Leader: The eurozone’s fate lies in the hands of Greece’s government

WHATEVER else may be preoccupying the minds of Scottish policymakers as they survey our already dismal economic prospects, the implications of the latest developments in Greece cast even these in the darkest shadow.

The decision by the Greek premier George Papandreou to hold a referendum on the latest debt relief and austerity programme has shattered the fragile relief on last week’s eurozone debt “solution” and sent markets reeling across the world.

The referendum move not only stalls that deal for months, it also creates huge uncertainty as to what would befall Greece – and the entire eurozone – were Greek voters to vote “no”, as currently seems likely. How ironic that a pauperised Greece should thus expose the gaping hole at the heart of last week’s summit agreement, lacking as it does, both in conception and execution, any semblance of democratic validation. A referendum may not be at all the right way to achieve it. However, the people of Greece have indicated not just an intense dislike of the government’s austerity measures but an evident unwillingness to put the austerity programme into effect. Mr Papandreou may have felt he had no alternative; other, of course, than to resign – a fate that may yet be forced on him by a no-confidence vote on Friday.

Remote though this turmoil in Athens may seem for us here, these events directly affect Scotland and our economy. They cast a further shadow on our export prospects, as business confidence across the eurozone has taken another severe hit. They put a major question mark over not just the ability of our banks to lift their lending to business – and the small and medium-sized enterprise sector in particular – but their ability to withstand further shocks without more government assistance. Shares in Royal Bank of Scotland tumbled 8 per cent yesterday to 22.3p, Lloyds Banking Group lost 6 per cent, Barclays almost 10 per cent. It is not just their exposure to Greece, but to leading continental European banks which suffered deeply worrying double-digit percentage falls yesterday. Finally, there is the effect on business confidence generally. Which company dares to consider labour hiring or expansion when markets are so febrile and the outlook so uncertain?

Yet all these pale before the repercussions of a Greek “no”: the collapse of the Greek government, an automatic default on Greek sovereign debt and colossal pressure for Greece to exit the eurozone. That, in the longer term, may prove the most logical and correct outcome of this whole sorry debacle. But it is the prospect of a chaotic default and traumatic exit creating a financial tsunami across the eurozone that is the “black swan” event all have been fearing. The region would be engulfed in a capital flight that could bring Italy down.

Matters are now in the hands of the Greek parliament. The stakes could not be higher.