Greece

There are two articles in today's FT dealing with Greece. John Plender argues that the EU attempt to muddle through as best it can to see if Greece's disastrous fiscal position can be rectified. Given that it is so inefficient, there is some hope that it can albeit accompanied by drastic domestic deflation. Martin Wolf demonstrates why the ECB is so adamantly against restructuring because of the damage it will do the EU banking. The Greek banking sector is so dependent on ECB funding that its collapse would threaten the European banking sector as a whole. The threat of excessive financial interconnectedness has raised its ugly head again.

The trouble is that Greece is insolvent. At its current level of relative prices, it cannot grow and if it cannot grow it cannot pay off its debts. The domestic deflation to get unit labour costs/relative prices in line with Germany is probably politically unacceptable, and, anyway, deflation means that the debt burden continues to increase. The Greek people are faced with an unenviable choice - domestic deflation and a surrender of financial sovereignty or a collapse of the economy led by their banks. The experience of Argentina 10 years ago suggests that the latter is the preferable optionl, but neither will be pleasant.

The final issue is the lack of political legitimacy of the EU itself. Closer economic integration has been beneficial for all concerned, but one can only take that so far. When the euro came into being, many analysts warned that you cannot have monetary union without fiscal union. And now, as Martin Wolf points out, you need a European integrated banking system as well. But Europe does not have a mandate for fiscal union or the abolition of national banking systems.

Europe cannot win. There is no way it can force political integration on the unwilling populations of Europe but lending a bankrupt country billions of euros to sustain what is unsustainable won't work either. Another financial crisis is in the offing.