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The sooner Greece leaves the euro, the better

1 July 2015

11:24 AM

1 July 2015

11:24 AM

Ten years ago, the Greek minister Yainnos Papantoniou came to London to give a talk at the London School of Economic on the country’s first four years as a member of the euro. A skilled, pro European technocrat, Papantoniou had, more than anyone else, steered his country through dogged German resistance into the single currency. Papantoniou boasted that a history of weak growth and chaotic government had been swept aside, and that Greece was now the equal of Germany and France. What lay ahead, he argued was ‘a new dynamic phase for the Greek economy, based on knowledge and modern structures’. A ‘bolstering of national self-confidence’ would be the natural result.

It was an articulate exposition of the view of a whole generation of Mediterranean politicians, eurocrats and bankers. The euro was in part a currency, but it was also a catalyst: a single element that would sweep away out-dated structures, and catapult them to modernisation. There can rarely have been such a terrible miscalculation. Papantoniou’s country lies in ruins. It is defaulting on its debts. The banks have closed for the week, and its citizens are limited to 60 euros a day in cash. The economy has shrunk by a quarter, and the country is controlled by a motley collection of former communists with a penchant for tweeting about game theory as the country teeters on the abyss.

As the country prepares itself for a referendum on Sunday which will decide whether it wants to stay in the single currency or not, there will be usual feverish negotiations to try and patch together some kind of deal. The standard platitudes about stability and solidarity will be trotted out. In fact, however, the whole charade should be called off. What needs to happen next is very simple. The Greeks are not going to make it in the euro, and never were. The damage being done both to the country itself, and the global economy is too great. To borrow a phrase from Queen Elsa in Frozen, let it go. The sooner Greece is out of the euro, the better for everyone.

‘Without the flexibility of its own currency, Greece is looking at a depression that stretches into the indefinite future,’ says Stephen Lewis, chief economist at ADM Investor Services. ‘At the same time, it is posing tremendous risks to the  stability of both the European Union and the wider global economy.’

It wasn’t as if this moment could not be foreseen. Way back in 2010, I wrote a piece in The Spectator with the headline ‘Let the Greeks go bust’, arguing that bankruptcy was the best option. As it turned out, I was right, and the EU, the IMF, and every government in Europe was wrong. I certainly wouldn’t claim any special powers or insight. Lots of people could see this catastrophe coming. In fact, the great monetarist economist Milton Friedman, who inspired Margaret Thatcher, put it even better all the way back in 1997. ‘The drive for the euro has been motivated by politics not economics,’ he argued, warning that that single currency would be a disaster. Instead of drawing countries closer together, as it was meant to do, it would drive them apart, turning ‘shocks that could have been readily accommodated by exchange rate changes into divisive political issues’.


As was so often the case, Friedman hit the nail on the head. Greece before it joined the euro was pretty much what it had always been: a slightly ramshackle, inefficient Balkan economy, rife with cronyism and corruption. But it got by. It took the special magic of the euro to turn Greece into the epi-centre of a major financial crisis. The single currency has a kind reverse alchemy: everything it touches quickly turns to rubbish. Greece ran up too much debt, and spent a bit too much. But in normal circumstances, it could have devalued its currency, and renegotiated what it owed, just as Friedman argued. It would have been a problem, but a small one. Instead, it has been magnified into a crisis of epic proportions. Greece has been pitted against the rest of the euro-zone in a geo-economic psycho-drama from which there can be no good outcome.

Sunday’s referendum, called by the Greek Prime Minister Alexis Tsipras, on the bail-out package offered by the EU and the IMF, has been turned into a vote on whether the country remains in the single currency or not. In the days leading up to the ballot, you will hear plenty of dire warning about what might happen if it were to leave. Ignore them. For three reasons, it would be better for Greece to get out now.

First, inside the euro, there seems no chance of Greece ever recovering. Public spending has been cut to the bone, deflation is running at 2 per cent a year and wages are still falling. There is a limit to how much economic pain any country can suffer. In the 1930s gold standard, which the euro resembles, the Dutch hit 33 per cent unemployment before they threw in the towel, and took control of their currency again. Every other country gave up sooner. Greece is very close to those levels, and with another deep recession inevitable after this week’s crisis, may well be beyond its pain threshold.

Second, it is damaging the global economy. At this stage of the economic cycle, with an upswing underway, and with the Federal Reserve even contemplating the first rate rise in nine years, the markets should be in a robust condition. The balance sheets of governments, financial institutions and central banks should be strong. Instead, the markets are constantly on a knife-edge, waiting for the next horrendous piece of news out of Greece, and trying to calculate where the losses will fall. That hits confidence, which in turn hits investment. Tiny Greece has become a permanent drag on global growth – and that is crazy.

Finally, it is wrecking the institutions that are meant to be promoting financial stability. The IMF has its critics, but in most countries where it has intervened, it has generally been a force for good, steadying rocky economies and nursing them back to health. In Greece, it has been hi-jacked by its French masters to prop up a political currency that was doomed from the start. It has squandered billions in loans, much of which will never be re-paid, and will make every country reluctant to stump up their membership subs. It will find it harder to be listened to in the future, and will have far less money to deploy.

As for the Greeks, they will be fine. The ‘Gre-covery’ will follow on fairly quickly from the ‘Grexit’ (after which there should be a ban on words starting with ‘Gr’ – they are getting ‘gr-iresome’). ‘Greek wages are already competitive with western Europe, and after devaluation they will be competitive with eastern Europe as well – with the advantage of all the infrastructure that comes from thirty years of EU membership,’ says Charles Robertson, chief economist at Renaissance Capital. ‘So the Greeks will be just fine.’ Quite so. Most countries that collapse out of dysfunctional currency unions do pretty well. In 2002, Argentina tumbled out its peg to the dollar, in the middle of a banking crisis, but between 2003 and 2007 it averaged 8.5 per cent annual growth. Greece should do just as well. It will not suddenly turn into Switzerland, except with more olive groves. But that was never very likely anyway. Instead, it will be a slightly wobbly, middle income country, with a weak-ish currency. But that will be a heck of a big improvement on what it is now.

To a generation of politicians, the euro was meant to modernise Greece, and draw the nations of Europe together. It has been a comprehensive failure. It has bankrupted Greece, and set country against country. By next week, with any luck, the Greeks will have consigned the whole ill-fated project to the dustbin, and will be getting one with re-building their country.

Matthew Lynn is a financial columnist for WSJ MarketWatch, the Daily Telegraph and Money Week


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