Hamish McRae: The eurozone won’t be helped by all-night talks

It is time to starting thinking about Europe rather than Greece.

The negotiations over the weekend were absurd. To have ministers and officials sitting up all night haggling about terms for Greece that cannot possibly be fulfilled anyway is of course ridiculous. But it is worse than that.

What is happening shows the fissure at the core of Europe — in shorthand between north and south, between those countries that lean towards a soft euro, where rules are bent and contracts fudged, and those that want a hard euro where order and discipline prevail.

France and Italy are on one side, Germany and the Netherlands on the other.

At some stage the Greek rescue story will be settled and the people there can get on with their lives. But the outcome cannot be stable. Greece’s debts cannot be repaid. They will continue to overhang not just European politics but also the entire eurozone economy. But those debts cannot be written off because that is against eurozone rules.

Even when the Greek banks eventually reopen, those debts will remain. You can fudge by stretching out the maturities still further and by giving even more concessionary rates. The advantage of that is that the losses are not crystallised and eurozone taxpayers are not notionally out of pocket.

But if you maintain the letter of the law that the capital value of debt cannot be reduced you are maintaining a fiction. So the outcome is not stable.

Unfortunately it is not just Greek debt, though this is the highest at 180% of GDP under the Maastricht definition. The corresponding figure for Italy is 133%, for Portugal 128% and for Ireland 108%. (UK debt on this measure is 91% of GDP.)

There is no hard and fast rule as to what level of debt is sustainable and at what stage such debt seriously undermines future growth. Near-zero interest rates make the burden more manageable, though they create other distortions.

But rather than focus on the numerical level of debt, the thing to do is to look at growth and demography. Crucially, if you can generate decent growth, debts can be chipped away. And if the size of the working population rises, there will be more earners to do the chipping.

On growth, immediate prospects for Europe appear not too dreadful. The latest OECD forecasts are encouraging. For example Spain is expected to grow at just under 3% this year and next, and Ireland might do a bit better at around 3.5% both years.

Spanish debt looks rather stuck, but Ireland’s debt, which peaked at 123% of GDP in 2013, could be less than 105% next year.

Portugal is forecast to grow at between 1.6% and 1.8%, trimming debts a little. But I am afraid Italy is barely growing this year and only expected to manage 1% next. National debt, as a result, barely comes down at all.

I suppose you could summarise by saying that Ireland is the star performer, and the rest of fringe Europe is still struggling.

But note something else: Ireland’s recovery has been driven by exports. Its largest market is the US and its second largest, the UK. So it has been able to escape from the eurozone blues thanks to its non-eurozone exports.

We tend to lose sight, amid the high drama of Greece, of the more fundamental problem that the eurozone is only slowly pulling out of recession.

Look further ahead at demography and concern mounts further. Population projections should always be taken with a pinch of salt.

Remember how, 30 years ago, the demographers though the UK population would be shrinking by now? But the UN calculations of the changing size of the workforce by 2050 make troubling reading.

For example the US, UK, Canada, Australia, New Zealand and Ireland are all forecast to have increases in working population over this period.

By contrast Germany, Italy, Portugal, Greece and Spain are all projected to have a shrinking workforce.

Japan of course is the most extreme example, with the workforce shrinking by around 40%, but in Germany the projection is for a workforce down 30%, with Greece, Portugal and Italy down around 25%.

Obviously the more Greeks and Italians who come to Britain, the US or indeed the rest of the English-speaking world, the more dangerous this trend becomes for Continental Europe.

The shenanigans in Europe over this weekend have been about bailing out Greece and saving the eurozone. But behind this are longer-term and, I suggest, ultimately more important stories.

They concern the sustainability of much European sovereign debt — not just that of Greece — and the medium-term economic success of the entire eurozone, not just its southern fringe.