Beyond our hot-button issues

Protesters earlier this year occupied the square in front of the Greek Parliament, Athens, in opposition to austerity measures. Picture: AFP Source: AFP

Instead, three years on from the spectacular collapse of investment bank Lehman Brothers and the economic carnage that followed, the world of finance is looking almost as terrifying as it did back then.

And this time the problems are, if anything, even more fundamental. For the moment, it's Europe trying to teeter back from the abyss, but the prospect of Greece defaulting on its debt remains very real.

Nor is anyone confident it will stop there. Will Spain be next? Or Italy? And with what effect on the stockmarket, on governments, on the streets? It hardly bears thinking about. But increasingly people are, as they glumly contemplate fast-diminishing alternatives.

It's certainly a reminder that there's no such thing as a free bail-out. In 2008 and 2009, governments across

the world shelled out hundreds of billions to keep the banks upright as they staggered under over-leveraged balance sheets. Now it's almost the reverse.

Sovereign balance sheets themselves are under so much stress from carrying this level of debt that countries such as Greece threaten the stability of banks that bought their bonds.

That exposure is why Moody's downgraded, for example, two large French banks last week. It's why the central banks of England, the US, Europe and Japan have just agreed to make more US dollars, the currency of international business, available to European banks, as anxious private investors in the US are suddenly reluctant to lend dollars to European banks. It's why the European Central Bank bought up big on Spanish and Italian bonds last month, only to have the effective interest rates surge up again, ensuring that the debt threatens to overwhelm those governments as well.

All of this developing drama could hardly be heard in the Canberra cacophony about asylum-seekers and the carbon tax, of course. It was as if Australia's political system existed in its own little cocoon, somehow temporarily immune from much larger forces stalking the world.

But politicians everywhere else -- especially in Europe, the US and China -- have to be far more focused on the latest threat to the global economy.

To calm the rising panic, German Chancellor Angela Merkel and French President Nicolas Sarkozy firmly declared that a more disciplined Greece would get the financial backing it needed to avoid default, and that it should stay in the eurozone. Their confident-sounding assurances, combined with the co-ordinated actions of the central banks, meant that the sharemarkets, including Australia's, sparked up in relief during the past few days.

Yet the politics of keeping on muddling through, mini-crisis by mini-crisis, is becoming harder and nastier.

In essence, Germans really don't like the idea that their tax dollars are paying for the laxity of their colleagues. That's especially so when the Greek government still doesn't seem able to collect tax from many of its citizens. Greek citizens -- or the Italians or the Spanish -- are not persuaded that their economies should suffer years of financial pain and severe austerity to ensure that investors in French banks, for example, don't make big losses.

Or indeed that this "cure" will even work as it is supposed to. Forget the sophisticated-sounding strategies and complicated deadlines and statistics. It's obvious that crunching an economy across many years is hardly the way to grow a country's way out of crippling debt levels.

The result is that Europe is paralysed by basic political and economic divisions that make the differences between the Tea Party Republicans and left-wing Democrats in the US look like modest squabbling. The Americans are now lecturing European politicians to get their act together. And while the markets also got a temporary boost from the suggestion that China might use its limitless financial reserves to back governments such as Italy's, China is now saying firmly that Europe must get its house in order before it is interested in putting in money.

That was never going to be a simple matter, given the extent of the cultural and economic differences between countries. The notion of the EU was based on the understandable determination to avoid the destructive nationalism of the past, as well as to form a larger economic and political bloc to counter the power of the US. But the appeal of European integration still has strict limits, a reality that is becoming only more obvious.

That means the traditional political antidote to financial woes -- announcing a few salves and then letting the passage of time smooth over the worst of the panic -- doesn't seem to be working. In fact, the optimistic scenario in the markets is that the politicians will act only when they are pushed into it by the threat of another imminent financial meltdown.

In that sense, the omens of a Greek tragedy are regarded as a useful way of ensuring everyone gets serious about the options sooner rather than later.

The message is that the cost and the consequences of default or quitting the euro would be so catastrophic for everyone, including the Germans, that it just can't happen. Think bank runs, governments out of money, soaring unemployment, riots . . . the spectre of another Depression still lurks.

The obvious alternative is greater combined European funding and bank and country debt restructuring in exchange for greater European (read German) control over national finances and taxes in a sort of federation: the United States of Europe.

This has plenty of appeal in theory, but would be extremely difficult, if not impossible, to achieve in practice. Even without politicians such as Silvio Berlusconi. It is, at best, also a long-term evolution rather than a short-term fix -- when urgent solutions will clearly be required in coming months. Or . . . what?

Perhaps by then Julia Gillard and Tony Abbott will have noticed.