The Greek crisis is Europe's crisis
Athens, 10pm: All economic crises eventually become political crises. But they don't all follow the same pattern. Even the most complex of economic crises can usually be summed up in a few graphs the shape of a V or U. But once the pressure works its way through into the visceral world of street demonstrations, scarred national pride, old wounds re-opened, no graph is going to encompass or predict it. Thus, as the UBS sage George Magnus puts it: "political economy is back." (UBS Research, The Return of Political Economy, 5 February 2010)
But the political economy of the Greek sovereign debt crisis involves all those concepts that the two-dimensional economics of the past 20 years finds it not only hard to cope with, but distasteful even to discuss: class, communism, Europe's fascist past. Oh, and whether the Euro is going to survive.
The economic crisis has raised a bonfire of the vanities. It floored countries like Iceland and Ireland, where the prosperity and property booms were found to be driven by a financial system that went quickly bust. But Greece is on a different level: it's not the banks that are bust but the country.
The incoming Pasok (Pan-hellenic socialist) government discovered that instead of 3%, or even the revised 6% of GDP, the budget deficit was running to 13%. Somebody had been mis-stating the figures; whole tranches of defence expenditure, for example, seem to have been covered up.
And while a 13% deficit - and a 110% national debt for that matter - are not a disaster for a developed country, they cannot really be sustained in a country where, as my Greek barber puts it, "not paying your taxes is a national sport".
On the streets here, people don't blame the current Pasok government, yet. Young, trendy leftists rail against "global capitalism"; the jaded old guys in the cafes talk about "the octopus" - the political system with a corrupt (they allege) tentacle in every corner of Greek society.
But it's not just successive Greek governments that look culpable. The European Union turned a blind eye to consistent rule breaking. It offered the protection of a single currency and a central bank, without requiring fiscal discipline. Now it is finding out you need more than this to make a currency strong - you need political will.
For just as with Wall Street - where regulators had no idea about the scale of dodgy dealing and little enthusiasm to find out - Brussels has tolerated Greek government rule-flouting, more or less systematically, for the best part of two decades.
Greece was bailed out by the EU in 1987 and reforms were promised, but not delivered. Having scraped into the Eurozone at the height of an economic upturn, Greece has never looked like it could stay within the rules without some massive reform programme that the political system is incapable of delivering.
If Greece were a "true sovereign", with its own currency, that currency would now be the subject of a massive tactical burn by hedge fund speculators, just as Britain's was in 1992. But it is part of the Eurozone. So only the insurance policies on its national debt can be the subject of wild speculation. An $8bn bet has been placed on the collapsing value of the Euro - and as one banker tells Newsnight tonight, it has further to fall.
As George Magnus points out, sovereign debt crises usually need four measures to resolve: devalue the currency, slash interest rates, monetise the debt - by the central bank buying up government debt - and a bailout. Of these only a bailout would be possible for Greece. The Eurozone makes the first two impossible and the third nearly so. So it's bailout or bust.
But here's the problem: the crisis has exposed the absence of any mechanism for the Eurozone or EU to bail Greece out, and the absence of any collective will among EU finance ministers to do so. After 20 years of failing to force Greece to stick to the EU and Eurozone rules this should not come as a surprise, but it has suddenly struck the markets how weak it makes the Eurozone itself look.
For if Greece were to default, suddenly its bonds could not be accepted by the ECB as collateral. That would cause contagion to other parts of the financial system, because for Greece read also maybe Spain and Portugal. Bankers use government bonds issued by these countries as collateral in deals and suddenly their collateral would be not looking very healthy. It would probably spark a full blown run the debt of all flaky Eurozone countries, in the form of rising real interest rates on government debt and credit default swap movements.
And it would do something else: it would blow apart the strategy of the EU for dealing with the crisis beyond the Eurozone. Latvia, for example, imposing massive austerity as a price for eventually getting into the Eurozone; Iceland, pushing its way up the queue to join the Eurozone; Bosnia, unofficially already using the Euro; Ukraine, with its distant hopes of EU membership; Turkey ditto. Forget all this for a long time.
Suddenly the idea of inviting crisis-wracked countries to join either the EU or the Eurozone would not look very clever, especially to the good burghers of mittel-Europa who had been told for two decades that the whole Euro project was going to place them at the epicentre of world stability and prosperity.
But. Newsflash. Greece to planet Earth. Here's the better-than-expected news...
There is, I surmise on the basis of being here 36 hours, zero chance of Greece being forced into default by a mass social movement opposed to the cuts.
