Brussels is rejoicing with unseemly relish at yesterday’s vote in the Greek parliament, approving the austerity plan. But they rejoice too soon.
Today the parliament will vote on implementation measures. This too may go through. But the big questions are: (1) Can Greece deliver on the measures? and (2) Even if it does, will they do any good? The answers, I believe, are No and No.
We have already seen the depth of feeling in Greece, and it’s understandable given the huge sacrifices which the Greek people are called upon to make, and the grinding internal deflation they would face. As the awful reality starts to bite, Greece will simply become ungovernable. The extraordinary measures are simply undeliverable in a free society. Some Greeks are already saying that default could be no worse than the austerity on offer, so they may as well get on with it, and provoke a crisis.
Part of the (proposed) solution involves selling Greek assets. Yet yesterday a Greek emissary in London was told in no uncertain terms by leading figures in the City that Greece today is looking like a deeply unattractive place to invest. The best they can hope for is fire-sale prices. Perhaps they expect Britain to return the Elgin Marbles to Athens so that Greece can sell them to the Chinese, or to the Gulbenkian.
But even if they were to succeed in delivering the austerity package, they cannot deliver a rescue. Greece is so deep into the debt trap, the austerity package so vertiginous, that even with austerity, GDP and tax revenues will go down. The debt will never be repaid. There is no way out. They are (in William Hague’s phrase) in a burning building with the doors locked.
As many commentators have noted, we must not confuse a liquidity crisis with a solvency crisis. Temporary emergency loans can tide over a country or company facing a liquidity crisis. But extra debt can do nothing in a solvency crisis but delay the inevitable, while making matters worse. Greece is insolvent. Busted. Bankrupt. But until European leaders recognise that, and respond to it, we shall not see any resolution of the trauma. And China should take note of this before it does any more grandstanding about “standing by the eurozone”.
Surely European leaders know this? I believe that they do, but dare not say so. All they are doing is kicking the can down the road. They’re buying time. Buying time for what? Perhaps to allow European banks more time to consolidate and strengthen their balance sheets, so as better to survive the inevitable Greek default. Perhaps also to transfer more of the risk from the banks to the tax-payer.
Either way, it will get worse before it gets better.