Greece's financial problems European roots

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Today Greek prime minister, Giorgos Papandreou is in Russia, yet another stop on an itinerary which has seen him flit across the globe in a desperate bid to secure fresh funding for Greece's troubled economy. Faced with $420 billion debt the small Balkan nation with a population of just 11 million has sparked off a crisis which threatens to derail the European Union's grand experiment in creating a unified currency which started in 1999.

The revelations that Athens had massively under reported its debt load and so violated the conditions of the Stability and Growth Pact saw the light of day with the election of the centre left PASOK party in the country's national elections in October. The news that Greece's foreign debt load had reached 12.3% of GNP sent shock waves through European political and banking circles, raising the possibility that the Greek government might not be in the position to honour its monetary commitments.

The chance that a Eurozone nation might default on its repayments sent the cost of Greece's foreign loan requirement soaring and forced Germany's foreign minister Guido Westerwelle to backtrack on previous statement that the country had to put its own house in order before asking its European partners for help.

However, despite the storm of criticism Greece has weathered over its bloated public sector, rampant corruption and falling competitiveness the problems that Greeks face also have their roots in factors which have little to do with the country's internal pathologies that have long been known yet until recently politely ignored by fellow EU members.

As with the other PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations the introduction of the Euro as a common currency has seriously limited the ability of governments to regulate their economies so leading to a fall in competitiveness. Unable to adjust their local exchange rates businesses in Europe's soft underbelly have been gradually losing traditional markets due to the rise in cost of their products caused in part by the strength of the Euro. Unlike their northern European partners such as Germany and France the introduction of the Euro has lead to rising costs and prices which their economies have not been able to offset with rises in productivity.

However, the current crisis its roots in the European Exchange Rate Mechanism which means the the European Central Bank is obliged to support the Euro should it fall or raise by 15% against other currencies. As Britain learnt to its cost during Black Wednesday in 1992 such a commitment means that the currency could be the object of speculators who make vast fortunes selling back Euros to the ECB as art of its attempt to shore up the price of the currency.

The UK burnt through 27 billion pounds in the course of a day in a failed attempt to prop up the currency, making international financier George Soros $1 billion dollars richer and leading to Britain to withdraw its application to join the ERM.

With the chance that such a feat could be repeated on a European wide scale with even greater profits there is the possibility that the intense financial pressure of Greece is simply a stalking horse for a larger effort to weaken confidence in the Euro so leading to a fall in its price on the international money markets and so triggering a buying spree by the ECB which could reap billions of dollars in profits for banks and speculators.

None of this bodes well for Greece since the underlying fundamentals that laid the country open to attack by speculators have not disappeared. The country still continues to be plagued by a lack of innovation and a public sector which has ballooned out of control to such an extent that even ministers have no idea how many people they employ. In addition any serious econmic policy is necessarily hampered by the fact the succesive governments have cooked the books so extensively that the basci data needed to plan changes to the economy is next to useless.

The demands by France and Germany's conservative governments that Greece radically cut public spending and raise more revenue by taxation is certain to create a wave of intense protest by public sector unions who will not willingly agree to pay cuts or loss of jobs. In the long term a shrinking public sector is unlikely to help address fundamental productivity issues which stem from crony capitalism and the existence of shadowy price cartels which mean that Greek businesses have traditionally only invested in innovation as a last result, relying instead upon personal and political contacts with the country's main parties in order to secure contracts and inflated profits.

It seems too much to expect those who have created a system whereby huge amounts of money can be earnt with minimum risk to change the habits of a lifetime and take their chances in the cold waters of real competition in harsh international markets.