Stop-gap for Greece


THAT A continent holds its breath for a vote in the parliament of a small peripheral country says much about the precarious predicament in which the euro area finds itself. The Greek government’s winning of a vote of confidence in the early hours of yesterday morning ensures political stability in that troubled country is maintained – for now.

Yet the vote was no more than a pitfall avoided. The hurdles facing Greece in returning its economy to a sustainable footing are large and many. The biggest and most immediate is the country’s mountain of public debt. Multibillion euro repayments on part of that debt fall due in three weeks. Fresh bailout funds will be made available to meet these obligations and avoid default. Of that there is little doubt.

But this stop-gap approach that has been taken with Greece has utterly failed thus far and stands very little chance of working in the future. Ultimately Europe will have only two realistic choices in dealing with Greece: allow default or take on some of its debt. The first choice comes with enormous economic and financial risks – although it is impossible to predict what would happen in the event of a sovereign default, plausible scenarios include cataclysm. The second option of sharing Greek debt with the rest of Europe is hugely politically risky – taxpayers in northern European countries may rise up against a “transfer union” that they were promised would never come about.

Facing up to these choices will take some time yet, in large part because the euro zone’s most powerful country - Germany – cannot decide what to do. It has lumbered and dithered during the crisis. It continues to do so. Having raised the prospect of demanding a form of default on Greek sovereign debt in recent weeks, it pulled back last Friday. Raising the prospect of default heightened the rolling panic in financial markets and made Germany look uncertain and indecisive (yet again). The end result was bad for everyone: Germany, Greece and the wider euro zone.

The failure to take action proportionate to the magnitude of the crisis is alarming others outside the euro zone. In Britain ministers are making contingency plans for all eventualities in the euro area. The US urges action on a weekly basis. The International Monetary Fund is increasingly alarmed – on Monday following a weekend meeting with euro area finance ministers it warned of the global implications of inaction.

The implications for Ireland are as serious as for any other country, if not more so. Acute uncertainty about the future of the currency in our pockets merely adds to domestically generated uncertainty. It is difficult to see a return of confidence under such circumstances. If the focus on Greece has served to underscore Ireland’s status as a more reliable European partner it has distracted from efforts to win better bailout terms.

The EU is being shaken to its foundations by this crisis. What shape the euro zone’s economic, fiscal, financial and political structures will take in the future is unclear. One thing is certain though, they will either be very different or they will not exist.