THE BLOG

Greek Debt in a Nutshell

05/02/2015 15:23 GMT | Updated 07/04/2015 10:59 BST

You'd have to be inhuman not to have some sympathy for Greece. After all they've lost around a quarter of their GDP since the financial crisis and youth unemployment stands at a morale crushing 50%. At 175% of GDP, their national debt is the highest of any country. Now I'm all in favour of previously profligate governments putting on a hair shirt for a bit but Greece's uber-austerity seems unlikely to be the right medicine to treat its particular disorder. So even though the leftist party Syriza aren't exactly my ideological soul mates I do have some vague understanding of why they've been swept to power. Out of sheer frustration and absence of hope presumably.

New Greek Finance Minister Yanis Varoufakis is cutting a dash as he jets around Europe economy class. It certainly makes a change to see a leader so seemingly down to earth even if I think he'd look more credible with his shirt tucked in. But as the rest of the Eurozone wonders how to solve a problem called Syriza what are the rights and wrongs of this situation and where can the solution be found?

Greece never should have joined the Euro not least because it never met the joining criteria. Giving up the drachma was a concession of Greek sovereignty and therefore the Government of the time must take the blame for that pure and simple. But of course the rest of the Eurozone should not have let Greece in.

Greece should never run up such great debts. But the Eurozone creditor nations happily took the benefits of increased competiveness from the single currency and merrily lent Greece money so it could buy their goods.

The fact is the Euro in its current formulation is deeply flawed. In simple terms you can't have a single currency without all the mechanics of a single state. I'm not against the notion of a currency union by the way - we run one very successfully in the UK. But that's because we have a central government that stands behind all of our public debts and supports the less prosperous parts of the union by fiscal transfers. And this is something the Eurozone simply doesn't have. When RBS had to be rescued in 2009 the Bank of England didn't ask Scotland if it wanted a loan to help. It just stepped in and nationalized the bank. The opposite has happened in Greece.

There's a reason why the Eurozone isn't supported by a federal European state and why each member isn't jointly and severally liable for each other's debts. It's because there never has been a democratic mandate for a federal EU. In its absence European politicians have set off building some of the architecture of a state regardless. But in its absence they haven't been able to build something sufficient to work. And that failure of capacity has left Greece (and some other countries) high and dry.

So I'd submit that the problems faced by Greece are as much the fault of Germany and other Eurozone creditor nations as they are of the Greeks themselves. They set up a system which manifestly cannot work and have happily taken the advantages for themselves without facing up to the downsides.

There are four potential solutions;

1.notwithstanding Syriza's insistence that it won't do this, the parties could agree to give Greece more time to pay back its debt under what Varoufakis calls the "extend and pretend" scenario that currently prevails. This seems to be Angela Merkel's preferred solution;

2.Greece could negotiate debt relief by getting creditors to agree to write off say 50% of its debts. This is what Syriza said it wanted in its election campaign. Merkel has said this definitely won't happen;

3.The Eurozone could edge towards the kind of debt mutualisation which I believe is implicit in a single currency. Although this currently seems fanciful it is worth noting that the recent announcement the Eurozone would implement quantitative easing contained joint liability for up to 20% of the programme. Debt mutualisation is politically extremely challenging and there is almost always one Eurozone member having an election - next up is Finland- but nevertheless it is necessary to make the Euro function properly in my view; or

4.Greece could exit the Euro altogether. So called Grexit is the nuclear option in Greece 's armoury as it would probably fire the starting gun on the end of the Euro. If I had just been sworn in as Greek Prime Minister instead of Alex Tsipras this is what I would be pushing for because I don't believe 3 will happen, 1 is ultimately unviable and 2 would be of temporary benefit but would not be enough to help Greece prosper again in the long term. For that they almost certainly need a free-floating currency and their own effective central bank.

Although I said there were four solutions the most likely outcome is a compromise between 1 and 2. Indeed Varoufakis is already edging towards this by proposing that some of Greece's debts be converted into "growth bonds" which are only repayable if Greek GDP is growing. Stock markets rose on this news because it indicates that a confrontation with the rest of the Eurozone is much less likely. I wonder if they should've fallen because a lasting and viable solution now seems more remote.