On Greece, Martin Wolf is bleak…

Yet [despite the bailout] it is hard to believe that Greece can avoid debt restructuring. First, assume, for the moment, that all goes to plan. Assume, too, that Greece’s average interest on long-term debt turns out to be as low as 5 per cent. The country must then run a primary surplus of 4.5 per cent of GDP, with revenue equal to 7.5 per cent of GDP devoted to interest payments. Will the Greek public bear that burden year after weary year? Second, even the IMF’s new forecasts look optimistic to me. Given the huge fiscal retrenchment now planned and the absence of exchange rate or monetary policy offsets, Greece is likely to find itself in a prolonged slump.

Would structural reform do the trick? Not unless it delivers a huge fall in nominal unit labour costs, since Greece will need a prolonged surge in net exports to offset the fiscal tightening. The alternative would be a huge expansion in the financial deficit of the Greek private sector. That seems inconceivable. Moreover, if nominal wages did fall, the debt burden would become worse than forecast.

…Felix Salmon depressing…

Even if Greece were running a zero primary deficit (and I’d love to know if it’s ever managed that particular feat), a default without devaluation would still keep the country mired in its current uncompetitive state. If you’re going to go through the massive pain of a default, you might as well get the upside of devaluation at the same time, and exit the euro.

At that point, the only question is: do you default and devalue now, or do you wait a couple of years? Germany and France might well want to wait, in the hope that their banks will be better able to cope with such a thing in a couple of years’ time. But from a Greek perspective, if the pain is coming, best to go through it now and bring forward the growth rebound, rather than push off the devaluation stimulus to an indefinite point in the future.

…while most of Simon Johnson’s readers have now slit their wrists:

The Europeans will do nothing this week or for the foreseeable future.  They have not planned for these events, they never gamed this scenario, and their decision-making structures are incapable of updating quickly enough.  The incompetence at the level of top European institutions is profound and complete; do not let anyone fool you otherwise.

What we need is a new approach, at the G20 level; this can definitely include debt restructuring, but it has to be done in a systematic fashion (and even then there will be a considerable degree of total mess).  Such a change in framework for dealing with these issues will not get broad support until after further chaos in Europe, but it now needs to be put into place.

The Europeans will not lift a constructive finger.  The leading emerging markets are too busy battening down the hatches (and accumulating ever more massive chests of reserves).  And the White House still seems determined to sleep through this crisis.  Expect nothing.

What are the chances of the Euro emerging from this unscathed? Increasingly slim, it seems – surely one or more countries are going to find it almost impossible to stay inside the currency union. While the UK gazes at its navel, phase 2 of the global financial crisis has firmly taken hold.

We now have an inter-related banking and sovereign debt crisis; no procedures for an orderly bankruptcy of countries (having ignored the lessons of the East Asian financial crisis); and no legal way to allow the destitute to exit the Euro.

What a mess.

A few weeks ago, I questioned German wage restraint, pointing out that other Eurozone countries would prefer Germany to allow salaries to rise, thus stimulating domestic demand, and helping address Europe’s economic imbalances.

French finance minister, Christian Lagarde recently made the same point:

Clearly Germany has done an awfully good job in the last 10 years or so, improving competitiveness, putting very high pressure on its labour costs. When you look at unit labour costs to Germany, they have done a tremendous job in that respect.

[But] I’m not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence.

In the FT, Otmar Issing – who did his best to ensure the European Central Bank was run on Bundesbank-approved lines – reacts to the suggestion with characteristic restraint and good humour:

This idea, presented as a panacea for Europe’s problems, is so economically erroneous and politically dangerous that it would hardly deserve being taken seriously – were it not for the risk that it might actually prevail…

At a time when the EU has launched a new initiative to make the continent’s economies more competitive, after the failure of the “Lisbon agenda”, an approach that deliberately tried to reduce the competitiveness of one of the most successful exporters in world markets would look like a bad joke.

I’ll take that as a ‘no’ then. Issing, who has been lobbying hard against a Greek bailout, reflects a worrying trend in German opinion. According to this line of thinking, other Eurozone countries should buckle down, cut wages and public spending, and do what their richer and more prudent masters in Berlin Brussels tell them to.

