The final reckoning: Whether Greece remains in the eurozone or not, it faces further considerable hardship

For an event which has been looming for many months, indeed years, the possible exit of Greece from the euro still possesses an unusual capacity to spook financial markets. Shares across Europe have been dropping sharply all week, which does raise the question as to whether equity investors are an unusually inattentive bunch.

According to the latest German figures, the continuing doubts about Greece’s ability or willingness to honour its debts is having a depressing effect on business confidence in Europe’s largest economy. In so many Greek dramas in the past, there was a feeling that, in the end, the can would be kicked further down the road, to employ an overused phrase. This time, though, there is a nervousness that a reckoning is upon us.

The rhetoric of the Greek government does not help. Yesterday, the Prime Minster Alexis Tsipras was defiant as ever, declaring that his mandate from the Greek people was to end austerity, as if simply voting for an anti-austerity party is enough for a nation to have its debts forgiven by the rest of the world. He said that Europe wishes to “humiliate” Greece, with the ECB wanting financial “strangulation”.

Mr Tsipras speaks as though Greece had been somehow forced into taking on this vast mountain of debt in the first place, as if it were a kind of reparations imposed on it after a war. It was not. The debt was freely taken on by Greece as one of the benefits of joining the euro, and being able to borrow on international markets at low, German-style interest rates. Those funds were then, by and large, consumed rather than invested in the Greek economy.

That, in essence, is why Greece is in a mess now, and why its economy desperately needs reform. It is true that the austerity packages attempted by successive Greek governments may have made matters worse; but there has always been a basic problem of indebtedness, in point of fact pre-dating Greek entry into the euro, or the European Union for that matter.

So much of the debate about Greece has, understandably, been about whether the Greek people would be better or worse off leaving the euro, that this more fundamental issue has been neglected. Inside the eurozone there will be continuing austerity, whatever happens. Outside the eurozone, Greece will find life no easier, at least in the short term. Its debts in what would then be a foreign currency, the euro, will be revalued, and the nation will be liable to experience a bout of severe inflation and unemployment with the new drachma. What are needed are policies directed at making the economy more competitive, whatever money it happens to use. That means investing in infrastructure – with assistance from international partners – and reforming labour markets, the tax system and many other measures.

In the end, every nation has to learn to live within its means, or face the consequence that no one will lend to it, which forces the issue anyway. Greece is very near that moment, and not for the first time in the country’s history.

For the ECB, EU and IMF to simply abolish much of the debt now would only encourage similar popular movements in Spain and Portugal, in which the electors are offered a false prospectus that by voting for a radical party their own debts can be abolished. Greece’s debt is unaffordable and unmanageable, but debt forgiveness can only come if it agrees to real reform of its economy, which, as it happens, means that the rich should pay their share of the burden. Such is the compromise that would work for all. There is little sign of it emerging.