Police clash with protestors in front of the European parliament on 6 May
On Friday 14th May, Greeks read in their newspapers a list of 151 doctors alleged to have declared improbably low income to avoid tax. “The ‘poor’ doctors of Kolonaki,” jeered the front page of Ethnos, referring to the exclusive Athens district overlooking the Acropolis. “Tax-dodging doctors named and shamed,” said Kathimerini, adding that the finance ministry had found 57 who failed to issue receipts or record patient visits (and one who declared income of just €300 a year). Fourteen have been fined a total of €4.3m (£3.7m); four will also face criminal charges.
The ministry, which is raiding doctors’ and lawyers’ offices across Athens, has turned to Google Earth to scan the summer villas in Kifissia, the affluent Athens suburb, to count the swimming pools which tax inspectors use as an indication of wealth. If the government of Prime Minister George Papandreou keeps up the pressure, then it will go some way to calm fears that Greece is bankrupt and unreformable. The crackdown “is, I believe, an essential element of catharsis,” said Loukas Tsoukalis, a professor at Athens University and adviser to José Manuel Barroso, European commission president. “If Greeks see that the right people are punished, they are more likely to perceive the austerity programme as fair.”
If the crisis had been limited to Greece, it would already be over. Greece is tiny, its economy only 3 per cent of the EU. But just as the world appeared to be clawing its way out of financial turmoil and recession, Greece reminded the markets that countries, as well as banks, can go bust. “Lehman Brothers surrounded by turquoise water,” was one description. “Contagion,” that laconic metaphor of the markets, hardly captures the speed with which fears of insolvency spread along the rim of Europe, to Portugal, Spain, Italy, then Ireland and even Britain. For one climactic weekend in May, the race to put together the gargantuan rescue deal of €750bn (£640bn) commanded the urgent attention of all the leaders of the EU, President Barack Obama and the IMF.
The bailout has saved the euro for now, although the currency has reached an 18-month low against the dollar. But it has torn up the rules by which the European Central Bank (ECB) runs the bloc of 16 countries which use the euro. (The bank reluctantly agreed to start buying eurozone bonds, even though that might trigger inflation and expose the ECB to big losses if Greece does write off part of its debt.) The crisis has also shattered the principle that eurozone countries should not be bailed out by others. Moreover, it has sharply divided France and Germany, who have been on opposite sides of the argument throughout the crisis, left Germany in rare isolation within the EU and even raised questions in Berlin about its own longer-term participation in the currency.
Nor is the crisis over. It remains unclear whether Greece and its Mediterranean neighbours can make the changes that Europe is finally demanding of them. The comparison with Ireland, which faced similar problems, but has handled them with far more rigour, offers some hope, but also suggests that Greece’s problems may be too ingrained to resolve.
*****
The drama began in October, when Papandreou, the socialist prime minister, told his country that Greece’s finances were in a far worse shape than the previous right-wing government had declared. A tall, stooping figure with neat grey moustache and an undemonstrative manner, hailing from a dynasty which has dominated Greek politics, Papandreou said that Greece was running an annual budget deficit (the gap between state spending and income) of 12.7 per cent of GDP. That was twice as much as the previous government had told the European commission, and four times the official limit for the eurozone. It also had accumulated debts of €300bn (£250bn), equal to more than 100 per cent of GDP. As Greek euro bonds began to plunge, the commission dispatched teams of auditors to Athens, to discover that the true figure was even worse—nearly 14 per cent.
The roots of the predicament go back centuries, to the forces which shaped modern Greece. Robert Kaplan, an American scholar, argues that “there is a deeper cause for the Greek crisis that no one dares mention because it implies an acceptance of fate: geography.” The EU, preoccupied with balancing France and Germany, and its modern division between north and south, ignores the historic rift between east and west. It ignores, as he puts it, “the boundary between Rome and Byzantium, and later between the prosperous Hapsburg empire in Vienna and the poorer Turkish empire in Constantinople.” Greece, he argues, “is far more the child of Byzantine and Turkish despotism than of Periclean Athens.”
