Ruth Lea: Britain better off out of Greek tragedy as storms batter euro

Arguably Greece's problems have been an accident waiting to happen. The country met the eligibility criteria for joining the euro by fiddling the statistics relating to its public finances.

More specifically, the Greek government claimed that its public borrowing to GDP ratio was lower than it really was. Once in the euro, Greece carried on as before. It did little to control its big state spending and little to repair its reputation for "economy with the truth" when it came to statistics.

When buffeted by the financial crisis and economic recession, Greece experienced a dramatic deterioration in its public finances – as in many countries including Britain. But it was not until last October, when a new Greek government was elected, that the truth finally came out about just how badly they had deteriorated. Before that, the government had disguised the full horror. That moment of truth effectively marked the beginning of the current Greek crisis, which has worsened dramatically since.

The Greek government, under perfectly justifiable pressure from the European Commission to cut its deficit, announced a three-year

stability plan in early January to cut borrowing as a percentage of GDP to less than nine per cent in 2010, compared with nearly 13 per cent in 2009, and to less than three per cent in 2012.

Policies put forward included boosting tax revenues, freezing public sector pay, and cracking down on the widespread tax evasion. The plan was met with union hostility and market scepticism. Public sector strikes occurred this week with many schools closed and hospitals operating with emergency services only.

These strikes, and the possibility of social unrest, are politically very significant. And there have to be major doubts that the Greek government can deliver the spending cuts required to meet the borrowing targets in the stability plan and, therefore, satisfy the Commission and the financial markets.

The government does not just have a fiscal deficit, it has

a "credibility deficit" too.

Matters took a turn for the worse a fortnight ago. The markets were frightened by rumours that the Greek government was sounding out the Chinese as potential buyers for its bonds (government IOUs). Speculation mounted that the Greek government may not be able to honour its debts – in other words, it could default.

The panic rippled out to the other Club Med countries – especially Portugal and Spain where the public finances are almost as bad and the economies are also in dire straits.

Italy and Ireland are also seen as vulnerable.

Market speculation was beginning to undermine the very stability of the euro which, of course, is a major concern of the other eurozone members, not least of all Germany and France, and the European Commission.

A stable and strong euro is regarded by Germany as a lynchpin of its economic policy. But concern over the euro is not just a matter of economics. It is also political because the euro is part of and a pre-eminently important political symbol of the European Project of the "ever closer integration of the peoples of Europe". Make no mistake about this – the Greek crisis is a crisis for the euro and the EU.

But this week, as the euro crisis intensified, it was becoming clear that this position was untenable. And a bailout of sorts for Greece, if deemed necessary, was agreed by the EU yesterday.

Given the possibility of a bailout, the key question now has to be where does Greece, and the other weaker countries in the eurozone, and indeed the euro itself, go from here?

For a start, the bailout is a dreadful precedent. If Greece is to receive such help, then why not Portugal or Spain? Or Ireland or Italy? There is also the matter of the conditions attached to the bailout, which could be politically very unpalatable indeed.

But even more fundamental than these considerations are the likely economic prospects of Greece and the other weaker eurozone countries including Spain, Portugal and Ireland.

Britain's prospects are dreary enough, given the need to get to grips with the horrendous public borrowing figures.

But at least we are free to run our own monetary policy, unilaterally influence the value of our own currency and decide what our fiscal policy should be.

Eurozone members cannot do this.

In particular, they cannot devalue and, given the lack of

competitiveness of the weaker members, they will struggle to recover. The strong euro exacerbates their problems. Add to this the need for big public spending cuts and/or sizeable tax rises and their prospects look very bleak indeed.

Any bailout for Greece is but a sticking plaster. It will do nothing to solve the eurozone's fundamental structural problems and debate will increasingly focus on the need for closer economic co-operation and increased fiscal transfers from the richer North to the poorer South.

Ruth Lea is economic adviser to the Arbuthnot Banking Group.