Greeces staves off bankruptcy but troubles lie ahead

Greek riot police line up in front of parliament Image copyright AP
Image caption Strikes and protests will continue in Greece as the economy continues to weaken

In Greece, the basic script is easy: the parliament last night narrowly passed the latest austerity package.

Its passage should release further EU/IMF funding and allow the country to avoid bankruptcy.

The Greek Prime Minister, Antonis Samaras, spoke of putting a smile back on Greek faces. There are many reasons to be cautious, however.

  • Greece is heading for its sixth year of recession
  • the latest measures, which will see salaries and pensions cut, will only weaken the economy further - if the past is a guide
  • the governing coalition is weak and fraying
  • implementation will be difficult. One MP last night called on the people to "disobey the measures". The strikes and protests will continue
  • the country's debt levels are unsustainable. Debt is expected to reach 190% of GDP next year. The target agreed by the IMF - 120% by 2020 - is out of reach
  • Greece will almost certainly need some kind of refinancing and that will test the German taxpayers once more.

Yet again time is being bought. One former Greek minister told me that the country was surviving on Angela Merkel's instinctive caution. She fears - particularly in a German election year - the uncertainty of Greece leaving the euro.

So the country that has seen its economy shrink by 23% remains on life support.

Merkel, Britain and the EU budget

It is worth remembering when dealing with the German chancellor that she plays her cards late. She makes up her mind at the last possible moment.

On the budget, the European Commission still does not have Germany's detailed proposal of how it would apportion spending.

Mrs Merkel will not be drawn on whether she supports a freeze in EU spending, despite having signed a letter supporting such an idea.

Both Berlin and Brussels are pessimistic that a deal on the 2014-2020 budget can be reached in November.

There is a glimmer of a compromise. That is ensuring that the bulk of new spending goes to policies that demonstratively support growth and innovation. Such measures would help the European economy - and might appeal to Britain.

The Germans and others are actively exploring how to guarantee that money is spent efficiently - an idea that will also find favour in London. A glimmer as yet.

The chancellor went out of her way in Brussels on Wednesday to say she wants Britain to stay in the EU. In recent weeks I have heard that message from other senior Germans.

But there is another signal. There is not the will to indulge further British demands. The message has been passed to London that Berlin will not tolerate the UK obstructing moves to closer integration.

One final point. A colleague commented on the real hostility towards the UK in the European Parliament on Wednesday. The Germans still want the UK at the centre of the EU, but Britain's allies are getting fewer.