THAT GREECE’S current street demonstrations against budget cuts should attract so much international attention tells us much about the rapidly evolving politics of the euro zone. This is first and foremost a domestic political question, as the Greek government struggles to impose a drastic 33 per cent cut in this year’s budget deficit. Unless its citizens are convinced this will be done fairly they are unlikely to accept it. But unless they do, Greece, and by extension the whole euro zone, will suffer a deep crisis of credibility. That means all other euro zone members have an interest in helping to resolve Greece’s problem.
In doing so, the rest of the European Union must take proper account of the difficulties facing George Papandreou and his government. They inherited a dire economic situation from the outgoing conservatives last autumn, having campaigned on a programme of social protection. Compounded by the rapid discovery that State deficits were twice what was reported, Greece rapidly and unacceptably became the object of international market speculation, which has intensified in recent weeks. The growing realisation that this could be fatal for the euro has driven the latest political efforts to rescue the system. Typically for the EU, institutional innovation is thereby driven by crisis conditions.
Greece has a powerful trade union movement and a tradition of direct political confrontation which Mr Papandreou and his colleagues must negotiate their way through. He has to maintain his political legitimacy by convincing the population that the grave shortcomings of economic governance concerning taxation, corruption and a profligate public service are being tackled and that this is necessary to preserve the state’s international credibility. So far the indications are that this is possible. Many Greeks accept the need for change. The strikes and protests insist this be done justly rather than not done at all and the intensity of the crisis has scared key sectors into dealing with it seriously.
The EU is developing a short term and a longer-term response with a growing realisation that, in Mr Papandreou’s words, Greece may be its next but will not be its last victim. A sovereign debt default would undermine the euro system. It is now likely to be headed off, first by these severe budgetary measures, secondly by financial and political support from other EU governments and institutions and thirdly by emerging commitments to add a rescue and preventative capacity to the existing euro zone system. The German government has opened up a badly-needed political debate on this, but Germany’s interests alone cannot dictate the outcome.
The European monetary union was designed during the 1990s when it was widely assumed better understanding of markets had minimised the possibility of cyclical crises in the capitalist system. We have learned how wrong these assumptions were. It is just as well the lessons are now being learned in the middle of this storm. Greece has the misfortune to be a guinea pig, but Ireland too has much to gain from seeing it come through this political and economic turbulence safely.