In Greece and its neighbours along the Mediterranean, with relatively poor farming land and shut out from the growing trade of prosperous northwestern Europe, a middle class was slow to develop. Greece’s social structure became polarised into the wealthy and the poor; it is no accident, as Kaplan points out, that for the past 50 years, Greek politics have been dominated by the Karamanlis and Papandreou families.
Greece’s difficulty in developing the apparatus of a modern state was made worse by the civil war of 1946 to 1949, between the communists and conservative forces backed by the US. This shattered the few parts of government left working after the German occupation in the second world war, and entrenched a bitter polarisation in political life. The emergence of a fervently anti-communist security establishment paved the way for military rule from 1967 to 1974. The decisions that led to the present level of debt were taken in the early 1980s, when Papandreou’s father Andreas, who towered over Greek politics for a decade and a half, determined to lay the foundations of a social democratic state so all-embracing that it would mark the end of this traumatic episode.
Yet the public sector that he built became impossible to afford. It is now extravagantly generous by European standards. Working hours are often 7.30am to 2.30pm; employees receive a bonus of an extra month’s salary twice a year, and some can retire at the age of 53. Greek newspapers have noted caustically the “Oedipus problem” of this prime minister: he must “kill” his father’s policies to save the country.
Even that would not be enough. A culture of corruption and tax evasion threads through national life, making it hard for governments to raise money; as one headline jeered: “No taxes—we’re Greek.” One young woman described how, in public hospitals, “doctors blackmail you. If you don’t give them a small packet of money, they say, ‘Oh, I will put the other patient first.’” The planning departments of any town, she added “are the most corrupt of all—everyone knows.”
Nor is the private sector a healthy antidote. Family companies make up three-quarters of the private sector, and many are neither competitive nor innovative. If they cannot find a public sector berth, young Greeks will try to work in their father’s business or that of a relative. The high minimum wage means, as one banker put it, that in his village, people eat imported oranges and lemons while the fruit hanging on nearby trees remains unpicked, because it costs too much to harvest. Bureaucracy has been “strangulating,” argues Tsoukalis. “We have a capitalist system with a Soviet state.”
Greece skated over these failings when it rushed to joined the then European community in 1981—14 years ahead of the much richer Austria, Finland and Sweden, and five years before Spain and Portugal. In its petition for membership, it played to the romance about ancient Greece among Europe’s leaders, many of them educated in the classics. Invoking Greece’s claim to be the cradle of democracy, it glossed over the powerful affinity between modern Greece and cultures to the east. Supporters of Greek entry argued that to refuse entry would have been a rebuff to the country’s success in shaking off military rule, and would have left the peninsula isolated; worse, it would have been to doubt Europe’s ability to help a small, poor country leave behind a troubled past.
Greece was guilty of far worse misrepresentation when it applied to join the euro. Yannis Papantoniou, former finance minister, has said that: “Once we were in line to join the euro, we started to transform from a third-world country to one that aspired to look more like Switzerland.” But even though the economy, lifted by EU subsidies, was growing at 3 per cent a year, Greece failed to meet the conditions set by Germany for deficits and inflation by the time of the euro launch on 1st January 1999. The country succeeded two years later, presenting figures which claimed its budget deficit met the rules, and that its debt, which did not, was no worse than Italy’s.
Since October, as it has become clear that those figures were unreliable, much has been made of Goldman Sachs’s role in advising Athens on a derivatives deal which removed some debt from official figures. It would be wrong, however, to portray this as the device which enabled Greece to join the euro; the deal happened after entry and concealed only a fraction of the debt. But it reflects the spirit in which Greece approached the eurozone rules. It also shows the lack of scrutiny by those who wanted to see the euro expand its domain.
