Britannia Radio

Stability is nowhere to be found.  Just as the half-educated 
politicians talk about Britain joining the euro comes ever more 
evidence that the euro is unsuitable for many of the countries 
already in it!   Our economic performance is deplorable but Brown has 
one thing denied to the countries in the eurozone - he has floating 
currency which acts as the safety valve denied if you are in the Euro.

xxxxxxxxxxxxx cs
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TELEGRAPH      10.12.08
Greek fighting: the eurozone's weakest link starts to crack
Posted By: Ambrose Evans-Pritchard

The last time I visited Greece, I was caught in the middle of a tear-
gas charge by police in Thessaloniki - a remarkably unpleasant 
experience, if you have not tried it. My eyes were in screaming pain 
for an hour.

Protesters smashed up the shops on the main drag, broke the windows 
of my hotel, and torched a few cars.

So the latest four-day episode in Athens and other Greek cities comes 
as no great surprise. The Greeks are a feisty people. This is meant 
as a compliment - broadly speaking - just in case any Greek readers 
should take it the wrong way. Hitler was so impressed by Greek 
bravery that he accorded Greek soldiers full military honours, almost 
the sole example among captive nations in the East - or at least 
professed to do so at first.

That said, these riots are roughly what eurosceptics expected to see, 
at some point, at the periphery of the euro-zone as the slow-burn 
effects (excuse the pun) of Europe's monetary union begin to corrode 
the democratic legitimacy of governments.

Note two stories in Kathimerini (English Edition)
"Athens riots spin totally out of control"
And an editorial: "Greece has gone up in flames and the concept of 
democracy and law and order has been eliminated"

Without wanting to rehearse all the pros and cons of euro membership 
yet again, or debate whether EMU is a "optimal currency area", there 
is obviously a problem for countries like Greece that were let into 
EMU for political reasons before their economies had been reformed 
enough to cope with the rigours of euro life -  over the long run.

In the case of Greece, of course, Athens was found guilty by Eurostat 
of committing "statistical alchemy" to get into the system - ie, they 
lied about their deficits.

Be that as it may. Greece's euro membership has now led to a warped 
economy. The current account deficit is 15pc of GDP, the eurozone's 
highest by far. Indeed, the deficit ($53bn) is the sixth biggest in 
the world in absolute terms -- quite a feat for a country of 11m people.

Year after year of high inflation has eroded the competitive base of 
the economy. This is an insidious and slow effect, and very hard to 
reverse. Tourists are slipping away to Turkey, or Croatia. It will 
take a long time to lure them back.

The underlying rot was disguised by the global credit bubble, and by 
the Greek property boom. It is now being laid bare.

Greece has a public debt of 93 per cent of GDP, well above the 
Maastricht limit. This did not matter in 2007 when bond spreads over 
German Bunds were around 26 basis points, meaning that investors were 
willing to treat all eurozone debt as more or less equivalent.

It matters now. The credit default swaps on Greek sovereign debt were 
trading around 250 today (compared to 52 for Germany, 62 for the US, 
120 for the UK, and 178 for Italy). It has moved into a class of its 
own.

This is potentially dangerous because Greece needs to tap the capital 
markets for 40bn euros next year to roll over debt and fund the 
budget deficit, as well as 15bn euros or so in bond issuance by banks 
under the state's new guarantee. This is a lot of money.

The Greek government will need budgetary discipline to convince 
markets that it has matters under control. But governments facing 
riots and imminent defenestration are not good bets for fiscal 
discipline. There is a general strike in any case on Thursday.

While the violence was triggered by the death of a 15-year old boy, 
the underlying motives of the protest obviously  run deeper. The hard 
left can mobilize demos because the youth unemployment is endemic and 
because the goverment is being forced by economic constraints to 
adopt a hair-shirt policy at a very bad moment. At some stage a major 
political party - perhaps PASOK - will start to reflect whether it 
can carry out its spending and economic revival plans under the 
constraints of a chronically over-valued currency (for Greek needs). 
Then there will be a problem.

I am a little surpised that the riot phase of this long politico-
economic drama known as EMU has kicked off so soon, and that it has 
done so first in Greece  where the post-bubble hangover has barely 
begun.

The crisis is much further advanced in Spain, which is a year or two 
ahead of Greece in the crisis cycle.

My old job as Europe correspondent based in Brussels led me to spend 
a lot of time in cities that struck me as powder kegs - and indeed 
became powder kegs in the case of Rotterdam following the murder of 
Pim Fortyn, and Antwerp following the Muslim street riots (both of 
which I covered as a journalist). Lille, Strasbourg, Marseilles, 
Amsterdam, Brussels, all seemed inherently unstable, and I do not get 
the impression that the big cities of Spain and Italy are taking 
kindly to new immigrants.

The picture is going to get very ugly as Europe slides deeper into 
recession next year. The IMF expects Spain's unemployment to reach 
15pc. Immigrants are already being paid to leave the country. There 
will be riots in Spain too (there have been street skirmishes in 
Barcelona).

Hedge funds, bond vigilantes, and FX traders will be watching 
closely. In the end, a currency union is no stronger than the 
political will of the constituent states.

No doubt events will be ugly in Britain as well. My comments are not 
intended to suggest  that British behaviour is better. Far from it. 
But I am certain that the British people still feel that the 
authorities who set economic policy are ultimately answerable to 
Parliament and to the democratic system.  [That's the trouble here.  
People - quite wrongly - still believe that! -cs]
Will the Greeks, the Spanish, the French feel that way about the 
European Central Bank and the Stability Pact when the chips are 
really down?