Greece baulks at a hurdle

November 4, 2011

EDITORIAL

Taking it to the people ... George Papendreou. Photo: AFP

THE momentum of the half century-long movement towards European integration has slowed to a stop in the global downturn. The Greek government's decision to call a referendum on the European Union's latest austerity package for Greece may mark the point at which the direction of change shifts into reverse. The downturn and Greece's rapidly growing debt problem have revealed the structural flaw at the heart of the integration project - a common currency without fiscal union.

The architects of this inherently unstable arrangement knew about the flaw when the euro was launched in 1999 but they believed any crisis it caused would tend to pull the EU members tighter together. The common currency would be so valuable that national governments would cede sovereignty to a fiscal union - a single Europe-wide control of budgets - rather than lose it. The case of Greece casts doubt on that hope, as the prospect of years of enforced recession in an economy which has already contracted sharply stretches national consensus beyond breaking point.

The options for Greeks are limited. If they vote no at the referendum, they will have rejected not only the rescue package but membership of the euro zone, the rules of which have imposed austerity on their economy. The French President, Nicolas Sarkozy, and the German Chancellor, Angela Merkel, have made the point that there is no other option for Greece in the euro zone than the package agreed to last week.

Yet the euro's designers were not entirely mistaken. Although austerity, and the so-called troika imposing it - the European Commission, the European Central Bank and the International Monetary Fund - are profoundly unpopular, Greeks may still hesitate to reject what is on offer. Polls show they realise a no vote would shut them out of the euro zone. Staying in has 70 per cent support.

Some observers have suggested a no vote, and a quick exit, might be the best outcome, since voters and not EU bureaucrats would have taken the fateful step. But that assumes a rational, measured process, when this reality is anything but that.

Uncertainty about Greece's future will last until its referendum, which is a month away. It is driven by the herd instinct of a global market already twitchy from years of bad economic news. And Greece is just one domino at the head of a longish line. Once it falls, Italy - bigger economy, larger debts, closer integration to Europe's core - is next. And then, if the momentum continues, the EU's other stragglers.

Julia Gillard's announcement at the G20 meeting that Australia will double its contribution to IMF special drawing rights is a gesture of solidarity - but only that. There is no easy or quick route back to stability in Europe.

Greece baulks at a hurdle