When Greece revealed the true state of its finances last October, it caused alarm, then panic, in the bond markets. They feared that Greece could not repay tens of billions of euros in April and May, nor did they want to lend it €45bn more to cover its spending for the rest of the year. Bankers began to talk of default and rescheduling. Even the big taboo—that Greece might leave the euro—was broken, as some German politicians declared it was the only remedy.
The fear was that the problem would spread to Portugal, Italy, Ireland, and Spain. In frantic talks over 40 hours, ending at 2am in Brussels on 10th May, the EU, the ECB and the IMF stapled together the €750bn rescue. Of that total, a fifth bigger than the rescue package for all the US banks, €440bn came from the countries belonging to the eurozone, €60bn from the EU (including an estimated £10bn from Britain), and up to €250bn from the IMF.
They forced Papandreou to plan to cut Greece’s deficit to 3 or 4 per cent within three years, beginning with salary and pension cuts—and a tax crackdown. Demonstrations against the various austerity packages had been running for weeks, filling the streets of Athens with burning tyres and tear gas; three people were killed by a petrol bomb in a bank a few days before the Brussels deal was struck. A sandy mongrel dog, seen harassing police day after day, became a totem for self-proclaimed anarchists; “Riot Dog,” nicknamed Louk, after a kind of sausage, now has his own Facebook page.
The protests are now subsiding. Despite the street violence there has been a narrow majority in polls in favour of the various austerity plans from the start of the crisis. Papandreou has no real opposition, and many union leaders support his party. But some are sceptical. “Can Greece really deal with its problems? I have my doubts,” said Josef Ackermann, chief executive of Deutsche Bank, one of those who designed the bailout. Others warn that the cuts will plunge Greece into recession, making it harder to pay down its debts. The best hope, as Tsoulakis puts it, is that “in a crisis you can do things that would be unthinkable in normal times.”
*****
Comparison with Ireland offers hope—but only up to a point. In the past year, Ireland has successfully started to tackle financial problems that looked at least as bad as Greece’s. Through the 2000s, Ireland used low eurozone interest rates to finance a property boom. The global financial crisis punctured that bubble, leaving acres of ugly, concrete ghost-dwellings, sprawling out from Dublin and across previously picturesque farmland.
The property crash threatened to topple Ireland’s main banks, and the rescue cost between €50bn and €60bn. Prime Minister Brian Cowen followed that deal with a budget in the autumn of last year to make savage cuts in the annual deficit, then running at more than 13 per cent of the economy. Yet despite pay cuts of up to 15 per cent for many public servants, there have been only low-key protests.
Why the difference? Ireland started with a better financial hand, with total debt of only about 60 per cent of GDP, about half of Greece’s. It is also easier to make radical changes in a nation of just 5m, compared with Greece’s 11m. Brian Lenihan is a popular finance minister who has adroitly brokered difficult deals with the unions, postponing the severest cuts for 2014. But political culture is also a big factor—Ireland has no equivalent of Greece’s left-right polarisation. Indeed it still enjoys some of the sense of solidarity of a small country which has lived in the shadow of a large one—its delight in membership of the EU and the euro is evident. Most important, says a former government official, is that the Irish have had a powerful sense of having enjoyed the fruits of the boom years together, and now have to share the pain together.
But Ireland is not yet safe, Greece considerably less so—and the bailout has left collateral damage at the heart of Europe. The rescue has left Germany sulking and confused about its future role in the EU. In December, as the crisis deepened, Chancellor Angela Merkel’s first instinct was to protect Greece. She talked of the “common responsibility” of EU countries to help each other. But she may be one of the last generation of German leaders to feel that commitment to the European cause—strengthened, in her case, by having grown up in East Germany. Not all her cabinet share it. And German voters have loathed the deal, failing to see why they should work until 67 to pay for Greeks to retire 12 years earlier, and why their country should hand over €120bn, which may be their eventual share of the rescue bill. “We are again Europe’s fools,” declared the mass circulation Bild. Merkel is seen to have been outmanoeuvred by French leader Nicolas Sarkozy and in the North Rhine-Westphalia elections on 9th May her Christian Democrats were beaten, losing control of the state and the upper house of parliament too.
