after an initial rise in Asia, barely moved in Frankfurt and Paris. EU countries currently have total exposure of £445 billion to the Greek economy, which is now in freefall. Assuming he can form a coalition with other parties willing to support austerity measures, Mr Samaras's best hope is to negotiate more time for repayment. Even if that is granted, there will be a continuing question about whether the cuts to pensions and public sector salaries plus higher taxes can be sustained to a sufficient degree and for long enough. The real issue is how monetary union can be effectively underpinned when Angela Merkel's insistence on the need to stick to the terms of the bailout is being challenged by Francois Hollande's new agenda for easier terms to promote growth. Last week's bailout of the Spanish banks has failed to boost confidence and yesterday borrowing rates rose in both Spain and Italy in a reminder of the interconnectedness of the European economies. David Cameron is right to warn of the danger of delay: the situation in Greece has deteriorated in the six weeks' political hiatus between elections. His argument for the "remorseless logic" of a banking union for the eurozone will ring hollow while London, Europe's biggest banking centre, remains outside but its logic must be examined by the euro leaders. Ineffective, short-term measures can hold off mayhem indefinitely. Next week's summit in Brussels must begin the difficult task of drawing a new road map for the euro. The desperate situation in Greece has prompted a race to privatise assets and the ancient port of Piraeus, still one of the most important harbours in the Mediterranean, has already been sold to China. There can be no clearer illustration of the kernel of Gordon Brown's analysis: that we are in transition from an old world to a new one.The crisis in the eurozone will dominate the G20 summit in Mexico whose leaders can no longer afford to ignore what Sir Mervyn King, governor of the Bank of England, called the black cloud that has descended over the global economy. With the outgoing head of the World Bank, Robert Zoellick, warning that Europe's debt crisis could spill over into developing countries, the G20 must prove its worth by agreeing concerted action.

Commenting & Moderation

We moderate all comments on HeraldScotland on either a pre-moderated or post-moderated basis. If you're a relatively new user then your comments will be reviewed before publication and if we know you well then your comments will be subject to moderation only if other users or the moderators believe you've broken the rules, which are available here.

Moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours. Please be patient if your posts are not approved instantly.

Painful transition from an old world

Commenting & Moderation

MOST READ

SPONSORED LINKS

MOST COMMENTED