Beware of Greeks playing roulette with their whole economy

The breaking news is that George Papandreou seems to have played Roulette with his nations debts but many in his own party and the rest of the government have prevented him from staking it all on a referendum. Earlier today four of his own cabinet opposed the measure and the Prime Minister will be seeing Greek President Karolos Papoulias to offer his resignation.

The crisis came to a head today after the EU withdrew its bailout offer of a rescue package unless Greece decided immediately whether they were in or out of the Eurozone. Earlier the main opposition leader Antonis Samaras of the New Democracy party called for a coalition goverment to safeguard the EU deal, which wrote off 50% of the debts owed by Greece in return for sharper austerity measures. Some of Papendreou's MPs refused to back his call for a referendum calling instead for a national government or an early election. His slim majority was only 4 in the 300 seat parliament.

So where does this leave us?

Clearly the Greek political leaders are trying to shore up their economy as best they can. Realising that the EU deal may be the best option that they can get at this point. However, the people are still angry about the need for greater austerity measures to enable them to pay back the new deal. However, it looks likely that they will leave the Euro to allow greater flexibility over their own economy to enable them to pay back their debts. But the level of austerity in Greece is likely to last for many years.

One thing that appears to have come from the past week since the Greek package was agreed is that the entire world seems to be at a point where if someone fails to take positive economic action there will be panic. The fact is that in or out of the Eurozone, whether in Europe or not, every economy is getting so entwined with each other that any nervousness or fear of default could be on the point of bringing down a lot more than simple the economy of one relatively minor country. Also if Greece were to leave the Eurozone, there is the question of the lack of mechanism for them to do so, and also the question of whether they would also have to leave the EU. In doing so this may well lead to further issues.

The fact is that when David Cameron says we're all in this together he means not just across the UK, but across Europe and further afield.

Whether a new Greek government can bring about stability quickly is the matter that world leaders at the G20  in Cannes will be watching closely. As the latest events in Greece were happening as the EU deal was being discussed in Cannes.

Note As this is a breaking news story issues may well move on while I am away from my computer this afternoon.

The Real Test for Euro Membership

When I was a student we still only had the exchange rate mechanism of the European Monetary System. But being the great fan of Sci-fi that I was my dissertation looked to the future and a European currency, I pointed out that the real test for such unity wouldn't come in the good times but would come in the bad, then I said it would depend how Germany, France, Italy and the UK (yeah I was an optimist) reacted when times were tough and part of the zone needed help.

Well it may be almost twenty years later but such a crossroads has been arrived at. Or to be precise we've been standing at that crossroads for sometime waiting to stride off confidently but now we're about ready to head off, we're not sure what to do.

The issue of course is Greece.

The EU leaders have said they are prepared to deliver a rescue package for the Greek economy and to shore up the integrity of the Eurozone, they just haven't announced the details yet. But at the end of over a year of such support for other EU economies some nations are not happy. This morning on the news I heard mention of some in Germany being up in arms and saying enough is enough and saying they would be better returning to the Deutchsemark.

Of course there are criteria for entering the Eurozone these have to be met before admission is allowed. These are clearly laid out to EU member states that wish to enter. The issue of expulsion isn't so clear, but there is talk that some wish to remove Greece. Indeed Phoebus Athanassiou writes in a European Central Bank working paper that such a move in almost certainly illegal, there is no exit criteria only for entry.

Of course the reason for setting up the Euro was to allow competitive advantage, economic stability and smooth out the dips that any one Euro member would have against the world economy. The larger nations would benefit from the security if their prices across the zone and the ability to plan within the world. The smaller nations would have the security blanket of the more established nations, benefiting from the economy of scale to help them develop. That is all well and good when times are good, even when they are stagnated, but not when they are dipping sharply.

There is the option of voluntary withdrawal a country then could in theory devalue its currency to improve competitiveness and to set its own interest rates.But either expulsion or withdrawal would not be an easy option. Don't forget as well as Greece, Ireland, Spain and Portugal are also finding it tough just now.

The Options

• Expulsion - verges on illegality, plus needs to create a new European Community minus the expelled member.
• Voluntary withdrawal - at this stage almost impossible to withdraw from all the institutions needed to be in Eurozone without withdrawing from EU itself.
• Withdrawal keeping Euro - Some states outside the EU currently operate the Euro so would be possible to withdraw, revalue and keep Euro at new rate.

However, as I said above the smaller nations saw the Euro as a security blanket. Any move to expel would lead to insecurity of the remainder, it could see the unravelling of the EU.

The thing is that the Eurozone countries have to be in this together, that was the agreement, that was the commitment that was made. Like a marriage it is for sickness or in health and divorce is a whole lot messier with so much involved.