Greece

European leaders have now agreed to bail out Greece in a coordinated affair, involving the IMF and bilateral assistance. The Times has written this up as a grab for more centralisation of policy-making by European Council President Herman Van Rompuy, but even the Tories know that’s not true, as judge by William Hague’s calm remarks. Trying to understand the problems of the euro has sent me back to my undergraduate economic textbooks and Robert Mundell’s work on optimum currency areas. As Spectator readers (many of whom are bankers) will know, the US economist theorised that a group of countries will benefit from a common currency like the euro if three conditions are satisfied.   1).

The credibility of the Chancellor’s Budget tomorrow depends on the policy changes that he announces for the public sector.  It won’t be enough for him just to announce a series of public spending totals that decline gracefully in the years to come.  Within some broad limits, anyone can do that.  What counts is whether he backs it up with practical ideas to target the big government costs, which lie in two places - benefits and the public sector workforce. In retrospect, the general election has fallen at the wrong time for the UK public finances.  Since early last year, the prospect of an early election has allowed the Government to put off the date of publication of its full plan to address the deficit.

While we’re talking about countries on the brink, it’s worth taking a look at Greece – which has probably passed beyond it.  The government has published its package of austerity measures – aiming to reduce its deficit to 8.7 percent of GDP by the end of 2010 – and the markets are deciding what they think. But, in the meantime, the country faces strikes; the Euro is taking a pummeling; there are fears that problems may spread to countries like Portugal and Spain; and Greek foreign policy – particularly with regard to Macedonia and the Balkans – is stalling.  Nobody is through the woods yet. All this mean that George Papandreou's problems are also the EU's problem.

The crisis in Greece shows just how quickly a fiscal crisis can blow up. Just two-and-a-half weeks ago, Greece was able to raise several billions in financing, with demand for almost 25 billion of their debt in an auction. The very next day, their bond market collapsed and the rout began. Just ten days later, they were turning up in Brussels with a begging bowl, and inviting the European Commission and IMF to Athens to start making their tax and spending decisions. There can be nothing worse for a government than having your economic policy dictated by the markets, and then other governments, as access to finance disapears. All you can do is rush out announcement after announcement, promising tax hikes and spending cuts, and pray that the market pressure eases up.