Grexit may solve nothing, and cost Britain dearly
July 10, 2015
The utterly desperate situation in Greece is fast-developing. As a consequence of these unprecedentedly momentous events I appreciate any of my observations here risk being superseded rapidly.
However, in the aftermath of the unexpectedly clear rejection of the latest bailout deal it is evident that the original 2010 Greek rescue package was way too heavily weighted towards preserving the interests of bondholders, banks (mainly German and French), and private sector creditors rather than rebuilding an already shattered Greek economy.
The same, of course, applies to many of the bailouts secured by nations after the financial crash.
Nevertheless the petulance of the Syriza government, first elected on an ‘end to austerity’ slogan in January, has done lasting damage to the Greek reputation for straight-dealing. The preposterous referendum last Sunday was merely the latest in a series of infuriatingly manipulative gestures in recent months.
Even the narcissistic, game theorist Finance Minister, Yanis Varoufakis, threw in the towel the day after that vote.
He doubtless recognised that the ECB, IMF and European Commission (the notorious Troika), not to mention the German government. realise that time is on their side – why be rushed into further meetings? Let Syriza and their supporters stew for a while before returning to the negotiating table.
The truth is that Alexis Tsipras, the Greek Prime Miniter, is less the charismatic democrat he would like the world to believe and more a political fantasist.
His ‘business as usual’ approach flies in the face of the critical need for structural reform to the Greek economy, alongside a programme of living within its means, for once. Rather than levelling with their electorate, the Greek government has simply ramped up a culture of grievance and victimhood.
Tsipras would like to make the Greek people believe that the challenge facing them is to meet wholly unrealistic spending targets. What is really being asked of his administration, however, is the implementation of a credible programme of reform that modernises the Greek state and tackles head-on embedded cronyism and corruption.
In the absence of delivery over recent years since the bailouts began, there has been the complete erosion of trust and a consequent, understandable reluctance by other Eurozone members to offer any broader debt relief or commit to the longer-term goal of transfer union.
Whilst the world awaits the next moves in this increasingly ill-tempered negotiation, it is also clear that the Spanish, Italian, Portuguese, Slovenian and Slovakian governments (to name but five) are implacably hostile to any concessions being made to the Syriza government, whose antics compared unfavourably with the genuine efforts made by the people and rulers of all these nations to stabilise their own economies within the Eurozone.
Giving ground now after a succession of Syriza stunts would only encourage opposition parties in all those other Eurozone nations to ‘play the system’ and campaign to have their own debts written down. Granting Greece a free lunch would be contagious, and a recipe for chaotic economic irresponsibility.
However, exiting the Euro may not prove the elixir that many in Greece fervently believe.
For the new Drachma to be successful requires deep depreciation of the domestic currency. Yet this presupposes the structural reform in Greece that has been woefully lacking (successive governments have kicked this as well as the debt can down the road ever since Greece became a founder member of the Euro), as well as a flexible labour market (which it does not have) to ensure that the boost of currency depreciation is not immediately offset by a rise in nominal wages.
Leaving the Euro will only work if Greece can sustain an economy producing robust domestic goods and services rather than its never-ending reliance on imports. The truth is that Greece today desperately lacks that range of domestic expertise that can easily replace imports from the EU and beyond, especially in the energy and food sectors.
Without hard currency Greek business will struggle to fund even the most basic raw materials. Falling out of the Euro will make it even harder to avoid the economy grinding to a standstill.
What of the UK’s position in all this? Well, if Greece were to be forced from the Eurozone its future economic and social travails will end up being funded by all 28 fellow EU members.
Whilst much Greek debt is indeed held by German and French banks, the interconnected nature of global finance means that many British banks will also be indirectly on the hook in the event of a Greek bankruptcy and large scale debt write-off.
Moreover, such an outcome would probably result in speculators in the capital markets turning their attention to Spain, Italy and Portugal as the next ‘weakest links’ in the Eurozone, potentially driving other nations out of the single currency, whose very integrity will have been dangerously undermined by Grexit.
The worst case scenario would be a further cycle of extreme turbulence in global financial services, a renewed credit crunch and, given the importance to the City and UK as a whole of the banking industry, the derailing of the domestic recovery.