Contagion risks are back with a vengeance. With Greece edging towards the euro exit gates, pressure is building in familiar territories. Yields on Portuguese sovereign debt have spiked even more rapidly than those on Greek debt. Spanish and Italian borrowing costs are creeping up. The markets are pointing to another imminent euro crisis. And, once again, Greece is at the epicentre.
The people of Greece know what they don’t want – they don’t want any more austerity. If another election is called to sort out the mess of last weekend’s result (the talk is of holding one on June 17) and the result is again a roughly 70pc vote against austerity, it will probably mandate the government to ditch the bail-out.
That would mean a euro exit, a return to the drachma, a massive devaluation, and a default on the remaining private sector debt. If that is what the people of Greece do want, it carries enormous risks.
It would create unbearable tensions across Europe. The European Central Bank’s holdings of Greek sovereign debt would suffer losses, which would largely be transferred back to Germany. Even the original €109bn bail-out might face a write-down, which would leave British taxpayers taking a hit.
The last thing Greece could afford, though, would be to alienate the International Monetary Fund – also part of the original bail-out. The country is running a primary deficit, which means it spends more on public services than it raises in taxes even excluding interest payments. The balance has to be borrowed but, having defaulted on creditors, Greece would have locked itself out of the markets.
If it called for IMF assistance, a “programme” not dissimilar to the current one would be demanded.
If Greece refused the money, or if the IMF refused to lend, the consequences would be dire. With the economy plunged into immediate crisis by the currency’s collapse, an even more severe austerity would be thrust upon the people. There simply would not be the money to public sector pay wages, for example. With tensions seething, the neo-Nazis might even gain further ground.
The alternative would be a managed exit from the euro, one endorsed and arranged by Brussels. But that would only provide a template for Portugal and even Spain, where popular anger at austerity might direct policy down the same route. The outcome would be anathema to the political forces doing everything they can to salvage the euro project. In the meantime, the eurozone would have hit another, even more unpredictable, leg of its interminable journey.
By then, France’s elections would have been largely forgotten. Francois Hollande’s demand that growth be made part of Germany’s “fiscal compact” would probably have been resolved by a supplementary, loosely worded pact drawn up by Brussels bureaucrats. There might also have been a virtually unnoticeable slowing in fiscal austerity measures for the region. After all, Hollande’s growth plans for France are merely to balance the budget one year later than President Sarkozy.
The Franco-German alliance would be as strong as ever at the centre of the single currency. But there would be chaos in the periphery. It is no coincidence that German and French bond yields fell this morning, as the others rose.
