While the British election meanders along its somewhat flat and lacklustre course, disconnected from the real fundamentals, an ominous cloud is gathering elsewhere in Euroland.   The Greek Government’s decision to initiate help from the IMF and ECB, because it cannot finance the market’s bond yields while still hoping to cut its budget deficit, could on the worst scenario trigger a domino effect across the EU.   The obvious next candidates for vigilante financial attack are Portugal and Spain, with the UK on the outer margins.

There are several alarming elements in this deteriorating situation.   The 45bn Euro borrowing facility already provisionally agreed was designed to impress the market sufficiently that it would never have to be exercised.   Within less than a week it has failed to do that as Greek boind yields have spiked.   Since Greece cannot devalue within the Eurozone, it can either default with potentially profound long-term structural damage to the Euro or be obliged to accept whatever conditions its creditors impose.   There is really little option but to bow to the latter.   But the social and political instability this will trigger in Greece will be severe and unpredictable.

The policy implications of this impasse touch on the very foundations of the EU.   It has hitherto been assumed that one can have monetary union and a single currency without political union.   That will now come increasingly under question.   Because the ECB lacks the financial muscle to tackle a national financial collapse and because intervention is still determined by national politics (i.e. extreme German reluctance to fund a bail-out), the Greek contagion which might have been contained by early action may now go viral, as happened with Thailand the first of the East Asian tigers to succumb in 1997.

The only real long-term remedy (other than the break-up of the Eurozone) is closer moves towards European union and greater political authority to scotch fiscal irresponsibility in the making.   The long-term significance of the Greek debacle may well be that it is impossible to maintain a middle way between independent nationalisms and full-blown political union.