It is hard to see the Germans tolerating any repeat of this rescue. But nor do they want to change their own ways to make it easier for the Mediterranean countries to grow faster. Germany has prospered because of its southern neighbours’ willingness to buy its goods with borrowed money. But the idea that Germany should persuade its own people to buy more and save less is dismissed out of hand.
Indeed, this crisis has highlighted just how little convergence there has been in the eurozone. Far from making the weaker economies more competitive, the euro has served as a kind of shelter under which Greece, and others, have used the benefit of low interest rates to fuel asset bubbles without reforming their economies. France, and many people in the ECB, now believe that if the euro is to survive it will require much more co-ordinated economic governance to prevent imbalances. Germany wants much stricter rules limiting budget deficits. Yet will countries tolerate the infringement of sovereignty which this would require? It seems unlikely.
The alternative to this convergence—and the more likely outcome—is the unravelling of the eurozone. Greece itself could still be the catalyst. Unless Greece begins to grow fast, it is hard to see how it can meet repayments without rescheduling its debt—indeed it would require a bigger adjustment than any in IMF history. Yet it is hard to see rapid growth without devaluation, and that would mean bringing back the drachma. There is no mechanism for leaving the euro. It is supposed to be a “Roach Motel”—you “check in but don’t check out,” in the slogan of the pest control device. Any exit might have to be done overnight, to avoid a run on the banks. It would be legally very messy, and the national currency to be recreated might exist only in electronic form for some time, said one banker in London who has considered the question in detail. But it is no longer impossible to imagine—indeed, across Europe, bankers and lawyers are beginning to test run the idea.
Even if Greece did devalue it would still face economic pain. Tourism would benefit but Greece has a weak export sector (“olives, ships and sunshine,” said one British banker disparagingly). The markets would allow the government to borrow only at punitive rates. Most of all, exit from the euro would be a national blow. The idea of leaving the euro flicked through many conversations in Athens before the bailout, but, for the moment, has disappeared.
Not so in Germany. The debate about whether the euro still benefits Germany, the country that did more than any other to bring it into being, would have been unimaginable a year ago. But it is now happening, as Germans begin to focus on the notion that the currency union will demand the steady transfer south of their hard-earned surpluses.
The crisis has changed the outlook not just for the euro but for the EU itself. After the long institutional wrangle of the Lisbon treaty many people hoped that the EU could look outwards again, but instead it may be plunged back into years of emergency summits and bailout deals. The crisis is also likely to prove a brake on future expansion, because it has exposed the limits of the richer countries’ willingness to pay for the poorer. Turkey and Ukraine, both big and poor, might now have to look instead to close partnership rather than full membership. Yet at a point when Russia is seeking to rebuild its influence, in places such as Bulgaria and Ukraine, Europe will suffer by seeming to pull away.
It is easy to forget, in the modern EU, when it is possible to take cheap flights anywhere, live and work anywhere, just how different national cultures remain—consider the reaction to the crisis in Greece and Ireland. Moreover, the EU has changed its poorer members less than its founders imagined. The crisis that started in Athens in October has delivered a profound shock to this EU vision—and above all, to Germany’s sense of its role in Europe. The failure by the commission, and by France and Germany in particular, to insist that countries observe the rules, sprang from their enthusiasm for the European project and the desire to indulge the smaller and poorer countries in their cultural differences.
Perhaps this crisis—the most serious in the EU since its creation, according to Angela Merkel—will finally persuade Greece, and the other weaker economies, to make the reforms they have ducked since joining the euro. Their easy ride is over, as economic reality asserts itself over the political dream of a pan-European currency. In the case of Greece, this will demand profound changes to a culture whose roots stretch back for centuries. In the meantime, the crisis has already had consequences that are far from picturesque—and which still threaten the health of the entire union.
