Ed Conway has a very important article in the Telegraph about the current situation in Greece. It is worth reading the whole article, but here is the conclusion:
"Though the EU's
technocrats deny it, it is quite feasible to imagine Greece
defaulting, or –
to use lawyer-friendly jargon – restructuring its debt, over the next
few
years.
Less predictable are the implications for the rest of us. What is
certain is
that there would be an instant Lehman-style hit to the banks, as those
who
held Greek sovereign bonds (mainly in Switzerland, Portugal and
Ireland)
would have to write off chunks of their investments. But the indirect
contagion could be far more damaging. Just as the collapse of Lehman
Brothers raised questions about the solvency of all banks, so a Greek
collapse would turn the spotlight on any country with ugly public
finances
and an addiction to debt.
Which, inevitably, brings us back home. Everyone knows that, at some
point,
our Government must tackle the deficit and overhaul the welfare state,
which
is the largest drain on the public finances. But the speed with which
the
Greek crisis developed ought to remind our politicians that merely
glossing
over these issues – as, for the most part, they have in their
manifestos –
is not good enough. If the voters do not make that clear, the markets
soon
will."
The Financial Times makes clear the extent to which the parties have glossed over how they will get the public finances under control. Their analysis suggests that a minimum of £40 billion of spending cuts are needed in the first three years to meet the parties' pledges on the deficit but each party has outlined less than £10 billion. It is important to note that even if they had reached the £40 billion figure, the Bank for International Settlements report last week makes it very clear that wouldn't get us anywhere near out of the woods.
Some of the measures that the parties have identified, like public sector pay restraint, we recommended in our report with the Institute of Directors last September on how to save £50 billion. There is still more than enough left in that report's recommendations, updated for the new book, for the parties to get to £40 billion with room to spare.
The Financial Times article also mentions a survey they have conducted which sheds some light on the ongoing exchange of letters from economists about whether to get started cutting spending and the deficit. In the latest episode in that long running saga, the usual suspects like Lord Skidelsky argue against cuts and for maintaining deficits as an economic stimulus. The FT's survey finds that British economists are split roughly 50-50 between the two camps, cut now and cut later. Our view is that the Keynesians underestimate the extent to which deficits are undermining economic confidence, and a credible plan to get a handle on the nation's finances could help get things going again.
But the argument over cutting in 2010-11 or 2011-12 is a bit overrated. The more important divide is between those trying to work out a plan to deal with the situation and those putting off serious questions about how to deal with the crisis. The Keynesians have a legitimate, though mistaken in my view, case for putting off cuts. They are only credible if they put as much effort into arguing for a set of cuts in 2011-12 as they do for avoiding cuts in 2010-11 though. As I've written before, too many politicians are just using Keynesian economics as an excuse for not being responsible and cutting spending.