Tonight in Athens a vote of confidence on the Prime Minister Papandreou’s will take place and our future might depend upon it. If PM Papandreou loses the vote, Greece’s constitution demands that a General Election will be held and that could hasten Greece – the country – to being bankrupt. What that means is that Greece will have no money to pay out it’s Civil Servant’s wages… or Pension to OAP’s… or benefits to the poor. It will also mean that the Greek Government will not be able to pay back the loans it has taken from other Governments or Banks from around the world… including the U.K.
‘So what?!’ You might ask. ‘The Banks are evil & if they lose some money, good enough for them’ you might even say.
Well, unfortunately for you (and me!) it will impact you in very real ways.
Firstly, looking at the direct impact, loans from the U.K. government not repaid mean that the U.K. has lost money – that’s your money – which it could have spent on schools, hospitals, roads, jobs (and which might have helped boost our own economy some more). Losses by companies mean less Corporate Taxes paid to the U.K. Government, which could have been spent on schools, hospitals, roads, jobs… and when your Government owns significant stakes in some of those banks, the hit is multiplied through a lack of profitability and the loss of more money which could have been spent on schools, hospitals… you get the picture.
Greece going bankrupt will be a bad thing for the U.K. directly and yet, that won’t be half the problem because the U.K. and U.K. companies are not that linked to Greece. Sure we have lent them some money, but nothing on the scale of say Italy, Spain or the Republic of Ireland… which is where the indirect problems lie, because Italy (in particular) are also linked to Greece and a Greek bankruptcy will impact Italy – massively.
Italy has a big economy, one of the biggest in Europe, and yet it has massive debt and a deficit (i.e. it’s spending more money than it’s bringing in through taxes) and a Greek default (i.e. going bankrupt and failing to pay it’s bills) will significantly impact on both, making it harder for Italy to pay it’s bills – to it’s citizens, it’s neighbouring countries and the banks. In effect, the same impacts to the U.K. as Greece, but on a much, much bigger scale.
It’s difficult for me to explain what the impact of an Italian bankruptcy would do to the U.K. Our economic growth is not strong at the moment so it’s likely that such a tidal wave of missing money (i.e. unpaid debts) would hit hard. Jobs would be lost and the Government’s ability to pay bills would be harder… and that’s only if Greece and Italy default. If Spain, Portugal, Belgium, the Republic of Ireland (and who knows, France?!) were to fall like dominos behind Italy… well, it would be a catastrophe for us all. There would be global ramifications given how interlinked the world is today.
Italy’s Prime Minister Silvio Berlusconi is under massive pressure to act quickly to shore up his county’s finances to minimise any threat of this scenario, should Greece fail. The thing is though, no one wants to tighten their belts.
When Labour came to power in 1997, it inherited a balanced U.K. budget and yet went on a spending spree which the U.K. has not recovered from yet. The current Coalition government are aiming to return our budget to balance inside five years by reviewing all sorts of Government spend… and it’s not popular. Not one bit! The 30th November this year is in line to be the biggest day of strike action in the U.K. since the 1970’s. When Greece imposed some ‘austerity’ measures the Greek public went daft, with violence on the streets. Italy so far hasn’t even worked out how it’s going to tighten its belt, never mind tried to make it happen. Eire, is one of the few countries who, along with the U.K., have taken steps to return it’s coffers to balance.
So what’s the answer?
There are two aspects… firstly, in the short term, Greece needs to decide if it’s going to go for ‘austerity’ or ‘bankruptcy’. If it goes for the former, EU and Eurozone partners are going to take some losses and lend it money to get through the worst, provided the Greek government start balancing the books. If it’s the latter, it needs to give it’s neighbours & creditors as much warning as possible because they need to start (if they haven’t already) insulating themselves against the loss of money. Everyone needs to start being open and honest with each other about their levels of debt and to whom.
In the long term, governments around the world need to start managing their finances better! Greece could have helped itself if it was in any way efficient at collecting taxes and if it hadn’t planned on the good times lasting forever. When pensions were introduced, back in the day, the average life expectancy beyond pensionable age was 2 years – today it’s more like 12 – and yet as we can see from the U.K. Government’s attempts at pension reform for public sector workers, it is not easy or nice work. Being able to commit to paying good pensions for everyone, forever doesn’t take into account the bad times.
How do you pay for ‘good time’ pensions in a recession? Well, the answer to date has been by borrowing… and of course that means debt, fees, interest payments and lost money to the economy (if borrowing from abroad). It simply can’t continue – we need new answers!