Peter Jones: Let's run this one up the flagpole Published on Tuesday 19 June 2012 02:10 A NEW government in Greece does not change much, therefore radical ideas appear to be the only solution, writes Peter Jones Now that the majority of Greeks have voted for parties which accept the EU's tough bail-out terms, does this mean we have finally turned a corner in the eurozone debt crisis? No, it doesn't. Frankly, we can't even see the corner because, everyone agrees, the fundamental problems besetting the euro have not gone away and there is no plan to fix them. Indeed, I begin to think that there are only two solutions. Both involve a great deal of short-term pain for long-term gains which may turn out to be mirages and almost certainly imply major political, social, and economic upheaval and a re-shaping of the continent as profound as those resulting from the wars of the last century. It's scary, dreadfully scary. The basic problem is that there are no mechanisms, beyond the transfer of money from Europe's rich core to the poor periphery, which will enable the weaker economies to regain their competitiveness. And money transfer only works as a solution when other conditions happen to be right. This lesson becomes apparent when you look at the history of two smaller currency unions within Europe - the UK sterling zone and Italy's lira zone. The sterling zone has been around since 1707 when 12 Scottish pounds were pegged as equivalent in value to one English pound, the English pound then gradually becoming the British pound. The Irish pound joined in 1801. Though Scotland was poor relative to England in 1707, the sterling union worked largely because of the Industrial Revolution which brought great wealth to Scotland. In modern times, the discovery of North Sea oil and the flowering of financial services also boosted Scotland's economy. Indeed, this sterling union has been so successful for Scotland that the SNP want to keep it after independence. The same cannot be said for Ireland which did not have the resource luck of Scotland and suffered the terrible disaster of famine. Ireland thus remained poor relative to both Scotland and England and so the Irish were more than happy to break with sterling when the opportunity of the euro came along, an opportunity which the SNP hawked to Scots in the 1990s but found no takers. But the economic lessons from this appear to amount to not much more than that luck, both good and bad, plays a big part in making currency unions work. Italy's lira came into being in 1861 with the creation of the Kingdom of Italy, replacing half a dozen currencies. The north was rich and south poor, a problem which a century and a half of transferring money from north to south, as much as 5 per cent of Italian GDP, has not solved. Economists argue about why this is so, but a predominant view is that paying subsidies to the south has kept incomes, and hence unemployment, artificially high while the money poured into infrastructure construction has sustained corruption and criminal societies. Thus it can be argued that currency union has been a great disaster not just for southern Italy, but northern Italians too. In the UK, there have also been fiscal transfers. Sometimes they have flowed from south to north - during the 1930s depression and the 1990s, for example - and sometimes they flow from north to south - as in the 1980s and as seems to be the case now if you count North Sea oil as Scottish and ignore the cost of Scottish bank bail-outs. These transfers have worked because, as the SNP point out, labour productivity rates north and south of the border are broadly similar. And it could also be argued that this is due to having had a centralised state which has ensured generally comparable wage and public service levels throughout the UK. This has implications for the current domestic constitutional debate, matters for another day. The lesson in the context of the eurozone is that, alarmingly, it more resembles the Italian model than the British one. There is a poorer periphery, to which billions of euros from European cohesion and structural funds have been transferred. The infrastructure development which this financed has not improved competitiveness; indeed the creation of the euro locked in an undervalued currency for the richer core and an overvalued currency for the poorer periphery. Heavy borrowing by the peripheral countries has been used more for consumption than investment, meaning that rising debt levels have not been matched by the rising productivity needed to pay off the debt. Corruption, in the shape of endemic tax evasion in Greece, estimated at as much as a third of all taxes owed, is a further blight. These problems, to varying degrees, afflict Spain, Portugal, and Italy. The Greek election result did not cause them to disappear so it was no great surprise that their borrowing costs rose to unsustainable levels yesterday, even though all three countries have been swallowing the prescribed EU austerity medicine. That's because renewed recession means there is no growth to reduce deficits and debts. It is a desperately grim picture. While solutions to Greece's problems - mass privatisation of its bloated state sector - can be proposed, they do nothing to solve the wider eurozone problem. That now looks as if it can only go two ways - very deep and rapid integration of debt, tax, and welfare systems, or break-up. The former, with all the centralisation and loss of national sovereignty it entails, looks unthinkable. How likely is it, do you think, that the French government, having just fulfilled an insane election promise to reduce the retirement age to 60, will agree to raise it to 65 and perhaps even higher? The latter, with the eventual massive defaults on sovereign debt impacting on bank balance sheets and pension funds, also seems unthinkable. Although it allows for national currency devaluation, restoring competitiveness, the devaluations would cause banking crises, corporate bankruptcies, inflation and unemployment. To neither of the above, would we in these little islands with our little currency union, be immune. Recession, unemployment and more banking bail-outs would afflict us too. But the horrible logic of what we see happening in Europe now means we, and Europe's political leaders, need to start thinking about the unthinkable.