As if the woes of decade-long austerity, pay freeze, and demolition of the NHS and Welfare State were not enough, the signs of a final showdown in the Eurozone are becoming more ominous, at three simultaneous levels.   True, huge efforts, and money, have been poured into finding a solution.   The European Financial Stability Facility (EFSF), which proxies as the Eurozone bailout fund, now has resources of €780bn, banks on the edge with enormous amounts of Greek and Italian debt are being re-capitalised (again), and a haircut of near 60% for past investors in Greek debt seems about to be achieved till it was scuttled at the last moment.   But that still leaves three thunder-clouds threatening the scene.

First, after last weekend’s summit (the 15th), Merkel looks like getting her way that there should be central supervision of Eurozone budgets, with tough controls even in severe recession.   The aim is to ensure that each country in the Eurozone has to turn itself into a mini-version of thrifty Germany  – more fiscal imperialism than an aspirational model of fiscal union.   This is an impossible goal for the crisis-hit countries to live up to.   The Greek economy has now been shrinking for 4 years, spending cuts will push Spain and Italy according to the IMF into recession for 2 years, and Portugal shows signs of following Greece into likely default.   Prolonged enforced deflation amid recession, both in the Eurozone and the UK, is a policy of self-destruct.

Second, the democratic credentials of the EU, and the Eurozone in particular, are clearly coming under severe strain.   Italy and Greece already have unelected technocratic governments.   Germany now appears to want to go further and station a kind of 21st century viceroy in Athens to ensure that the dictats of  the fiscal pact are carried through without back-sliding.   How that tallies with the original vision of the EU as a group of states united together by a framework according respect for national identity and dignity is not explained.   The market is steadily spreading its tentacles across the European continent to the detriment of democracy and its peoples.

Third, this is not really a Eurozone crisis at all, it’s a second global banking crisis.   EU banks have exposure of $2.8tn in Greece, Ireland, Italy, Poetugal and Spain.   The financial sector as a whole has a total exposure of $3.55tn (more than twice Britain’s entire GDP), and US banks in addition are worryingly liable to default if the Eurozone breaks up.   A Greek bankruptcy could well bring down the 3 largest French banks which together hold over $40bn of Greek debt and propel the French economy into serious recession.   But British, German and Benelux banks would also be hard hit, many lacking the capital to sustain heavy losses.

Overall this is not a scenario which can go on for long.

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