Greek drama and the euro

BY Gwynne Dyer

In December 1893, the Greek prime minister of the day stood up in Parliament and announced: "Regretfully, we are bankrupt." Nobody was greatly surprised, because the country had already defaulted on its foreign debt three previous times during the 19th century. It defaulted once more in 1932, and the smart money is betting that it will do so again in 2012.

Since Greece uses the euro, the common currency shared by 17 members of the European Union (EU), this is not just a matter of local concern. Many fear that a Greek default could take the euro itself down with it, so there have been frantic EU attempts to cobble together some bailout package that could keep Greece solvent.

The latest package was enormous: €130 billion (US$178 billion) in direct aid and a 50 per cent write-off of Greece's huge debt to various European banks. In return, Greece must impose an even tougher austerity programme on its citizens to bring its deficit under control. But Greek citizens are already fed up with austerity, so every day brings a new surprise.

Day-by-day swings

Last Tuesday, Prime Minister George Papandreou agreed to the EU's rescue package, and everybody heaved a sigh of relief. But a day later, he astonished everybody by promising to hold a referendum on the financial package in February: three more months of uncertainty, with a high probability that Greek voters would reject the deal in the end.

The markets erupted in panic, and the EU leaders exploded in fury. On Thursday, they told Papandreou that he couldn't just hold a referendum about the rescue package, as if the Greeks could renegotiate the deal if they didn't like it. The referendum must simply ask Greek voters if they wanted to keep the euro as their currency or not. There would be no more money from the EU until they said yes, and none at all if they said no.

So late Thursday night, Papandreou cancelled the referendum. On Friday, he barely survived a confidence vote in Parliament by promising to allow the creation of a broad coalition government. But on Saturday, Antonis Samaras, the leader of the main opposition party, demanded a snap election instead.

On Sunday, however, Samaras agreed to join an interim government that would pass the promised austerity measures and then hold elections in February - on condition that Papandreou stepped down. The roller-coaster ride continues.

Greeks practically invented drama, and they do it very well, but Greece is a small country and foreigners don't really care about either its economy or its politics. The markets are panicking because this crisis isn't really about Greece at all. It's about the future of the euro, which was built on a very shaky foundation from the start.

No public support

It was primarily a political project, intended to lock the EU members into perpetual union by the device of a common currency - but there was no public support in any EU country for the surrender of national sovereignty that creating powerful shared financial institutions would require.

When the crisis struck last year, it became obvious that the Greek government could never pay its debts, no matter how savagely it cut its spending. If it defaulted, however, the big European banks that lent so much money to Greece would be gravely damaged.

So the EU is shovelling enormous amounts of money into Greece to forestall a default, while forcing European banks to take a 'haircut' of 50 per cent on their Greek loans. Even with all that, however, Greece is still drowning in debt, and the EU is no closer than ever to creating a financial authority with the power to protect the euro.

When will Greece finally default and get it over with? Here's a clue. Euro deposits in Greek banks fell by 14 per cent last year, as depositors moved their money abroad to protect it from being converted into 'new drachmas' at a huge discount when Greece crashes dumps the euro. In just the past month, euro deposits fell by a further six per cent. It may not be long now.

Gwynne Dyer is a London-based independent journalist. Email feedback to columns@gleanerjm.com.