Europe is a doom-monger's paradise at the moment. Riots in Greece; summary Cabinet reshuffles; meetings between Merkel and Sarkozy to save the single currency — and there's still the potential for things to get worse, much worse. If the Greek government defaults on its debts, then there's no knowing where the contagion will spread, only that it it will spread wide: from Spain and Portugal to markets across the world. Share indices have already been trembling at the prospect, although many of them rallied slightly today.
One consolation, however scant, is that all this crystallises just what can happen to governments who operate beyond their means. Indeed, this seems to be the point that Jean-Claude Trichet, the President of the European Central Bank, makes in an interview with the Times (£) today. As he puts it, "We were not at ease with the idea that, in the heat of the crisis, all countries were called to spend as much as possible, embark on deficits as much as possible." And he concludes the argument with a sober warning: "I believe that the tensions we are observing in Europe today are part of a much more global phenomenon."
For other reading material, I'd urge CoffeeHousers towards Allister Heath's article for The Spectator a few weeks ago, in which he explains how and why "a Greek tragedy would all too soon become a British one." Here's part of his analysis, by way of a taster:
"The disaster scenario goes as follows. In London, City analysts are openly suggesting that between half to three-quarters of Greece’s debt will have to be written off, at a cost to investors of more than €210 billion. This would wipe out most Greek financial institutions and cost European banks and funds €130 billion. If you think the numbers are scary, remember that Greece is a minnow of an economy; the fallout would be many orders of magnitude higher were Italy or Spain to succumb.
Britain is especially vulnerable because London remains at the heart of Europe’s financial networks, the nerve centre for the management and allocation of capital across the continent. A French or German financial crisis would be a disaster for the City, and hence for British jobs and tax receipts. Even if George Osborne were able to borrow as easily and as cheaply as he was before, he would need to borrow more — because the bankers would be paying less tax. It is a dirty secret in Whitehall, but we badly need the bankers to succeed. A resurgence in banking profits is the best hope for tackling the deficit."