The decision by George Papandreou to hold a referendum on the terms of the repayment conditions has collapsed amidst ignominy. It had alarmed everyone in the eurozone. Now the referendum question will become an issue of Papandreou?s own survival. He obviously thought he could seize the initiative and appeal to the Greek masses by promising a referendum and start a debate about whether Greece should be in the eurozone. Alas, no such luck for Papandreou.
Yet, in some ways, the referendum could have been the key move. All these months, the eurozone leadership has dragged its feet, first in denial that the problem existed, that IMF may be needed to tackle it, that a large package was needed to shore up the Greek economy and that private banks would be hit by sovereign debt default. Along with Greece, Ireland, Portugal and Spain have also been implicated. Italy would never have been a problem if Greece had been tackled last year.
The decision to have the European Union was always a political one. The EU has had a peculiar philosophy that, to keep the Union together, it must have constantly new initiatives. It was described as the problem that if a bicyclist stops he may fall off, so he has to keep moving. This shows that none of these leaders had ever ridden a bicycle! The bicycle theme meant that once the single market had been decided upon, the Maastricht Treaty was signed. Even before the single market was implemented, the project of a single currency was launched. Even before the single currency was formally launched, the enlargement of the EU from 15 to 27 members was started. Each step was taken before the previous step had been completed.
The euro was so blatantly political that, even though it was known before hand that Italy would never qualify under the Maastricht conditions about debt-to-GDP ratio, it was admitted. Greece had not only falsified its national income accounts to qualify, but everyone knew that the accounts were falsified. Germany had dreams of putting a hard deutsch mark regime in place for all EU except that it was not going to be identified with Germany. So, the euro was invented by the Germans.
It was never going to work without a single fiscal authority or at least a central bank that could act as a lender of last resort. But the euro as a currency is no single government?s liability, which is why now no single country wants to own up to its rescue. It was a hopeless dream that all eurozone members were going to be fiscally disciplined like the Germans or the Dutch. No country had consulted its citizens whether to join or not.
Papandreou thought Greece could be asked. The solution worked out 10 days ago in Brussels by the eurozone leaders involved a 30-year austerity programme for Greece even after the ?haircut? for its creditors. Any responsible democratic leader could not embark upon such a prospect without consulting his electorate. The choice is rejection and exit from euro with chaos and misery for three to five years, as against continual misery for 30 years as a mark of financial responsibility. But the rest of the Greek political class refuse to take such a high risk. The choice is a difficult one, but ideally it should be made by the people who will have to suffer either way. It is obvious now the Greek masses will not be offered such a choice. The rich people among the Greeks have already begun to take their money out and are buying property in London. The Greek aam aadmi will have to just grin and bear it.
The reaction of Merkel and Sarkozy has been arrogant beyond belief. Instead of solidarity or sympathy, there is contempt for the Greeks as being lazy and feckless. Germany has benefited immensely from the euro as it gives the German economy an undervalued currency, which helps its exports.
Perhaps the eurozone needs a shock so that it can rebuild itself on sounder principles. Within the 17 members, there are far too many weak brethren and not enough strong ones to carry them. If there were to be a credible fiscal union with tax raising powers as well as budgetary disciplinary measures, we may yet get a viable currency. But it has to be seen as an economic problem. Merkel has been hysterical in saying that if the euro fails then the EU fails and war will resume on the European continent.
It is because of such sentimentality that the EU has grown as large it has. The constant nightmare has been Europe?s belligerent past and the dream is of a universal peace throughout the union. But that is politics or perhaps philosophy. The harder economic story underlying any political union has not been spelt out. This is why there is a crisis.
The author is a prominent economist and Labour peer