On Friday 14th May, Greeks read in their newspapers a list of 151 doctors alleged to have declared improbably low income to avoid tax. “The ‘poor’ doctors of Kolonaki,” jeered the front page of Ethnos, referring to the exclusive Athens district overlooking the Acropolis. “Tax-dodging doctors named and shamed,” said Kathimerini, adding that the finance ministry had found 57 who failed to issue receipts or record patient visits (and one who declared income of just €300 a year). Fourteen have been fined a total of €4.3m (£3.7m); four will also face criminal charges.
The ministry, which is raiding doctors’ and lawyers’ offices across Athens, has turned to Google Earth to scan the summer villas in Kifissia, the affluent Athens suburb, to count the swimming pools which tax inspectors use as an indication of wealth. If the government of Prime Minister George Papandreou keeps up the pressure, then it will go some way to calm fears that Greece is bankrupt and unreformable. The crackdown “is, I believe, an essential element of catharsis,” said Loukas Tsoukalis, a professor at Athens University and adviser to José Manuel Barroso, European commission president. “If Greeks see that the right people are punished, they are more likely to perceive the austerity programme as fair.”
If the crisis had been limited to Greece, it would already be over. Greece is tiny, its economy only 3 per cent of the EU. But just as the world appeared to be clawing its way out of financial turmoil and recession, Greece reminded the markets that countries, as well as banks, can go bust. “Lehman Brothers surrounded by turquoise water,” was one description. “Contagion,” that laconic metaphor of the markets, hardly captures the speed with which fears of insolvency spread along the rim of Europe, to Portugal, Spain, Italy, then Ireland and even Britain. For one climactic weekend in May, the race to put together the gargantuan rescue deal of €750bn (£640bn) commanded the urgent attention of all the leaders of the EU, President Barack Obama and the IMF.
The bailout has saved the euro for now, although the currency has reached an 18-month low against the dollar. But it has torn up the rules by which the European Central Bank (ECB) runs the bloc of 16 countries which use the euro. (The bank reluctantly agreed to start buying eurozone bonds, even though that might trigger inflation and expose the ECB to big losses if Greece does write off part of its debt.) The crisis has also shattered the principle that eurozone countries should not be bailed out by others. Moreover, it has sharply divided France and Germany, who have been on opposite sides of the argument throughout the crisis, left Germany in rare isolation within the EU and even raised questions in Berlin about its own longer-term participation in the currency.
Nor is the crisis over. It remains unclear whether Greece and its Mediterranean neighbours can make the changes that Europe is finally demanding of them. The comparison with Ireland, which faced similar problems, but has handled them with far more rigour, offers some hope, but also suggests that Greece’s problems may be too ingrained to resolve.
*****
The drama began in October, when Papandreou, the socialist prime minister, told his country that Greece’s finances were in a far worse shape than the previous right-wing government had declared. A tall, stooping figure with neat grey moustache and an undemonstrative manner, hailing from a dynasty which has dominated Greek politics, Papandreou said that Greece was running an annual budget deficit (the gap between state spending and income) of 12.7 per cent of GDP. That was twice as much as the previous government had told the European commission, and four times the official limit for the eurozone. It also had accumulated debts of €300bn (£250bn), equal to more than 100 per cent of GDP. As Greek euro bonds began to plunge, the commission dispatched teams of auditors to Athens, to discover that the true figure was even worse—nearly 14 per cent.
The roots of the predicament go back centuries, to the forces which shaped modern Greece. Robert Kaplan, an American scholar, argues that “there is a deeper cause for the Greek crisis that no one dares mention because it implies an acceptance of fate: geography.” The EU, preoccupied with balancing France and Germany, and its modern division between north and south, ignores the historic rift between east and west. It ignores, as he puts it, “the boundary between Rome and Byzantium, and later between the prosperous Hapsburg empire in Vienna and the poorer Turkish empire in Constantinople.” Greece, he argues, “is far more the child of Byzantine and Turkish despotism than of Periclean Athens.”
