Ten points on the Euro crisis


1. The EU leaders are at loggerheads over the issue: should Greece be allowed to do a soft, controlled, partial default on its debts which forces banks and pension funds to lose some of the money they lent to Greece? Germany says yes, the European Central Bank chief Jean-Claude Trichet says no.

2. The question arises because the first Greek bailout, 110bn euros, did not work. Greece now needs another 85bn euros from the EU/IMF, and has to sell at least 30bn euros of assets on top of that because it cannot borrow in the global markets.

3. To justify the new bailout, both under its own rules and because voters in Finland, Netherlands and Germany resent the bailout, the EU is insisting on a new range of austerity measures, amounting to a 10% cut in public spending, a 1/3 cut in the public wage bill and 50bn euros worth of knockdown privatisation.

4. But the Greek PM George Papandreou could not get this through parliament. His majority fizzled to nothing as the details emerged and public pressure mounted. He offered a national unity government to New Democracy, the centre right, who refused; he offered to stand down on condition a new government signed up to the austerity plan, but no-one bought this.

5. So now, the one stable factor in the Euro crisis is gone. The Eurocrats were busy arguing over the terms of the bailout, but now their trusted dialogue partner has gone missing: even if a new government is sworn in on Thursday, how can the EU negotiate if there is no guarantee that the full spectrum of austerity measures can be got through the Greek parliament?

6. This is why the markets have long, already, discounted a hard default: 50 to 70% of the money is, as far as they are concerned, as good as gone.

7. But the moment of actually writing that into the account books will trigger a "credit event" for those who value and insure countries' sovereign debt. This will instantly raise people's aversion to risk: they will do instant de-risking of their own portfolios and you may come to a point where one bank refuses to lend to another. This is a credit crunch and is what the Euro policy makers fear. If it is triggered, it will negatively impact the whole world economy.

8. What's the fallback position? To let Greece default - chaotically or otherwise - but use taxpayers' money to bailout the affected north-European banks. That is what the German political elite is said to be considering. Market people are worried that Dexia, a Belgian bank, could be hit hard, bringing Belgian sovereign debt into the picture next.

9. Who will lose? Any pension fund or bank that lent money to Greece, Greek banks, or Greek people. And Greece will, if it drops out of the Eurozone, be forced to implement austerity anyway. However it will have economic sovereignty, which it does not have now.

10. Is there an alternative? Yes: a Marshall Plan for Europe, where German, French and British taxpayers voluntarily send money to Greece, Portugal and Ireland, shore-up their banks, shore-up their country finances, give them time to do structural reforms; in return they effectively seize control of south Europe's economic policy and impose a single Eurozone tax and spend regime. Another alternative is to let peripheral Europe leave the zone and rebuild it with Denmark and Sweden as a kind of "dark winter night" economic zone, based on sound principles and weak beer. Politics makes all of point 10 currently a non-starter.

11. Is there a wildcard? Yes: the Greek population. They will not accept any more austerity and if they succeed in resisting it, this will give Ireland and Portugal ideas. Another wildcard is the myopia of the Eurozone elite. It is not clear if they really understand points one to 10.

Paul Mason Article written by Paul Mason Paul Mason Former economics editor, Newsnight

End of an era

After 12 years on Newsnight, Economics editor Paul Mason has moved on to pastures new and this blog is now closed.

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  • rate this

    Comment number 59.

    We here of all the hardships of the greek people ect,what i would like is some figures compareing G.B for age of pensions and ammounts received as i am of the understanding they fair much better than us and have a shorter working week that is after the cuts .Would someone like to post a resonse with some facts please.thanks.

  • rate this

    Comment number 58.

    why should we in the uk have to give any money to europe we need money in the uk to keep public services going i worked long enough with continentals to know they hate the brits would anyone you know give money to your enimies

  • rate this

    Comment number 57.

    Paul, re. points 8 & 9; where does that leave the ECB? The EU is reluctant to allow default & re-capitalise the affected banks, as the ECB will be top of that list and its credibility will be destroyed. The question is; how much public money are the political elite going to be allowed to flush down the black hole that is the Greek economy just to protect the prestige of a flagship EU institution?

  • rate this

    Comment number 56.

    A good blog.

    I think Ireland, Greece and Portugal will do a runner. They will follow Iceland and choose the sovereignty of a referendum which will vote for default to rid themselves of the interest payments on 110 plus 85 billion Euro in the case of Greece.

    Germany must decide if it will surive better in a Eurozone without these three countries or throw good money after bad.

  • rate this

    Comment number 55.

    I am Greek, I live in Athens and I have a couple of words to say. My salary decreased directly by 10% the last year and indirectly by the increase of VAT, gas etc. I could accept a further decrease given the circumstances. What I cannot accept is a total privatisation of vital sectors as the electric power, the ports or the water company, a direct treat to the sovereignty of this country.


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