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-	What really caused the eurozone crisis?	+	The Greek PM has warned the nation of a collapse in living standards if MPs fail to pass an unpopular austerity bill demanded in return for a 130bn-euro ($170bn; �110bn) bailout.
-	World leaders probably spent more time worrying about the eurozone crisis than anything else in 2011.	+	In a TV address, Lucas Papademos said Greece was "just a breath away from Ground Zero".
-	And that was in the year that featured the Arab Spring, the Japanese tsunami and the death of Osama Bin Laden. What's more, 2012 looks set to be not much different. But as eurozone governments hammer out new rules to limit their borrowing, are they missing the point of the crisis?	+	The cabinet has approved the measures but five government ministers resigned.
-	* The eurozone has agreed a new "fiscal compact"	+	Unions are holding a 48-hour strike, and thousands of protesters rallied in central Athens against the measures.
-	* Eurozone leaders have agreed to a tough set of rules - insisted on by Germany - that will limit their governments' "structural" borrowing (that is, excluding any extra borrowing due to a recession) to just 0.5% of their economies' output each year. It will also limit their total borrowing to 3%. These rules are supposed to stop them accumulating too much debt, and make sure there won't be another financial crisis.	+
-	* But didn't they already agree to this back in the '90s?	+
-	* Hang on a minute. They agreed to exactly the same 3% borrowing limit back in 1997, when the euro was being set up. The "stability and growth pact" was insisted on by German finance minister Theo Waigel (centre of image). What happened?	+
-	* So who kept to the rules?	+
-	* Italy was the worst offender. It regularly broke the 3% annual borrowing limit. But actually Germany - along with Italy - was the first big country to break the 3% rule. After that, France followed. Of the big economies, only Spain kept its nose clean until the 2008 financial crisis; the Madrid government stayed within the 3% limit every year from the euro's creation in 1999 until 2007. Not only that - of the four, Spain's government also has the smallest debts relative to the size of its economy. Greece, by the way, is in a class of its own. It never stuck to the 3% target, but manipulated its borrowing statistics to look good, which allowed it to get into the euro in the first place. Its waywardness was uncovered two years ago.	+
-	* 3/9 Italy	+
-	Worst offender	+
-	* 5/9 Germany	+
-	First to break rules	+
-	* 6/9 France	+
-	Offender	+
-	* 9/9 Spain	+
-	Top of the Class	+
-	* But the markets have other ideas	+
-	* So surely Germany, France and Italy should be in trouble with all that reckless borrowing, while Spain should be reaping the rewards of its virtue? Well, no. Actually Germany is the "safe haven" - markets have been willing to lend to it at historically low interest rates since the crisis began. Spain on the other hand is seen by markets as almost as risky as Italy. So what gives?	+
-	* So what really caused the crisis?	+
-	* There was a big build-up of debts in Spain and Italy before 2008, but it had nothing to do with governments. Instead it was the private sector - companies and mortgage borrowers - who were taking out loans. Interest rates had fallen to unprecedented lows in southern European countries when they joined the euro. And that encouraged a debt-fuelled boom.	+
-	* Good news for Germany...	+
-	* All that debt helped finance more and more imports by Spain, Italy and even France. Meanwhile, Germany became an export power-house after the eurozone was set up in 1999, selling far more to the rest of the world (including southern Europeans) than it was buying as imports. That meant Germany was earning a lot of surplus cash on its exports. And guess what - most of that cash ended up being lent to southern Europe.	+
-	* ...bad news for southern Europe	+
-	* But debts are only part of the problem in Italy and Spain. During the boom years, wages rose and rose in the south (and in France). But German unions agreed to hold their wages steady. So Italian and Spanish workers now face a huge competitive price disadvantage. Indeed, this loss of competitiveness is the main reason why southern Europeans have been finding it so much harder to export than Germany.	+
-	* ...and a nasty dilemma	+
-	* So to recap, government borrowing - which has ballooned since the 2008 global financial crisis - had very little to do with creating the current eurozone crisis in the first place, especially in Spain (Greece's government is the big exception here). So even if governments don't break the borrowing rules this time, that won't necessarily stop a similar crisis from happening all over again.	+