In Greece and its neighbours along the Mediterranean, with relatively poor farming land and shut out from the growing trade of prosperous northwestern Europe, a middle class was slow to develop. Greece’s social structure became polarised into the wealthy and the poor; it is no accident, as Kaplan points out, that for the past 50 years, Greek politics have been dominated by the Karamanlis and Papandreou families.
Greece’s difficulty in developing the apparatus of a modern state was made worse by the civil war of 1946 to 1949, between the communists and conservative forces backed by the US. This shattered the few parts of government left working after the German occupation in the second world war, and entrenched a bitter polarisation in political life. The emergence of a fervently anti-communist security establishment paved the way for military rule from 1967 to 1974. The decisions that led to the present level of debt were taken in the early 1980s, when Papandreou’s father Andreas, who towered over Greek politics for a decade and a half, determined to lay the foundations of a social democratic state so all-embracing that it would mark the end of this traumatic episode.
Yet the public sector that he built became impossible to afford. It is now extravagantly generous by European standards. Working hours are often 7.30am to 2.30pm; employees receive a bonus of an extra month’s salary twice a year, and some can retire at the age of 53. Greek newspapers have noted caustically the “Oedipus problem” of this prime minister: he must “kill” his father’s policies to save the country.
Even that would not be enough. A culture of corruption and tax evasion threads through national life, making it hard for governments to raise money; as one headline jeered: “No taxes—we’re Greek.” One young woman described how, in public hospitals, “doctors blackmail you. If you don’t give them a small packet of money, they say, ‘Oh, I will put the other patient first.’” The planning departments of any town, she added “are the most corrupt of all—everyone knows.”
Nor is the private sector a healthy antidote. Family companies make up three-quarters of the private sector, and many are neither competitive nor innovative. If they cannot find a public sector berth, young Greeks will try to work in their father’s business or that of a relative. The high minimum wage means, as one banker put it, that in his village, people eat imported oranges and lemons while the fruit hanging on nearby trees remains unpicked, because it costs too much to harvest. Bureaucracy has been “strangulating,” argues Tsoukalis. “We have a capitalist system with a Soviet state.”
Greece skated over these failings when it rushed to joined the then European community in 1981—14 years ahead of the much richer Austria, Finland and Sweden, and five years before Spain and Portugal. In its petition for membership, it played to the romance about ancient Greece among Europe’s leaders, many of them educated in the classics. Invoking Greece’s claim to be the cradle of democracy, it glossed over the powerful affinity between modern Greece and cultures to the east. Supporters of Greek entry argued that to refuse entry would have been a rebuff to the country’s success in shaking off military rule, and would have left the peninsula isolated; worse, it would have been to doubt Europe’s ability to help a small, poor country leave behind a troubled past.
Greece was guilty of far worse misrepresentation when it applied to join the euro. Yannis Papantoniou, former finance minister, has said that: “Once we were in line to join the euro, we started to transform from a third-world country to one that aspired to look more like Switzerland.” But even though the economy, lifted by EU subsidies, was growing at 3 per cent a year, Greece failed to meet the conditions set by Germany for deficits and inflation by the time of the euro launch on 1st January 1999. The country succeeded two years later, presenting figures which claimed its budget deficit met the rules, and that its debt, which did not, was no worse than Italy’s.
Since October, as it has become clear that those figures were unreliable, much has been made of Goldman Sachs’s role in advising Athens on a derivatives deal which removed some debt from official figures. It would be wrong, however, to portray this as the device which enabled Greece to join the euro; the deal happened after entry and concealed only a fraction of the debt. But it reflects the spirit in which Greece approached the eurozone rules. It also shows the lack of scrutiny by those who wanted to see the euro expand its domain.
