Why?

Because investors (the same ones that are now running scared and pushing interest rates up) were willing to lend them money at those rates.

Do you really want to tell me that these sophisticated banks and financial institutions (not to mention rating agencies) couldn’t see that these countries were running up large debts? All right, in the case of Greece there were some fudged figures, but it wasn’t all that rosy even with those figures.

So it must be because they were in the eurozone. Perhaps the investors thought that this would make their economies stronger. That was certainly part of the idea, but it was evident well before 2008 that not all of them were doing so well, especially Italy.

The other conclusion is that the investors just did not believe the ‘no bail out’ clause in the Lisbon Treaty, or at least were willing to take a large speculative bet against it.

In that case, those banks, etc. deserve all the haircuts they are asked to take. The problem is how we can implement them without causing the banks to actually fail and so to dry up the credit that the real economy needs. Somehow we want to protect ordinary depositors (and pensioners) and make the bankers themselves take the hit.

Unfortunately, a financial transactions tax won’t do that. The attempt by the previous British government to tax bonuses was also not very successful – the banks mostly said, thank you, we’ll still pay the bonuses and just absorb the tax elsewhere. You can imagine where ‘elsewhere’ was.

That’s the real crisis we still need to solve.

However, the Prime Minister says he is a Eurosceptic. So he is not going to agree to any changes that shift power from Westminster to Brussels. He might agree to a treaty change that repatriates a few powers to Westminster and gives Brussels more powers over Euro-zone budgets, but since that wouldn’t shift any powers from Westminster, there wouldn’t be a referendum.

Of course, some people have suggested that the moves to fiscal union for the Eurozone would give Britain less of a say in the EU councils, as the Euro-zone countries will be more likely to come to advance agreements on issues and then vote together. But you can be sure that a Treaty change to bring in Euro-zone fiscal union still won’t lead to a referendum in Britain. Under the Referendum Act, it is the government that decides whether a Treaty change shifts powers away from Westminster. Guess what the government will conclude about any Treaty change it is willing to agree to.

So Mr Cameron has not needed to say it in so many words: no EU referendum under this government.

Is it worse if he is just trying to scare us, or if he really believes it?

The problem is that, if the rollover is not “voluntary” enough, the rating agencies might regard it as a technical default, so that they would rate Greece’s bonds as being in default. And of course the ECB would then have no choice.

Now, just how did we get into a situation where the rating agencies, the same ones that kept giving AAA ratings to derivatives made from subprime mortgages, are the ones who decide what sort of rollover or rescheduling deal on Greek debt is acceptable. Perhaps ordinary private sector investors (such as large investment banks and sophisticated hedge funds) don’t have the resources to form there own opinions about such things, but if the ECB can’t do that, perhaps it is time to look at the ECB’s economic governance.

Mohamed El-Erian argues convincingly that the approaches taken up to now do not recognise the size of Greek debt and the lack of growth in Greece. So, he says, “Critically, it now requires giving up on at least one, and more likely at least two, of the three principles that have underpinned the coalition’s approach to Greece: avoiding a debt restructuring, a currency devaluation and a change in the fiscal set up of the eurozone.”

The problem is that he offers not suggestion of how to do this, which is just a little crucial to taking his advice.

Let’s try another approach. The real problem is that the Greek government does not currently have enough money to pay its debts. This can be solved only by having someone take a hit: Greek taxpayers through lower government spending and higher taxes, banks and other bondholders through voluntary rescheduling or default, or EU taxpayers through loans to Greece, which might not be repaid. The problem is that the second group includes Greek banks and banks in rich EU countries. The ECB says it will no longer fund the Greek banks if there is a technical default, suggesting that Greek or other EU taxpayers would have to bear that burden. Similarly, if the hit to other EU banks is too great, they might need support from taxpayers.

Getting the balance right looks more and more like politics as much as economics, but we have to be careful that it does not become the politics of smoke and mirrors.

But you might think that what will really happen is that each consortium will employ people to do the background work. These people will present a proposal to the GPs on how the money should be allocated (which hospitals should be used, how much should be allocated to different procedures, medicines, etc.). The GPs will then offer their views about it, but they will end up approving a version of what is offered to them. So the people preparing the proposals will be making 80 or 90 per cent of the decisions.

And who are these people going to be? One guess is that many of them will be people who are now working for the primary care trusts and strategic planning bodies that the GP consortia are supposed to be replacing. Except that many of them will be employed by private companies providing services to the consortia.

Plus ça change … But at what cost?

The trouble is that, while the profits today look great compared to the dire state of things six months or a year ago, things are still pretty rough compared to the situation before the recession began. For example, shares in Intel rose 1.66% in one day with the announcement of better than expected profits for the third quarter. But profits are still down on a year ago and sales were 8% down on the year before. What is more, Intel has probably had a boost from production of new computers with the new Windows 7 operating system, so the good news might all be a blip.

The danger is that analysts are focusing on how good things are relative to how bad they were just a few months ago. But if people start to look at the longer term, and realise that we have a long way to go, the present market could easily start to look like a bubble.

Let’s get beyond anecdote. How are the fundamentals? Europe is basing recovery on exports, but is being hammered by the rise in the euro. The euro is rising because it is bearing the brunt of the effect of the fall in the US dollar. Which in turn is good news for US exports, but not for US consumers, and it is the reaction of US consumers that is probably more critical than any other one thing to achieving a stable recovery.

How are they doing? US retail sales were down in September by 1.5%, or 5.7% on a year earlier. The good news is that non-car sales were up – the problem was the end of the cash-for-clunkers program. But it is hardly good news that consumers were not willing to shift their spending directly from cars to other items. If consumer optimism still depends on government subsidies, the recovery is looking fragile.

This gives a warning to all those rushing to undo the large deficits that governments have been running up to fight the recession. Planning for how to undo the deficits is good, but let’s not rush to implement them at the cost of a lost recovery and perhaps years of stagnation. David Cameron, the UK Conservative leader and likely next Prime Minister, needs to take heed.

Here is a question then. Does Mr Klaus, who is concerned that the Lisbon Treaty would harm the sovereignty of his country, have a greater obligation to do what the people of Europe overall want (as understood in the UK), or to do what the people of the Czech Republic want?

We can also ask two more questions. First, does Mr Klaus have any right to hold off in ratification? It certainly seems reasonable to wait for the Czech Constitutional Court to decide on the challenge to the Treaty first, though this is undermined by the fact that the challenge is a second challenge by a minority of senators who are supporters of Mr Klaus. As noted here in the last post, the Czech Constitution seems to give him some authority to do this, but many Czech commentators disagree. It is, however, a question that the Czech Constitutional Court could resolve, if Mr Klaus presses the point.

Second, does his argument about the Charter of Fundamental Rights and the Beneš Decrees have any merit? He argues that the Charter might let the European Court of Justice decide whether ethnic Germans displaced from the Sudeten after World War II should be entitled to recover any property or to receive any compensation, something that the Czech courts have not accepted.

Article 17 of the Charter says that a person can only be deprived of property in the public interest as provided by law and subject to fair compensation. However, by article 51 the Charter only applies to EU member states when they are implementing Union law, which was not the case in 1945. This could be an issue that would need a ruling from the ECJ, but the risk to the Czech position is not self-evident.

But there is another aspect to this, as a Czech commentator noted on the BBC PM programme today, there are two views in the Czech Republic. Some hold that the Beneš Decrees should be maintained, but others believe that it is time for at least an apology to those displaced, if not for compensation.

Once again it is far from clear that Mr Klaus is in step with his fellow citizens. It can be so hard to be a good democrat.