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“A single currency without a single decision- making government on monetary and fiscal policy is an unworkable nonsense”

Counting the cost Jim Sillars

Compared to the crisis in the European/US/Asian economies,

Holyrood v Westminster over whether the Scottish Government will be able to borrow £2.2bn or £5bn, is minor stuff. Te Greek crisis is more than about Greece. It is about the epic battle

between politics and the realities of economic forces. So far, via the manoeuvres by Merkel and Sarkozy, politics is winning, which means we shall all stumble on for a few months, but eventually, economic reality will prevail. Indeed, the longer politics holds off economics, the worse the final outcome will be. Reality is unavoidable, and the more political leaders ignore it, the greater will be the economic deluge. Te eurozone is the outstanding, but not the only example of where politics is held more important than economics (the USA and China are others). Te creation of the euro was and is a political project; a major step towards a Europe of one government setting tax and spend policies for all subordinate federal-type states. A single currency without a single decision-making government on monetary and fiscal policy is an unworkable nonsense. Te Brussels elite whose political project it is, believed the logic of a

central government would become inevitable. To that end they spread the net of euro membership as widely as possible. Greece and Italy were admitted to the euro despite everyone in Brussels knowing that in order to qualify for membership, they were fiddling the figures. We are now seeing the consequences of crooked accounting for a political purpose. Te Greek crisis poses dangers not only to Spain, Italy, Portugal and Ireland, but to the whole EU economy, and beyond it to the USA and Asia, which are adding their own poisonous political policies to a possible economic catastrophe of global dimensions. How does Brussels tackle the Greek economic problem when

Greece is deep in debt, cannot generate economic growth to pay for it, is hampered by a deep-grained habit of people avoiding taxes (“only the stupid pay taxes,” an eye surgeon told Greek radio), and where the rich have taken their wealth out of the place? Te answer is ladling more debt on Greece, which hasn’t a snowball’s

chance in hell of ever being able to pay it off. Even if the Greek government drives its people into penury (20 per cent pay cuts and soaring prices so far, with worse to come), it merely maintains a deep recession, making it impossible for that country to service its debts, never mind pay them off. Tis is economics giving way

Greek protests

once again to the political project; a policy that will fall apart if the eurozone cracks, and crack it will if Greece defaults on its debt and leaves the euro. Defaulting and exiting the euro is the only way out for Greece, unless Germany is willing to take on and service its debt, and continue subsidising its economy for years to come. I cannot see the German Constitutional Court agreeing to that. So, in order to keep the political

project alive, the European Central Bank, the elite in Brussels, the IMF, and the other eurozone members plus the UK and others not in the zone, are lending more money to Greece, plunging it into more debt, so that it can stagger on to nowhere, punishing its people. Avoiding economic logic in the forlorn hope that something will happen to make Greece better, and Spain, Portugal and Ireland miraculously recover as well, is intended to save the euro. Eventually, of course, economics will win. Greece has a debt of

€350bn, with around another €110bn of debt, and more, parachuted on to it. Given that the Greek economy shrunk by 4.5 per cent last year and is heading for another – 3.5 per cent this year, how does a country mired in recession service the interest, never mind pay back the capital? If Greece’s government, under pressure from citizens no longer

able to tolerate the make-the-people-poor policy, finally obeys the laws of economics, defaults on its debt and leaves the euro, then the waves from that action will create a new level of crisis in the world economy. Why? Because foreign banks have a liability of €103bn lying in

Greece. German banks have €30bn of that total on their books; French banks €49bn; UK banks €14bn; Italians €4bn. If those are wiped off their books by a Greek default, banks will be once again facing enormous losses, and failure, requiring another taxpayer bail- out. RBS is an example: it has £936m tied up in Greek government bonds,

and a further £528m loans out to commercial outfits in that country. If, however, Greece defaults and the eurozone starts to disintegrate, the other basket cases such as Ireland, Portugal and Spain will follow. Te economists call it contagion. UK banks have liabilities of £139bn in Ireland alone, with RBS holding £54bn of that total. Te sooner the economic realities are faced the better. Te euro

was flawed from its inception, as was admitted last year by the EU president who confessed that the people had been misled (Daily Telegraph, 27.05.10). A one-size-fits-all policy could not work given the economic disparities between Germany and Holland in particular, and Greece, Spain, Portugal and Italy. What is needed now is a policy that involves a sensible re- engineering of the currency, some but not total losses by the banks, German/Dutch/French/Belgium economies using a northern euro and the rest going their own way, able to devalue, become competitive again, and able to dig themselves out of the hole the euro political project has put them in. Te net effect of that policy

would not see us all, including our banks, escape easily, but with the removal of the euro straitjacket from the southern countries now, there would be some long-term hope.

27 June 2011 Holyrood 73

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