-	Spain and Italy are now facing nasty recessions, because no-one wants to spend. Companies and mortgage borrowers are too busy repaying their debts to spend more. Exports are uncompetitive. And now governments - whose borrowing has exploded since the 2008 financial crisis savaged their economies - have agreed to drastically cut their spending back as well. But...	+	Riot police were on standby after clashes on Friday, but the demonstrations were mostly peaceful.
-	* Cut spending...	+
-	* ...and you are pretty sure to deepen the recession. That probably means even more unemployment (already over 20% in Spain), which may push wages down to more competitive levels - though history suggests this is very hard to do. Even so, lower wages will just make people's debts even harder to repay, meaning they are likely to cut their own spending even more, or stop repaying their debts. And lower wages may not even lead to a quick rise in exports, if all of your European export markets are in recession too. In any case, you can probably expect more strikes and protests, and more nervousness in financial markets about whether you really will stay in the euro.	+	The austerity measures are being demanded by the eurozone and IMF - they must now be passed by the Greek parliament and approved by European finance ministers.
-	* Don't cut spending...	+
-	* ...and you risk a financial collapse. The amount you borrow each year has exploded since 2008 due to economic stagnation and high unemployment. But your economy looks to be chronically uncompetitive within the euro. So markets are liable to lose confidence in you - they may fear your economy is simply too weak to support your ballooning debtload. Meanwhile, other European governments may not have enough money to bail you out, and the European Central Bank says its mandate doesn't allow it to. And if they won't lend to you, why would anyone else?	+	Some MPs from the governing parties are expected to vote against the bill, the BBC's Mark Lowen in Athens reports.
		+
		+	But analysts say the package should still have enough support in parliament, because Pasok, the largest party, and its coalition ally New Democracy account for more than 230 deputies out of a total of 300.
		+	Catastrophe fear
		+
		+	Mr Papademos said the measures would "decide the country's future" and enable it to stay inside the euro.
		+	Continue reading the main story
		+	What went wrong in Greece?
		+
		+	An old drachma note and a euro note
		+	Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.
		+
		+	The opening ceremony at the Athens Olympics
		+	Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.
		+
		+	A defunct restaurant for sale in central Athens
		+	The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.
		+
		+	A man with a bag of coins walks past the headquarters of the Bank of Greece
		+	Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.
		+
		+	Workers in a rally led by the PAME union in Athens on 22 April 2010
		+	There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes.
		+
		+	Greek Prime Minister George Papandreou at an EU summit in Brussels on 26 March 2010
		+	The EU, IMF and European Central Bank agreed 229bn euros ($300bn; �190bn) of rescue loans for Greece. Prime Minister George Papandreou quit in November 2011 after trying to call a referendum.
		+
		+	Greece's problems have made investors nervous, which has made it more expensive for other European countries such as Portugal to borrow money.
		+	Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.
		+
		+	Lucas Papademos
		+	Under Prime Minister Lucas Papademos, Greece is trying to negotiate a big write-off of private debts and secure a second bail-out of 130bn euros ($170bn, �80bn) before a 20 March deadline.
		+
		+	BACK 1 of 8 NEXT
		+
		+	"The social cost of this programme is limited in comparison with the economic and social catastrophe that would follow if we didn't adopt it," he said.
		+
		+	Savings would be lost, the government would be unable to pay wages or salaries, and imports of fuel, medicine and machinery would be disrupted, he added.
		+
		+	Earlier, Greek conservative leader Antonis Samaras said all his party's MPs must vote in favour of the bailout law.
		+
		+	Mr Samaras, whose New Democracy party is a member of the governing coalition, said any rebels would face being dropped as parliamentary candidates.
		+
		+	Deputy Foreign Minister Mariliza Xenogiannakopoulou, who quit on Friday afternoon, is the most senior defection so far.
		+
		+	Her Pasok party, the largest in the coalition, also suffered the loss of a deputy labour minister on Thursday.
		+
		+	The austerity cuts include:
		+
		+	* 15,000 public-sector job cuts
		+	* liberalisation of labour laws
		+	* lowering the minimum wage by 20% from 751 euros a month to 600 euros
		+	* negotiating a debt write-off with banks.
		+
		+	These were presented to a eurozone ministers in Brussels on Thursday evening.
		+
		+	But they want a further 325m euros in savings for this year and also insist that Greek leaders give "strong political assurances" on the implementation of the packages.