And if this medicine is too bitter, then they should bugger off, re-adopt the drachma, lire or peseta, and spend the next hundred years or so paying back the Euro-denominated debt they have incurred while in the single currency.

It’s a depressing vision. And, for Europe, it looks like it’s stagnation ahead.

- With the UK election campaign under way in all but name, the FT’s Martin Wolf explains why he doesn’t fear a hung parliament – arguing that it might be just what’s needed to achieve fiscal restraint. “So poorly has single-party despotism governed the UK”, he suggests, “that I would welcome a coalition or, at worst, a minority government.” The Institute for Government, meanwhile answers all your hung parliament-related questions here, placing things in international and historical perspective.

- The Cable highlights the Obama administration’s key people on Iran. Richard Haass, meanwhile, suggests that the West’s strategy must do more to help the Iranian people – with the US and EU acting to “energise and lend rhetorical support to the opposition, helping it to communicate with the outside world”.

- Elsewhere, Der Spiegel profiles the five main risks to the Euro – namely Greece, Portugal, Spain, Ireland, and Italy – assessing their economic woes. Charlemagne, meanwhile, interviews Cathy Ashton. And The Economist also has news that Dominique Strauss-Khan, current IMF head, is considering running against Nicolas Sarkozy in France’s 2012 presidential elections.

- Finally, this week saw a group of British Academy experts writing to the Queen about the failure to foresee the credit crunch – a follow-up to a question from the monarch at the LSE last summer. Their suggestion: the need for a better-coordinated government horizon scanning capacity – something that could take the form of a monthly economics briefing to the Queen, which would serve – as Professor Peter Hennessy has commented – to “sharpen minds” of officials. Read the full letter here (pdf).

Poor old Europe: it just goes from bad to worse. Already sore from being brutally sidelined during the Copenhagen summit last year, it now faces this addition of insult to injury:

Greece is wooing China to buy up to €25bn of government bonds, a move that underlines Beijing’s increasing financial power, as Athens struggles to fund soaring public debt. Goldman Sachs, the US investment bank, had been promoting a Greek bond sale to Beijing and the State Administration of Foreign Exchange (Safe), which manages China’s $2,400bn foreign exchange reserves, said people familiar with the issue.

That’s what the FT reported yesterday, and the news immediately set pulses racing in Brussels and Frankfurt.  As Unicredit’s chief economist put it to the FT a day later,

For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme”.

But even worse, China then signalled they probably didn’t want Greece’s ropey debt anyway. Yu Yongding – who’s not only a senior member of the Chinese Academy of Social Sciences but was also a member of the Canadian-run L20 project back in the day (and hence a sort of Chinese government-licensed public intellectual on global affairs) – commented yesterday that,

It is unreasonable for an economist to support a diversification away from an unsafe asset class to a much more unsafe asset class. Let European governments and the European Central Bank rescue Greece.

Cue predictable carnage as the markets digested this news: stocks immediately fell 4%, according to the WSJ, and bond investors demanded a record spread of 3.70% between Greek 10 year bonds and the benchmark 10 year German bonds. But the events of the past couple of days are also an interesting little microcosm of larger issues, some of which are these. (more…)

The shooting of a teenager by police has sparked a wave of violent protests across Greece. In the past couple of days hundreds of hooded and helmeted protesters have poured into the centre of Athens, hurling petrol bombs and stones at shopfronts, banks, parked cars and police.

According to media reports the trouble began when a number of young people sitting at outdoor cafés in the centre of Athens hurled insults at a passing patrol car. After a verbal exchange between the police and the youths one of the policemen drew his weapon and fired three times, once towards the ground and twice in the air, one of the shots killed Andreas Grigoropoulos.  Two policemen have been arrested over the killing and the officer who fired the fatal shot has been charged with manslaughter.

The majority of protests seem to have been led by Anarchist groups which continue to plague Greece. According to CSM, anarchist groups frequently set off small bombs throughout the city – last week a bomb damaged the offices of the French news service Agence France Presse and arsonists torched a Bosnian embassy car and a bank cash machine. But there is a limit to what the police can do. Years of heavy handedness against such groups have created mistrust between the public and the police – and public sentiment seems to favour the anarchists – given this situation was created by the police they are going to have to tred very carefully.