When Greece revealed the true state of its finances last October, it caused alarm, then panic, in the bond markets. They feared that Greece could not repay tens of billions of euros in April and May, nor did they want to lend it €45bn more to cover its spending for the rest of the year. Bankers began to talk of default and rescheduling. Even the big taboo—that Greece might leave the euro—was broken, as some German politicians declared it was the only remedy.
The fear was that the problem would spread to Portugal, Italy, Ireland, and Spain. In frantic talks over 40 hours, ending at 2am in Brussels on 10th May, the EU, the ECB and the IMF stapled together the €750bn rescue. Of that total, a fifth bigger than the rescue package for all the US banks, €440bn came from the countries belonging to the eurozone, €60bn from the EU (including an estimated £10bn from Britain), and up to €250bn from the IMF.
They forced Papandreou to plan to cut Greece’s deficit to 3 or 4 per cent within three years, beginning with salary and pension cuts—and a tax crackdown. Demonstrations against the various austerity packages had been running for weeks, filling the streets of Athens with burning tyres and tear gas; three people were killed by a petrol bomb in a bank a few days before the Brussels deal was struck. A sandy mongrel dog, seen harassing police day after day, became a totem for self-proclaimed anarchists; “Riot Dog,” nicknamed Louk, after a kind of sausage, now has his own Facebook page.
The protests are now subsiding. Despite the street violence there has been a narrow majority in polls in favour of the various austerity plans from the start of the crisis. Papandreou has no real opposition, and many union leaders support his party. But some are sceptical. “Can Greece really deal with its problems? I have my doubts,” said Josef Ackermann, chief executive of Deutsche Bank, one of those who designed the bailout. Others warn that the cuts will plunge Greece into recession, making it harder to pay down its debts. The best hope, as Tsoulakis puts it, is that “in a crisis you can do things that would be unthinkable in normal times.”
*****
Comparison with Ireland offers hope—but only up to a point. In the past year, Ireland has successfully started to tackle financial problems that looked at least as bad as Greece’s. Through the 2000s, Ireland used low eurozone interest rates to finance a property boom. The global financial crisis punctured that bubble, leaving acres of ugly, concrete ghost-dwellings, sprawling out from Dublin and across previously picturesque farmland.
The property crash threatened to topple Ireland’s main banks, and the rescue cost between €50bn and €60bn. Prime Minister Brian Cowen followed that deal with a budget in the autumn of last year to make savage cuts in the annual deficit, then running at more than 13 per cent of the economy. Yet despite pay cuts of up to 15 per cent for many public servants, there have been only low-key protests.
Why the difference? Ireland started with a better financial hand, with total debt of only about 60 per cent of GDP, about half of Greece’s. It is also easier to make radical changes in a nation of just 5m, compared with Greece’s 11m. Brian Lenihan is a popular finance minister who has adroitly brokered difficult deals with the unions, postponing the severest cuts for 2014. But political culture is also a big factor—Ireland has no equivalent of Greece’s left-right polarisation. Indeed it still enjoys some of the sense of solidarity of a small country which has lived in the shadow of a large one—its delight in membership of the EU and the euro is evident. Most important, says a former government official, is that the Irish have had a powerful sense of having enjoyed the fruits of the boom years together, and now have to share the pain together.
But Ireland is not yet safe, Greece considerably less so—and the bailout has left collateral damage at the heart of Europe. The rescue has left Germany sulking and confused about its future role in the EU. In December, as the crisis deepened, Chancellor Angela Merkel’s first instinct was to protect Greece. She talked of the “common responsibility” of EU countries to help each other. But she may be one of the last generation of German leaders to feel that commitment to the European cause—strengthened, in her case, by having grown up in East Germany. Not all her cabinet share it. And German voters have loathed the deal, failing to see why they should work until 67 to pay for Greeks to retire 12 years earlier, and why their country should hand over €120bn, which may be their eventual share of the rescue bill. “We are again Europe’s fools,” declared the mass circulation Bild. Merkel is seen to have been outmanoeuvred by French leader Nicolas Sarkozy and in the North Rhine-Westphalia elections on 9th May her Christian Democrats were beaten, losing control of the state and the upper house of parliament too.