---

Current revision as of 12:31, 16 January 2013

The Greek PM has warned the nation of a collapse in living standards if MPs fail to pass an unpopular austerity bill demanded in return for a 130bn-euro ($170bn; �110bn) bailout.

In a TV address, Lucas Papademos said Greece was "just a breath away from Ground Zero".

The cabinet has approved the measures but five government ministers resigned.

Unions are holding a 48-hour strike, and thousands of protesters rallied in central Athens against the measures.

Riot police were on standby after clashes on Friday, but the demonstrations were mostly peaceful.

The austerity measures are being demanded by the eurozone and IMF - they must now be passed by the Greek parliament and approved by European finance ministers.

Some MPs from the governing parties are expected to vote against the bill, the BBC's Mark Lowen in Athens reports.

But analysts say the package should still have enough support in parliament, because Pasok, the largest party, and its coalition ally New Democracy account for more than 230 deputies out of a total of 300. Catastrophe fear

Mr Papademos said the measures would "decide the country's future" and enable it to stay inside the euro. Continue reading the main story What went wrong in Greece?

An old drachma note and a euro note

   Greece's economic reforms, which led to it abandoning the drachma as its currency in favour of the euro in 2002, made it easier for the country to borrow money.

The opening ceremony at the Athens Olympics

   Greece went on a big, debt-funded spending spree, including paying for high-profile projects such as the 2004 Athens Olympics, which went well over its budget.

A defunct restaurant for sale in central Athens

   The country was hit by the downturn, which meant it had to spend more on benefits and received less in taxes. There were also doubts about the accuracy of its economic statistics.

A man with a bag of coins walks past the headquarters of the Bank of Greece

   Greece's economic problems meant lenders started charging higher interest rates to lend it money. Widespread tax evasion also hit the government's coffers.

Workers in a rally led by the PAME union in Athens on 22 April 2010

   There have been demonstrations against the government's austerity measures to deal with its debt, such as cuts to public sector pay and pensions, reduced benefits and increased taxes. 

Greek Prime Minister George Papandreou at an EU summit in Brussels on 26 March 2010

   The EU, IMF and European Central Bank agreed 229bn euros ($300bn; �190bn) of rescue loans for Greece. Prime Minister George Papandreou quit in November 2011 after trying to call a referendum.

Greece's problems have made investors nervous, which has made it more expensive for other European countries such as Portugal to borrow money.

   Eurozone leaders are worried that if Greece were to default, and even leave the euro, it would cause a major financial crisis that could spread to much bigger economies such as Italy and Spain.

Lucas Papademos

   Under Prime Minister Lucas Papademos, Greece is trying to negotiate a big write-off of private debts and secure a second bail-out of 130bn euros ($170bn, �80bn) before a 20 March deadline. 

BACK 1 of 8 NEXT

"The social cost of this programme is limited in comparison with the economic and social catastrophe that would follow if we didn't adopt it," he said.

Savings would be lost, the government would be unable to pay wages or salaries, and imports of fuel, medicine and machinery would be disrupted, he added.

Earlier, Greek conservative leader Antonis Samaras said all his party's MPs must vote in favour of the bailout law.

Mr Samaras, whose New Democracy party is a member of the governing coalition, said any rebels would face being dropped as parliamentary candidates.

Deputy Foreign Minister Mariliza Xenogiannakopoulou, who quit on Friday afternoon, is the most senior defection so far.

Her Pasok party, the largest in the coalition, also suffered the loss of a deputy labour minister on Thursday.

The austerity cuts include:

   * 15,000 public-sector job cuts
   * liberalisation of labour laws
   * lowering the minimum wage by 20% from 751 euros a month to 600 euros
   * negotiating a debt write-off with banks.

These were presented to a eurozone ministers in Brussels on Thursday evening.

But they want a further 325m euros in savings for this year and also insist that Greek leaders give "strong political assurances" on the implementation of the packages.