There is only one end to Greece’s torment

By Telegraph View 7:57PM GMT 16 Feb 2012

Greece requires a significant devaluation to be competitive with Germany – which can only be accomplished outside the euro.

Greece has imposed a savage austerity programme, which has sent shockwaves through society and plunged the economy into a death spiral Photo: REX FEATURES

In Greek mythology, the sinners of the underworld were condemned to tasks involving back-breaking effort and perpetual, agonised frustration. For the country’s present leaders, the torments of Sisyphus or Tantalus would seem entirely familiar. In pursuit of economic salvation, they have imposed a savage austerity programme, which has sent shockwaves through society and plunged the economy into a death spiral. Yet every time they think agreement has been reached on a second bail-out package – every time the boulder has been pushed all the way up to the top of the peak – another objection is raised, and the whole thing crashes back down.

The immediate need is for Greece to repay bond payments worth 14.5 billion euros on March 20. To do that, the new bail-out will have first to be finalised, and then endorsed by other governments. But even if that can be agreed, it is increasingly difficult – impossible, in fact – to see a stable future for Greece within the single currency. The question is not whether it will default and exit the euro, but when.

For the other members of the single currency, that has long been the nightmare scenario. Indeed, one of the factors that has exacerbated this crisis has been the desperate attempt to sustain the unsustainable – the ideological commitment to maintaining the eurozone as originally envisaged. Now, however, the Greeks’ partners are losing patience: Germany’s finance minister, Wolfgang Schäuble, appears to be especially keen on shoving them towards the exit.

The hope is that Europe has decoupled itself sufficiently from Athens – and built enough of a “firewall” within the banking system, thanks to a flood of cheap money from the European Central Bank – that its default and departure would not trigger a wider crisis. The same hopes were expressed in 2008, in advance of the bankruptcy of Lehman Brothers. The firewall may well do its job: this week, a senior eurozone official put the odds of a repeat of that catastrophe at no more than 10 or 20 per cent. But those are hardly odds on which to gamble the world economy, especially given the way in which the Lehman situation spiralled out of control.

Even if the amputation is successful in the short term, the problem remains. However many reforms are imposed, countries such as Greece still require significant devaluation to be competitive with Germany – which can only be accomplished outside the euro. In Greece’s absence, the markets will turn on Portugal, Spain, Italy, Ireland or even France. The more appropriate myth may be that of the hydra: every time one head is lopped off, another takes its place. And these days, monster-slayers are in short supply.

There is only one end to Greece’s torment - Telegraph