As published on Conservative Home:
Greece’s choice today. Be crushed beneath the debt burden. Or escape it by departing the Euro – and defaulting
Today, in a desperate attempt to allay the agony of their people, the Greek Government is likely to accept yet another trade of more austerity in exchange for a few more years of dependency on the Euro-financial establishment. The truth is, even if it is seen as a success now, it can never be enough. It is time for acceptance. After all the denial, anger and bargaining of the last six years, the writing is on the wall for Greece and the Euro. The Greek economy is on the verge of collapse, people are queuing to take their money out of Greek banks, and yet still the creditor powers of Europe refuse to budge on their demands, presumably thinking they are being cruel only to be kind. Just as you cannot get blood from a stone, it is just not possible for Greece to repay all the money they owe.
Europe’s intransigence leaves only one reasonable course of action open to Greece. They can either toil forever under their debt burden, or they can depart, default and devalue. It is clear that without major concessions from their creditors, and possibly even with them, leaving the Euro is now Greece’s only way back to growth and competitiveness.
Consider, if you will, the two possibilities for Greece. If they stay in the Euro, without debt write-downs or interest holidays, then it will be decades before paying down the public debt is no longer their fiscal focus. During this time, spending on public services will remain inadequate, their key industries will struggle to regain competitiveness, and their best and brightest will move abroad in search of better opportunities.
This is still a possibility; the Greek Government, weakened by the suffering of its people, is understandably willing to compromise to return to normality, however temporary. But this would be a mistake, and if they concede it could be generations before Greece can stand on her own two feet. Further dramatic internal devaluations, meaning further wage and pension cuts, would be required, and it is possible that the Greek people would just not be willing to tolerate further austerity.
On the other hand, Greece could take her future into her own hands, and leave the Euro, default on her debts, to one extent or another, and reissue the drachmae.
This is portrayed as the dangerous choice, leaping into the unknown. In fact, there are numerous historical examples that suggest that the economic outlook is not nearly as bleak as has been portrayed. After the inevitable short-term economic pain, countries that default and devalue are often able to grow rapidly without a debt burden and uncompetitive exchange rate.
Argentina defaulted and hugely devalued its currency in 2001/2, with the economy growing by a quarter over the next three years as a result. Similarly, in 1998, Russia defaulted on its sovereign debt and devalued its currency. The pain lasted for about six months, followed by a decade long boom.
Even the UK has experience of this. After we disastrously entered the European Exchange Rate Mechanism in 1990, there was a period of short-term pain as the economy fell into recession. But after we dramatically exited the ERM in 1992, and the pound devalued, the UK experienced a period of sustained economic growth.
Looking back now, it would seem that Black Wednesday was a day of liberation for the UK economy, with the devaluation of the pound contributing to hauling the economy out of recession. This pattern has been true in similar, and more dramatic, cases around the world. The fact is that investors and lenders have very short-term memories. Defaulters tend to get away with it. So Greece should not fear that exit from the Euro would lead them locked out of international markets. The country would be able to borrow, and a long recession is unlikely.
This is especially true given the reforms that Greece has undertaken over the last six years. The fact is that it has already undergone a large correction. It has stomached much of the pain, but its economy is still shackled by an overvalued (for Greece) currency and a growth-crushing debt mountain.
Default and devaluation could well set Greece’s economy free to experience dramatic growth. And there is no quicker way to reduce unemployment, increase living standards and regain international credibility than a sustained period of economic growth. Two of the Greek economy’s most valuable industries, tourism and shipping, would be given a dramatic boost by a currency devaluation.
The practicalities of leaving the Euro would not be simple, but they would not be insurmountable. As it stands, the required capital controls are already in place. Sovereign debt can be converted into the new drachmae, and an interest holiday, if required, can be imposed. The largest upheaval would be caused by the conversion of local private debt into the new currency, and the fact that foreign debt would still be denominated in its currency of origin. Greek banks, already struggling, may collapse under the weight of their overseas debts, and would require nationalisation.
If Greece is to get its economy moving again then there could be no going back to the profligacy of yesteryear. Greece would need to continue its labour market reforms, maintain its newly found budget discipline, and the establishment of an independent central bank would help to keep inflation low. As with all fledgling currencies, inflation would be a real danger.
As I have argued before, the rest of Europe should support his course of action. A disorderly exit has the potential to seriously damage other European economies. A managed exit will help to minimise any damage. Greece can leave the Euro, and should leave the Euro. For the Greek people, staying would mean years of low growth and fiscal tightening, while leaving gives Greece a good chance of growth. At the end of the day, leaving the Euro is not about the political choice, it is sound economics.