Greece has “come to the brink of the abyss” said poor President Papoulias of Greece yesterday. And indeed it has. There can be little better exemplification of the inability of populations outside Japan to accept deflation, than the petrol bombings that killed three in Athens yesterday.
The Greeks may by now understand how they got into their current situation (a mixture of complacency, profligacy and malfeasance) but that doesn’t mean they have much intention of going along with the rest of Europe’s plan to get them out of it. And you can see why: as is always the way, tax rises and spending cuts are going to hit the poor more than the rich, forcing down living standards after a long period in which everyone had assumed things would keep getting better for ever.
The Greeks also have some cause to be angry with the European Union (EU) as a whole: being in the euro didn’t exactly force them to overspend, but it did produce the circumstances (stupidly low interest rates all round) that allowed them to do so.
So what next? Papoulias says he won’t be backing down on the austerity package – he’s given an undertaking to the EU to aim to get the budget deficit below 3% by 2014 and Parliament is expected to approve the austerity package (all £93bn of it) today.
But even if it does, it won’t be enough. If more violence is to be avoided and the fear that is gripping European investors is to be broken, then Greece needs more than fiscal support. Right now, like Spain and Portugal, it might well need monetary support too. Perhaps quantitative-easing-style direct purchase of government bonds by the European Central Bank (ECB), or the reintroduction of the “special liquidity measures” (which involved providing unlimited loans to banks, for example).
The ECB is meeting in Portugal today, and it seems unlikely that the idea of the ECB becoming a buyer of last resort for government bonds will come up for discussion. But might they actually do it? They might. As Aline Van Duyn points out in the FT, “with currency interventions no longer in eurozone central bankers’ bags of tricks, bond market interventions may need to be.” Buying large amounts of sovereign bonds might not do much for the ECB’s reputation as a fighter of inflation, but does that really matter? As Angela Merkel herself said only yesterday, “the future of Europe is at stake.”