It is hard to see the Germans tolerating any repeat of this rescue. But nor do they want to change their own ways to make it easier for the Mediterranean countries to grow faster. Germany has prospered because of its southern neighbours’ willingness to buy its goods with borrowed money. But the idea that Germany should persuade its own people to buy more and save less is dismissed out of hand.
Indeed, this crisis has highlighted just how little convergence there has been in the eurozone. Far from making the weaker economies more competitive, the euro has served as a kind of shelter under which Greece, and others, have used the benefit of low interest rates to fuel asset bubbles without reforming their economies. France, and many people in the ECB, now believe that if the euro is to survive it will require much more co-ordinated economic governance to prevent imbalances. Germany wants much stricter rules limiting budget deficits. Yet will countries tolerate the infringement of sovereignty which this would require? It seems unlikely.
The alternative to this convergence—and the more likely outcome—is the unravelling of the eurozone. Greece itself could still be the catalyst. Unless Greece begins to grow fast, it is hard to see how it can meet repayments without rescheduling its debt—indeed it would require a bigger adjustment than any in IMF history. Yet it is hard to see rapid growth without devaluation, and that would mean bringing back the drachma. There is no mechanism for leaving the euro. It is supposed to be a “Roach Motel”—you “check in but don’t check out,” in the slogan of the pest control device. Any exit might have to be done overnight, to avoid a run on the banks. It would be legally very messy, and the national currency to be recreated might exist only in electronic form for some time, said one banker in London who has considered the question in detail. But it is no longer impossible to imagine—indeed, across Europe, bankers and lawyers are beginning to test run the idea.
Even if Greece did devalue it would still face economic pain. Tourism would benefit but Greece has a weak export sector (“olives, ships and sunshine,” said one British banker disparagingly). The markets would allow the government to borrow only at punitive rates. Most of all, exit from the euro would be a national blow. The idea of leaving the euro flicked through many conversations in Athens before the bailout, but, for the moment, has disappeared.
Not so in Germany. The debate about whether the euro still benefits Germany, the country that did more than any other to bring it into being, would have been unimaginable a year ago. But it is now happening, as Germans begin to focus on the notion that the currency union will demand the steady transfer south of their hard-earned surpluses.
The crisis has changed the outlook not just for the euro but for the EU itself. After the long institutional wrangle of the Lisbon treaty many people hoped that the EU could look outwards again, but instead it may be plunged back into years of emergency summits and bailout deals. The crisis is also likely to prove a brake on future expansion, because it has exposed the limits of the richer countries’ willingness to pay for the poorer. Turkey and Ukraine, both big and poor, might now have to look instead to close partnership rather than full membership. Yet at a point when Russia is seeking to rebuild its influence, in places such as Bulgaria and Ukraine, Europe will suffer by seeming to pull away.
It is easy to forget, in the modern EU, when it is possible to take cheap flights anywhere, live and work anywhere, just how different national cultures remain—consider the reaction to the crisis in Greece and Ireland. Moreover, the EU has changed its poorer members less than its founders imagined. The crisis that started in Athens in October has delivered a profound shock to this EU vision—and above all, to Germany’s sense of its role in Europe. The failure by the commission, and by France and Germany in particular, to insist that countries observe the rules, sprang from their enthusiasm for the European project and the desire to indulge the smaller and poorer countries in their cultural differences.
Perhaps this crisis—the most serious in the EU since its creation, according to Angela Merkel—will finally persuade Greece, and the other weaker economies, to make the reforms they have ducked since joining the euro. Their easy ride is over, as economic reality asserts itself over the political dream of a pan-European currency. In the case of Greece, this will demand profound changes to a culture whose roots stretch back for centuries. In the meantime, the crisis has already had consequences that are far from picturesque—and which still threaten the health of the entire union.
