Don’t rush to demand Greece leaves the euro

Columnist

Saturday 5 November 2011

Greece has debts of €350 billion: a tidy sum for a nation of fewer than 11 million people.

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Ian Bell

Italy, where the preposterous Silvio Berlusconi clings to power and tells Corriere della Serra that his government is “on track”, is in the hole for €1.9 trillion. If the people who move money connect one case with the other there might just be a problem.

Both countries, like most western countries, are taking a stab at austerity. For self-styled policy-makers, it is the only game in town, even if the evidence from Greece says the process merely turns a wounded economy into a crippled economy. Without austerity there will be no bail-outs. Without bail-outs, Greek society will cease to function.But what if that happens regardless? This week’s posturing from George Papandreou, the country’s prime minister, has served to disguise a deeper problem. Polls last weekend reported that almost three-quarters of the Greek population want to stay in the euro. Yet a similar number cannot or will not meet the price being exacted. Greece has no more room left for manoeuvre.So the sage advice comes from all sides. Quit the euro; launch the “new drachma”; swallow the pain; export and rebuild: simple. That might cost Greece half of what remains of its GDP, by some estimates. It might regain the right to devalue, if devaluation makes sense for a worthless currency. Greece would not be able to bounce a cheque anywhere in the world. But it would be free, after a fashion.That might be unavoidable. Behind the ceremonials, the Cannes G20 summit has been even more useless than usual, if such a thing is possible. The melodrama around the Athens parliament does not suggest an excess of political will. While Germany’s Angela Merkel and Nicolas Sarkozy of France hand out orders to their “partners”, the eurozone is bereft of unity, clinging to the hope that the IMF – or someone – will ride to the rescue. Greece has become excess baggage.Plenty of people will tell you it always was, that it should never have been granted euro membership to begin with. They will say the Greek crisis is symptomatic: if the travails of one smallish economy can wreak this havoc, what price “the European project”? The idea monetary union could be established before anyone got around to creating political cohesion has been exposed as idiotic.It’s a fair point. The single currency stripped the likes of Greece, Italy, Spain and others of competitiveness while treating them to interest rates kept low for the sake of German exports. It was almost an invitation to borrow to excess when control of those rates, and of devaluation, was forbidden. Lacking the machinery of a state, meanwhile, “Europe” could exert no discipline, nor organise fiscal transfers in the American style. Add political delusions in Athens or Rome and here we are. This week Mr Papandreou tested the patience of his supposed rescuers by suddenly rediscovering the virtues of democracy. It seems he meant to frighten voters, and his own Pasok party, into obedience with his referendum ploy. Apparently he forgot that the world was watching. He had won 50% debt forgiveness and another round of bail-outs. He had caused the eurozone to confront its problems. Then – and this is emblematic – he decided to play poker.He lost the game. The question now is whether he has also lost Greece its euro membership. No process exists for expelling a country from the single currency, but that problem can be resolved. As Mr Sarkozy has made plain, and David Cameron has agreed, if push comes to shove Greece could be dumped. Better that than “contagion”. But if one small country’s problems can cause this fuss, imagine what would happen if Italy entered the cross-hairs.There are signs it is already happening. Yesterday those suddenly-famous bond yields, the interest charged (in this instance) on 10-year Italian debt, crept within a fraction of 6.5%. Should they exceed that mark, it is reckoned, Italy will not be able to meet its obligations. In such a case a eurozone that last week struggled to convince observers it had a plausible plan for a €1 trillion fighting fund would be utterly outmatched. Then the dominoes would begin to fall.Mr Sarkozy is worried about his banks, his triple A rating, and the ability of the French economy to withstand the shock. Spain, Portugal and Ireland remain among the usual suspects in the catastrophe. The simple fact is, nevertheless, that if Italy follows Greece into a full-blown crisis, no one knows what would happen. All you can say for sure is that British eurosceptics would learn, finally, that staying out of the euro confers no immunity. If Europe is heading back into recession, that’s our problem, too.So Greece becomes expendable, with one tantalising caveat. Perhaps Athens would refuse to be expelled, or at least refuse to relinquish the euro. How could it be forced to return to the drachma? Has anyone even begun to wonder how the mechanics of such a thing could be arranged? Somehow, I doubt it.You could argue, rightly, that all of this is a textbook demonstration of the fundamental flaws of international finance. It is exactly what the Occupy protesters, and a few others, have been on about. The debt mechanisms employed for so long to squeeze a profit from the developing world have been repatriated. With a certain poetic justice, the biggest of the developing nations now have the whip hand. The consequences of lunacy remain the same: the price of risk, as bankers like to call it, is being met by ordinary people.In Greece and elsewhere, those folk are beginning to understand something: the homely advice to tighten your belt doesn’t work in this sort of crisis. Austerity is the cure that kills the patient. An economy functions through jobs and growth. Without those, debt simply accumulates. Ask George Osborne, our own Chancellor: he’s just had to borrow £44.4bn more than he planned to meet the welfare costs of austerity. None of that helps the Greeks. It may prove small comfort for the Italians, and for all Europeans. The eurozone can no longer muddle through, putting out fires as it goes and struggling to stay ahead of the bond markets. The “firewall” proposed to protect Rome may be erected in Athens. If not now, then soon enough.For purblind sceptics, it will be schadenfreude all round: a good German word for their glee. They might pause, though, to notice the lesser bits of news from Cannes. Who, Europeans aside, is desperate for the euro to survive? Just the Americans, the Chinese, the Brazilians, the Russians, and more besides. The single currency is part of their world, too. If it fails, they will also suffer. There are few people alive now who can remember an authentically global slump. There is no one living who truly knows how it would affect a modern, inter-connected world. We only know that the G20 is paralysed. “Agreeing” to give more resources to the IMF at some future date means there has been no agreement. Calling for growth while maintaining austerity means there is no plan for growth. The rest of the world will not act, it seems, until the eurozone itself acts. Greece cannot depend on that hope.

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Don’t rush to demand Greece leaves the euro

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