Ten points on the Euro crisis Paul Mason

Former economics editor, Newsnight Published duration 16 June 2011

1. The EU leaders are at loggerheads over the issue: should Greece be allowed to do a soft, controlled, partial default on its debts which forces banks and pension funds to lose some of the money they lent to Greece? Germany says yes, the European Central Bank chief Jean-Claude Trichet says no.

2. The question arises because the first Greek bailout, 110bn euros, did not work. Greece now needs another 85bn euros from the EU/IMF, and has to sell at least 30bn euros of assets on top of that because it cannot borrow in the global markets.

3. To justify the new bailout, both under its own rules and because voters in Finland, Netherlands and Germany resent the bailout, the EU is insisting on a new range of austerity measures, amounting to a 10% cut in public spending, a 1/3 cut in the public wage bill and 50bn euros worth of knockdown privatisation.

4. But the Greek PM George Papandreou could not get this through parliament. His majority fizzled to nothing as the details emerged and public pressure mounted. He offered a national unity government to New Democracy, the centre right, who refused; he offered to stand down on condition a new government signed up to the austerity plan, but no-one bought this.

5. So now, the one stable factor in the Euro crisis is gone. The Eurocrats were busy arguing over the terms of the bailout, but now their trusted dialogue partner has gone missing: even if a new government is sworn in on Thursday, how can the EU negotiate if there is no guarantee that the full spectrum of austerity measures can be got through the Greek parliament?

6. This is why the markets have long, already, discounted a hard default: 50 to 70% of the money is, as far as they are concerned, as good as gone.

7. But the moment of actually writing that into the account books will trigger a "credit event" for those who value and insure countries' sovereign debt. This will instantly raise people's aversion to risk: they will do instant de-risking of their own portfolios and you may come to a point where one bank refuses to lend to another. This is a credit crunch and is what the Euro policy makers fear. If it is triggered, it will negatively impact the whole world economy.

8. What's the fallback position? To let Greece default - chaotically or otherwise - but use taxpayers' money to bailout the affected north-European banks. That is what the German political elite is said to be considering. Market people are worried that Dexia, a Belgian bank, could be hit hard, bringing Belgian sovereign debt into the picture next.

9. Who will lose? Any pension fund or bank that lent money to Greece, Greek banks, or Greek people. And Greece will, if it drops out of the Eurozone, be forced to implement austerity anyway. However it will have economic sovereignty, which it does not have now.

10. Is there an alternative? Yes: a Marshall Plan for Europe, where German, French and British taxpayers voluntarily send money to Greece, Portugal and Ireland, shore-up their banks, shore-up their country finances, give them time to do structural reforms; in return they effectively seize control of south Europe's economic policy and impose a single Eurozone tax and spend regime. Another alternative is to let peripheral Europe leave the zone and rebuild it with Denmark and Sweden as a kind of "dark winter night" economic zone, based on sound principles and weak beer. Politics makes all of point 10 currently a non-starter.