The dominoes are tumbling. Which European country is next to fall?
Whether or not the Greek parliament votes for the austerity measures, the fundamental problems will
The clock is ticking for the world economy. It is too fragile to deal with another financial cataclysm of the kind that hit in the autumn of 2008, but the incompetence of the European Central Bank (ECB) - especially its president, Jean-Claude Trichet - along with the French president, Nicolas Sarkozy, and Germany's chancellor, Angela Merkel, has made a further crisis ever more likely. The ECB insists that all it cares about is inflation when there is none. It ludicrously raised interest rates in April and appears set to do so again in July. This will only make matters worse.
If the problems had been solved the first time round, the dominoes would not be tumbling now. Negotiations over a second rescue package for Greece, worth an estimated €110bn, are continuing after European Union ministers failed to reach agreement at a meeting in Luxembourg on 20 June. The International Monetary Fund has repeated its warning that funding has to be in place for the year ahead before it will distribute the next tranche of bailout monies, and now the world waits.
The crisis has spread to Ireland and Portugal, and the cross hairs have moved to Spain, Belgium, Italy and perhaps even beyond. Growth has been compromised and unemployment is rising in countries that have imposed austerity measures. Locked in monetary union, states are unable to depreciate their currencies, which would provide some relief. Those nations that have benefited from a lower currency level than they would have experienced outside the euro - such as the Germans, French, Austrians and Dutch - should pay, not least to rescue their own banks from potential collapse.
Breaking up is never easy
Sovereign default in any of these countries (failure to pay back their debt) has major implications for banks across Europe, given the deep entanglement of financial institutions. As Chancellor George Osborne is beginning to realise, that includes Britain, which is especially exposed to the failure of Irish banks but also has at least £100bn exposure to Greece, Spain and Portugal. There are troubles ahead.
Greece lurches closer to default by the hour. The Harvard historian Niall Ferguson has said he thinks the chances of Greece defaulting are 100 per cent. That may be a fraction high, but he makes a good point. The ECB, EU and IMF are arguing about the details of a bailout that the Greeks can't afford to pay back. Meanwhile, Greece's prime minister, George Papandreou, reinvigorated by a vote of confidence in his newly reshuffled government, pushes on with the austerity measures - including public sector job cuts and a €50bn privatisation programme - that are a condition of the aid the country needs to avoid default.
The Greek people are not taking it lying down. Not only have there been violent demonstrations and strikes, but sensibly they have started withdrawing their savings and buying gold in fear of what is to come; they may be expecting Greece to leave the euro, which is a possibility.
In a recent paper entitled "The Breakup of the Euro Area", Professor Barry Eichengreen of the University of California at Berkeley pointed out the formidable difficulties involved in a single country withdrawing from the euro. It would become necessary to redenominate the residents' mortgages, credit-card debts and bank deposits, as well as the national debt, into the national currency. Notes and coins would have to be positioned around the country. Computers would have to be reprogrammed and payment machines serviced "to prevent motorists being trapped in subterranean parking garages".
Foreigners hold Greek bonds and, as Eichengreen notes, foreign courts might take EU law as the law of the currency issuer (Greece) and invalidate the redenomination of certain contracts. This would be a very messy process, to say the least, and advanced planning would be crucial. But that doesn't seem to have occurred. I haven't heard any suggestion that a firm out there is busily printing drachmas.
The Greek bailout as currently constituted will not succeed. The way to fix the problem was not to give more expensive debt to an over indebted country and expect it to sort itself out in a matter of months, even years.
The problems in the Greek economy will take at least a decade to solve. Greece suffers from endemic tax evasion, a poor tax collection infrastructure, parochial patronage policies, corruption and huge delays in the administrative courts dealing with tax disputes. There is no simple fix that would suddenly make the Greeks all start paying taxes and improve the infrastructure to collect them.
Indeed, according to the World Bank's Doing Business project (doingbusiness.org/rankings), which provides measures of business regulations and their enforcement, Greece ranks 109th in the world based on "ease of doing business". That puts it behind Ethiopia, Bangladesh and Paraguay. You can read the full rankings online, but I have provided highlights in the table (above). The UK ranks fourth. Osborne, in a speech to the Institute of Directors on 11 May, claimed that if he hadn't taken "difficult decisions", the UK could have been like Greece. This ranking suggests otherwise.
There is a marked difference between the UK and Greece on other measures, too, including ease of starting a business (with the UK at 17, compared to Greece at 149), registering property (UK 22, Greece 153) and trading across borders (UK 15, Greece 84).
Whether or not the Greek parliament votes for the austerity measures, the fundamental problems will remain uncorrected. Greece will still be an awful place to do business. The big question is who falls with it.
David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling