Published in the Nikkei Asian Review 21/1/2015
Greece is the cradle of both democracy and European civilization. So it is fitting that the imminent election in Athens should have profound implications for the future of the euro, the EU and potentially the world financial system.
In the background is the collapse of the Greek economy, which has shrunk by 25% in the past five years while the ratio of external debt to GDP has soared to 150% and youth unemployment hovers at a staggering 50%.
Syriza, the radical left-wing party which leads the polls, has pledged to end fiscal austerity and obtain debt forgiveness from foreign holders of Greek government bonds. The EU powers-that-be are loath to consent, on the grounds that other distressed countries would demand similar treatment. Already Greek taxpayers are delaying payments in anticipation of Syriza’s promised abolition of property taxes.
If no agreement is reached, Greece will face a cash crunch within months. The spectacle of a high income economy running out of money has not been seen since the 1930s. The only way to cover the shortfall would be for Greece to quit the Eurozone and start printing its own currency again.
A MOTLEY CREW
The whole subject of exiting the euro has long been taboo, so no detailed scenarios have been made public. Unfortunately it is in the interests of the EU establishment to make a Greek exit as painful as possible in order to deter other countries from following suit. For Spain also has an anti-austerity party rapidly gaining public support and Marine Le Pen – leader of the anti-immigrant, anti-euro Front National – will be a serious contender for the French presidency in 2017.
So on one side we have a motley crew of populists from the extremes of left and right. On the other stand the sober technocrats of the “Troika” (the European Central Bank, the European Commission and the IMF) with their attachment to fiscal austerity and structural reform. The problem is that in terms of economic policy it is the populists that are pragmatic and the technocrats who inhabit cloud cuckoo land. Syriza’s insistence on debt relief merely reflects the reality that the money cannot be repaid and creditors must eat their losses, as is always the case when unwise loans are made. In contrast, the Euro elite’s attempt to turn Greeks into northern Europeans by means of the single currency was always a fantasy. Proposing to deflate the economy back to health is doubly deluded.
THE ASIAN EXAMPLE
To see why, compare the current European crisis with the more explosive Asian crisis of the late 1990s. Already the European debacle has lasted twice as long and there is no end in sight. The key difference is the role of floating currencies, which rapidly enabled the distressed Asian countries to become ultra-competitive through massive devaluations. Booming exports then generated jobs for displaced workers and unemployment proved to be a transient problem. In other words, the currency market imposed its own version of structural reform. For both Korea and Thailand the ratio of exports to GDP has doubled from pre-crisis levels.
What if Greece had left the Eurozone in 2010? At first there would have been an unholy mess, but in all probability the economy would be back on its feet by now. Tourism accounts for about 20% of Greek GDP and employment. Given a sufficiently competitive exchange rate, it would be quite possible for that ratio to rise significantly, as with Thai and Korean exports. Tourism-related FDI would surely surge too as Asians, Americans and other Europeans pour into Greece to enjoy its unparalleled cultural and natural riches at bargain prices. Achieving equivalent competitiveness through the Troika’s favoured remedy of “internal devaluation” – cuts in wages and prices – is out of the question. For Korea and Thailand to recover, their currencies needed to halve.
DON’T WALK, BUT RUN
Greece has had a bad press recently, but over the long haul its performance has been impressive. During the economic miracle of the 1950s and 1960s, it grew faster than Japan. Contrary to the stereotypes, Greek workers put in more hours than any other Europeans, whereas Germans workers rank next to bottom in this respect. In the last few years, the country has made huge progress in narrowing its trade and fiscal deficits – but at a devastating social cost.
Syriza, if elected, and the Troika may stitch together some compromise that allows the status quo to continue, but that would merely prolong the Greek agony and further empower European populists. The endgame, unknown years in the future, would be a disorderly break-up of the Eurozone, a financial tsunami that would make the collapse of Lehman Brothers look like a summer squall. The best outcome remains the least likely – an agreed and planned exit from the euro that allows Greece to remain in the EU.
The key lesson is that floating currencies and independent monetary policy are essential tools of adjustment. Switzerland has just demonstrated the chaos that even a brief experiment with a fixed exchange rate can cause. If one day some major Asian power tries to push the idea of a regional monetary union, don’t walk but run in the opposite direction.