It's still possible that the bond markets themselves could force Greece this way - but having spoken face-to-face with left wing student leaders and public sector worker activists, here's what they say:
Their timescale is two years, not two weeks. Even those who do not want this to happen accept that Pasok will basically channel and head-off the anger. I have spoken to a bin-man on 750 euros a month take home pay, facing a 10% pay cut, who says this, and is mad as hell about it, but still prepared to see the Pasok government as a shield against the global markets, not enemy number one.
I've just sat in a village café with local leaders from both Pasok and New Democracy who say they will support the government, painful though it is. But only so far. As one put it, if they force us into deep austerity, we may have to launch a revolution - though it may not be this generation that does it.
For these reasons it's what happens after any bailout that is crucial.
The country has unresolved political fault-lines going back to the Cold War. Among commentators it has become fashionable to affect ignorance of the differences between Eurocommunist and hardline post-Soviet doctrines, or to care about strikes, or to remember who did what to whom in that chaotic period at the end of World War II. Now these are highly relevant in Greece, a country where a minister can state openly that there are "fascist elements" within his own police force, and where the rival wings of post-Soviet leftism have between them 34 MPs, and hammer and sickle posters plaster some village streets.
The Pasok government of George Papandreou was put into power during the first wave of political reaction to the economic downturn, in 2009. The centre-right New Democracy party, which it now seems mis-stated Greece's financial difficulties, was thrown out in a swing to the left.
The Papandreou government privately briefs that it is the target of a right-wing ideological speculative attack by US and European hedge fund managers and that its deficit reduction plan is sound. The communist-led, trade union movement has rejected the plan as too austere but is currently restrained by the fact that the voting base of Pasok and the left is supportive of Mr Papandreou and does not want to create an opening for the return of the right.
But soon the markets - or an IMF-led bailout, or even a rule-shattering EU-led bailout - will demand tougher measures.
There is a massive public sector workforce here. Its wages have grown rapidly, and out of proportion to any other Eurozone country, 30% since 2006 compared to 10% for the Eurozone, according to figures produced by GFC economist Graham Turner.
These public sector workers will be the big losers in any austerity plan. Staring, plaintively, at a binman's wage slip bearing the grand total of 750 euros takehome, for a month, after 25 years service, brings it home to you. On the same payslip I counted about 400 euros worth of deductions - only 58 of which were actual tax. Direct tax rises will hit such people hard.
If an austerity plan is, eventually, imposed on Athens from outside, either from Washington or Brussels, then the Cold War history of Greece becomes highly relevant.
During WWII the German occupiers tried to run the Greek economy from Berlin. Then in December 1944 a different army opened fire on Communist-led demonstrators in Athens, many of whom had been part of the anti-fascist resistance. That was the British Army. Together with the US, and with the approval of the Kremlin, the Brits then disarmed the communists. A year later civil war ensued, between the communists and a monarchist-conservative government. It tore Greece apart.
If it were all just ancient history it would be irrelevant. But if you go into the kafeneions where there are still veterans of that time alive, much of the discussion still revolves around these events. Villages are divided left and right, along lines of a blood feud that is viscerally remembered. And on the farmers' roadblocks that are paralysing northern Greece, where I've been today, they are not ashamed to voice their belief that this is all a plot by the US and Britain to ruin the Greek economy. And for Berlin and Brussels they have contempt.
Right now the Greek political class has held together: all except the two left parties in parliament have declared support for the Papandreou austerity plan.
If a harder one is imposed from outside there will be mayhem - and Pasok will most likely (if it follows generations of political form) swing leftwards, leaning on its popular base and refusing to countenance further austerity. To anybody who followed the Argentine crisis of 2002 it's a recognisable pattern. But Argentina was not in the Eurozone. A default-defying swing to the left would immediately call into question the credibility of the Eurozone, whose rules - at Maastricht, long before the Euro itself was launched - were written to make such swings to the left impossible.
The old fault-lines could persist peacefully in Greece, essentially, because it has been a laid back, highly educated and middlingly prosperous country. If the Eurozone's architects turned a blind eye to this low-tax haven on their southern border it has been because in many ways it has lived the Euro dream: entrepreneurship plus a welfare state; high culture plus flowing football.
To keep the dream alive, it is highly likely that Greece is about to be bailed out, and that the current EU mission to "monitor" Greek economic figures is a precursor to that. But it's the shape of the bailout, the conditions and the social reaction that will prove crucial.
Right now, from where I'm sitting, the Greek crisis looks as follows - the Pasok government will hold, making press speculation about imminent default or social upheaval look overblown - and in the light of the huge bet placed on it in the markets, a little bit cui bono.
But as for the young generation, they will be queuing up to leave the country: they see the whole thing as the end of a dream: they have only low wages, 27% unemployment, minimal pension rights and a decade of meagre growth to look forward to.
It's the anger of the youth, not strikes like the one that will paralyse this city on Wednesday, that is the real unpredictable factor.