Belfast Telegraph

It's bleak, but we can still keep this show on the road

By Hamish McRae

We know more about the short-term future of the eurozone this week than we knew last week, but the medium-term outlook remains as cloudy as ever.

It must be odds-on that the plan now sketched in outline to allow Greece to default but keep the eurozone intact will be hammered out in the next six weeks.

It is not certain and we will come to the consequences of that in a moment. But let's say there is an 80% chance of agreement on the plan.

We know it has several elements. These include allowing Greece to default with bond-holders getting back only half the face value of their debt. European banks that might collapse as a result, will be recapitalised. The various European central funds supposed to shore up the eurozone will be massively beefed up. The IMF will chip in some more money, not a lot. And European Central Bank will cut rates, print more money, buy more European government bonds - in short, do whatever it can to keep the show on the road.

If all this happens, Greece keeps the euro for the time being, no banks will go bust, there will be enough money to do a further bailout of Ireland and Portugal if they need it, and most importantly, enough money to persuade global investors that Spain and Italy will be supported, too.

If it doesn't happen then there will be an uncontrolled default, the banks will have to be rescued anyway, and economic and financial confidence in Europe will fall sharply. It won't be the end of the world, or indeed of Europe.

All this apocalyptic stuff from politicians seems more a reflection of their own lack of judgment and economic foresight rather than a rational response to the fact that one small member state cannot pay its bills. But this moment may be seen as a turning point in the EU's long-term development, for it will be clear Europe has reached the limits of "ever closer union".

Some aspects of regulation could return to the nation states, provided trade was not damaged. The euro would be retained but with fewer members.

This is not the vision of some Europeans, who would like to see yet more integration. So the question is whether we move towards this steady state in a controlled, orderly way or whether we have a big bang first. Europe ends up, I suspect, in pretty much the same place either way. Maybe the big bang in the shape of an uncontrolled default by Greece would be better than the continued muddle-through.

Share markets are funny, aren't they? They did give some early warning about the coming slowdown in the world economy by falling in the US and UK by more than 20% and in France and Germany by quite a lot more. So what should we make of this? Well, first, this is not at all the sheer panic of the Lehman Brothers period. Investors are worried and rightly so, but they are not looking over a cliff. Second, there is growth in the world - maybe not in the developed world but in the world as a whole. That affects London shares, which represent global demand as well as national demand. Third, even UK-orientated companies are not doing too badly and that reflects the disappointing but not dreadful numbers coming through. Not uplifting. But not the greatest catastrophe the world has ever faced.

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