Despite the IMF having strong-armed Germany into giving way on the principle that private banks should share the pain, Eurozone ministers still can’t agree on a bailout package, so the Greek crisis has not been resolved. Nor will it be anytime soon. Assuming the ‘new’ Papandreou government can push more cuts through the Greek Parliament (far from certain), the brake on growth created by the cuts means the Greek debt/GDP ratio will continue to rise—and the anger of ordinary Greeks will mount. Eventually, Greece will default—and probably leave the Eurozone.
British euro-sceptics are crowing once again that monetary union was never workable. But the truth is that the crisis need never have happened. While Greek politicians are hardly blameless, two key points have been overlooked by much of the press: the early role of the ECB and Germany in producing the crisis; and the politically retributive nature of the cuts imposed as part of the EU/IMF bailout package.
Had Germany moved to aid to Greece in January 2010, or had the ECB not threatened to cease accepting Greek bonds two months later, the crisis might have been contained in its early stages. It will be recalled that at the beginning of 2010, the Greek fiscal deficit for 2008-09 was found to be closer to 12% that the 3% Maastricht limit, in part because Goldman Sachs massaged the figures. One consequence was that Greek Eurobond prices tumbled (and yields rose)—between late 2009 and March 2010 the spread between German and Greek bonds widened by over 400 basis points.
Germany complained loudly about profligate Greek spending but essentially sat on its hands. Meanwhile, the ECB, which engages in weekly “refinancing operations” to add liquidity to the European banking system, announced in early March that it would return to the old A- standard for loan collateral. In essence it was the fear that Greek Eurobonds held by banks would not be accepted by the ECB—not the fear of the Government ‘going broke’—that lay at the heart of the refinancing problem. The crisis deepened when Greek sovereign debt was downgraded by S&P. By April Greece was forced to ask for a bailout, and (with reluctant German approval) a strongly conditioned package of EU and IMF loans began disbursement in May.
The second crucial point is that to appease centre-right deficit hawks in Germany and elsewhere in the EU, Greece was forced to accept impossible bailout conditions, including cuts in public wages, pensions and steep VAT rises. The rate of interest on the loan is over 6%, at least twice that at which Germany can obtain international funds, while the drastic budgetary cuts imposed have caused growth to turn negative (an annualised minus 5.5% compared to 2010Q1). The Greek debt-GDP ratio has risen to 150%, and its further rise is inevitable is even greater stringency is imposed. That is why most economists agree that sooner or later Greece will default.
Was this necessary? Clearly not; the EU could have borrowed money at 3% and lent it to Greece at the same rate or lower. Similarly, the harsh conditionality imposed was not merely unnecessary but, as many have argued, deeply counter-productive. Greece did not need to cut social spending then, nor does it today. Rather, it needs to raise productivity, particularly in the export sector. This can best be done by means of new investment.
A sensible EU bailout plan would direct cheap funds at productive expansion rather than insisting on punitive contraction. Indeed, Greece needs concessional lending (at less than 3%) —which could be financed by means of a new E-bond, a Tobin tax, un-sterilised quantitative easing, or some combination of these and other instruments.
In short, the real lesson of the Greek debacle is not that that peripheral countries should exit the eurozone (although that is now a distinct possibility); rather, it is that the current situation results from the increasingly rightward drift of Europe and the short-sightedness of our political class. Sadly, most European social-democrats have been complicit in this deplorable state of affairs.
 See Larry Elliot ‘Greece must exit the Eurozone’, The Guardian, 20 June 2011.