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The way to sort out a country's economic problems is typically not to give it a whacking great loan at a high price and expect it to pay it back by making huge spending cuts
The clearest lesson to be drawn out of this week's back and forth in the eurozone is this: Angela Merkel, Nicolas Sarkozy and the other single-currency heads of state have no intention of changing their tactics in tackling the gigantic problems facing Greece. Operation Muddle Through will continue – despite the trouble it causes the Greeks, despite the danger it poses to the rest of the eurozone and despite logic that argues to the contrary.
About this time last year, Ms Merkel and Mr Sarkozy led the eurozone and the IMF in a bailout of Greece. Well, it was generally called a bailout – but it did nothing to sort out the country's problems. Greece, struggling to service the huge debts its public sector had built up, was effectively loaned €110bn at a fairly punishing interest rate. It was a bridging loan intended to tide Athens over until it could borrow again from financial markets. As it has become clear that investors are still unwilling to lend to Greece, at any but the most punitive rates, Germany, France and the others are having to organise another loan. The smart money is on this one being worth around €30bn. There is also some talk that the repayment terms might be relaxed on last year's credit. None of this is exceptionable. None of this is daft. Trouble is, none of this will sort out the problems facing Greece or the eurozone.
The way to sort out a country's economic problems is typically not to give it a whacking great loan at a high price and expect it to pay it back by making huge spending cuts. That does not allow for the country to make extra money (through growth that leads to higher tax revenues). Only Tony Soprano would call this an economic policy. Certainly financial markets do not rate it much – which is why they are continuing to talk about the possibility of Athens defaulting on its debt. Those infamous credit-rating agencies don't think the plan amounts to much either, which is why they keep downgrading Greece's sovereign debt. Yet this is precisely what the single-currency club is doing to Greece – and Ireland and Portugal.
The sensible policy to pursue now would be for Greece to restructure its debt: write down the value of its loans, and offer to pay back the rest over a longer timeframe. The eurozone could help with this; meanwhile, Athens could work on upgrading its (negligible) tax-collection system. The obstacle to this is an obvious one: it would mean big losses for German banks, who have lent so much to Athens. But it is bizarrely circuitous for the German taxpayer to offer a bridging loan to Greece, purely to prop up its own banking system. Then again, ever since the financial crisis broke, the European way has been to kick the can down the road.
