The Greek economic crisis exposes the fact that even the most economistic of the European Union's policies, namely monetary union, is inextricably political and must be addressed by political measures. Athens, for its part, has made strenuous efforts to respond. Within a year, it has cut the budget deficit from 15.4 per cent of GDP to 10.5 per cent, mainly by slashing public spending, and tightened up on tax evasion. As a result of the cuts, however, the economy shrank by 4.5 per cent in 2010. It looks set to continue shrinking. The overall debt burden is now 142 per cent of GDP, and is still rising. The slide means the country cannot service its main current loan, the €110 billion jointly provided in 2010 by the International Monetary Fund and Greece's 16 eurozone partners. More bailouts are under discussion in the eurozone, as is a possible restructuring of the debt on easier terms. Even discussion of such matters affects national standing; and in what the researcher Paul de Grauwe calls self-fulfilling market expectations, the credit rating body Standard & Poor's has cut Greece's rating.

The other eurozone countries have handled the situation badly. Luxembourg Prime Minister Jean-Claude Juncker convened a secret meeting and then denied that the event had occurred. The exposure of that falsehood caused the euro to fall 2 per cent against the dollar. Secondly, focussing solely on the fiscal issues has made it harder for German Chancellor Angela Merkel to get her coalition partner, the Free Democratic Party, to back more loans for Greece; her government is now at risk. Thirdly, Greece's Prime Minister George Papandreou is under pressure. His 2010 cuts had broad support from a public who wanted to reform an economy they themselves saw as rotten. Now, well aware that the crisis was caused by the bankers and politicians, ordinary Greeks, hit hardest by austerity measures, are resisting fresh attempts to raise revenues and demanding that those who caused the problems solve them. Furthermore, the financial institutions' punitive policies threaten the social and political understandings on which the EU itself is founded; they remove the automatic stabilisers (to use Dr. de Grauwe's phrase) of unemployment benefit and counter-cyclical public spending. Finally, the narrow financial view precludes investments that would be far more likely to revive the economy; those would aim at areas like shipbuilding, solar or other renewable energy, and services. Greece, in effect, needs a new Marshall Plan; but the eurozone looks politically incapable of even imagining one.

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