The crisis in Euroland is far from over

By Alex Brummer, July 22, 2010

The untroubled scene is the open air breakfast restaurant at a luxury new resort hotel on Greece's bay of Navarone, developed - after three decades of planning - by a shipowner. Just in case the guests are too lazy to walk to the main swimming baths or down to the beach many of the rooms have their own infinity pools.

A London-born Greek entrepreneur holds forth on the ills of his nation's economy. Shipping, he notes, is one of the mainstays. In 2008 the earnings of the shipowners reached 19.2bn euros (£16bn) accounting for more than 7 per cent of the nation's economic output. In the teeth of the financial crisis, the Greek shipping firms have taken 230 new vessel deliveries. About 367 new ships are on order for this year and 249 in 2011.

This is an industry that is booming, providing untold wealth to the successors of such famous Greek shipowners as Aristotle Onassis and Stavros Niarchos.

Yet remarkably, at a time when taxes are being hiked until the pips squeak and public sector workers are being required to take pay cuts of 14 per cent to 15 per cent, the shipowners are allowed great privileges. They are treated like the non-doms used to be in the UK and pay no taxes.

The country's economic policymakers appear to see nothing irregular in this. A senior official from the Bank of Greece (the country's central bank) hosts a dinner for visiting economic experts - including former chairman of the World Bank James Wolfensohn - on a terrace high up above Athens with the magnificence of the Acropolis floodlit in the background.

‘The stresses and strains of Euroland remain as serious as ever’

The Bank of Greece official begins by talking of the sacrifices his nation is making to stay in euroland. Naturally, there is no reference to the missing taxes of the elite shipowners and bankers. Nor is there mention of the liberties taken by civil servants who think it is legitimate practice to strip their offices clean when, until recently, they would retire on full pensions in their early 50s.

Instead, he launches a broadside against the London-based financial press for exaggerating the difficulties of Greece, in particular reports that wealthy Greeks have spent the last few months emptying their domestic bank accounts and exporting their cash overseas.

It is these scurrilous reports, he argues - fed by speculators based in the City of London - which are the cause of the current crisis in Greece.

His attack, which astonishes the distinguished audience around him, has distinct echoes of Harold Wilson before his infamous 'the pound in your pocket' devaluation of 1967. He liked to blame Britain's then woes on speculative attacks by the 'gnomes of Zurich.'

Another distinguished banker close to me has a different version of events. Greeks 'do not want to work' he says. On Crete, where his family owns olive groves, he tells me that the lemons are allowed to rot on the trees and the markets are filled with citrus shipped from Morocco.

Imported workers from Bulgaria will pick fruit for 35 euros for a 12-hour-day. Local Greeks demand 40-45 euros and only work six hour days.

And so, since Greece became part of the euro area almost a million immigrants have flooded into the country from Bulgaria, Romania and Europe's traditionally poorer nations.

Such stories from Greece are typical of a wider malaise among Europe's so called PIIGS - Portugal, Ireland, Italy, Greece and Spain - which raise questions about the durability of Euroland.

Its difficulties are among the main reasons why a coalition between the eurosceptic Conservative Party and the euro-enthusiastic Lib-Dems has proved possible.

Indeed, the Coalition has sought to sell its 'austerity' budgetary policies as a direct response to maintaining Britain's 'triple A' credit rating - and not becoming the next Greece.

The reality is that Britain - which has never in its history defaulted on its debt and has the longest bond maturities of any Western economy - starts in a very different place from most of southern Europe.

The headlines may have faded in recent weeks, since the European Union came up with its near £1 trillion bail-out fund, but the stresses and strains within euroland remain as serious as ever.

Most of Europe, including Germany, has still fully to recognise the bad debts of the banking system.

Funds have been flowing at record levels out of European private banks, only to be replaced by deposits from the European Central Bank. In Spain unemployment is above 20 per cent and half the banking system is impaired as a result of property loans.

All of this has raised serious questions about the sustainability of the eurozone. A paper by Gabriel Stein of Lombard Street Research outlined how it would be possible for Greece to separate itself, unilaterally, from the single currency.

Other experts have suggested the creation of a two-band Euroland with the northern tier operating a harder currency regime than the ClubMed countries.

A further possibility is that Germany, the anchor of the single currency, agitated by the need to bail-out the euro's poorer members, could eventually secede.

What is without doubt is that the euro faces its greatest crisis and it is far from over.

Alex Brummer is City Editor of the Daily Mail

Last updated: 10:21am, July 22 2010