Hugo Radice: Myths and reality behind the Greek nemesis

At the epicentre of the crisis, Greeks mourned the death of three clerks following the petrol-bombing of a neighbourhood bank branch. Just when we were beginning to think that recovery from the global crisis was under way, it seemed that we were once more on the brink of financial meltdown, but this time garnished with the acrid smell of teargas and tragedy. Happily, while most of Britain was gripped by coalition talks, European Union leaders and officials finally came up with a package of support measures, worth e750m, that at last has convinced global financial markets that the Greek crisis can be contained.

In this they have also enjoyed not only the support of the International Monetary Fund, but also the active engagement of the United States, anxious to protect its own banks from potential losses on European lending.

As the dust settles, it is most important that policymakers the world over – and not least our own incoming Chancellor – learn the lessons of this latest crisis. We have to look closely at why Greece found itself facing national bankruptcy, and why it took so long for the eurozone countries to provide adequate help.

On the face of it, the Greek story is the one familiar from Greek mythology: hubris followed by nemesis. When Greece was accepted into the euro club as a founder member in 2002, it appeared to signal a coming of age for a country that had been a byword for economic and political instability ever since winning independence from the Ottoman Empire in 1830. But when the centre-left PASOK party won the November 2009 elections, they found the state of the public finances in a far worse state than they had expected, and soon after appealed to their European partners for assistance.

Officially, public deficits and debt levels are controlled throughout the European Union by the Maastricht Treaty of 1993. This limited annual deficits to three per cent of GDP and aggregate debts to 60 per cent, although these limits had frequently been breached, especially since the government-funded bank bailouts of 2008-9. With no structure for fiscal co-ordination, however, there was no mechanism in place for answering the Greek appeal.

Critics of the single currency project had always warned that in the absence of any Euro-wide powers to control taxation and spending, no monetary policy could meet the needs of both the profligate Greeks and the fiscally-conservative Germans. They have now been proved right. When a German-led rescue was first mooted late last year, many Germans were fiercely opposed to bailing out the Greeks.

Yet the prosperity of Germany is based upon its huge export surpluses; and within Europe, those surpluses in turn depend on Greek, Irish and indeed British consumers continuing to buy German cars and washing machines – with borrowed money. Chancellor Merkel was thus caught between the twin dangers of a Greek contagion or a revolt by her own citizens. Only after many false starts did the widening spread of the crisis finally lead to action sufficiently bold to satisfy the markets.

This brings us to the real nub of the problem. The measures taken since 2008 to restore the health of banking and finance across the world have entailed a huge commitment of public money, which must ultimately be borne by taxpayers. The result has been a huge increase in public borrowing. As I have argued in earlier articles, the collapse in household and business borrowing has meant that this public borrowing has been readily funded from global savings. This is why the global recession has been shorter and less severe than many experts predicted.

So why have the financiers responded by biting the hands that so generously fed them? Why have European taxpayers been obliged

to set aside up to e500m (the remaining e250m coming from the IMF), mostly in the form of a commitment to buy any government or private-sector bonds that investors want to unload?

The answer surely lies not in economic logic, but in the political battle over new measures of financial regulation. The financial lite is fiercely lobbying against restrictions on their activities. The underlying message is clear: if governments don't keep transferring wealth from taxpayers to bankers, the speculators will be unleashed yet again.

For the incoming Chancellor the message could not be clearer: start working at once with your colleagues in the European Union and around the world to put an end to this blackmail once and for all.

Hugo Radice is a senior research fellow at the University of Leeds