Daily Archives: September 28, 2011

Despite the Greek parliament’s support last night for an unpopular new property tax, Europe’s divisions over the terms of any new bailoutgive credence to talk of a looming euro exit. But such an exit would be terrible news for Greece, and equally terrible for the eurozone. The bottom line is this: Greece isn’t going anywhere.

First, no legal framework exists for an exit from the euro. Greece would have to negotiate with its eurozone partners, and most likely with the 27-member European Union. It would be a prolonged and messy process, creating a political and economic drag for everyone involved.

If Greece were to leaves the eurozone, sovereign default would also be accompanied by corporate default. Shutting down the country’s banks will be complex, costly and contagious. Also, Greece is a democracy. This makes things even messier.

Yet even if Greece could pull off this technical feat, what would it stand to gain? As the argument goes, Greece could reinstate the drachma, devalued relative to the euro. This would make Greek exports more competitive, and could ultimately put the country back on sound fiscal footing.

The problem with this line of argument, however, is that Greece actually is less exposed to international trade than any other eurozone country. Only €16bn of its €230bn gross domestic product is export-based. True, the tourism industry does comprise a significant 15 per cent of GDP, but a devaluation would have limited upside against Greece’s less expensive Mediterranean competitors such as Turkey.

Worse, Greece has a mountain of debt denominated in euros. A switch to a new drachma would not change this. In fact, the drachma’s devaluation would only make the debt that remains that much harder to pay off.

Any limited competitive advantage gained by euro exit (and devaluation) would not hold for long. And that wouldn’t be the end of it. Post-exit, the rest of the eurozone and EU would punish Greece by imposing tariffs, while Greece would also lose EU structural funds.

Tellingly, the Greeks have tried this experiment before. In the 1980s, the country went through a process of devaluation and inflation. But it failed to improve competitiveness, while high inflation eroded citizens’ savings. Today the same would happen: depreciation would not help much with exports or debt, but it would kill domestic demand and send inflation much higher, further undermining domestic spending, savings and standards of living.

Despite huge public anger over austerity measures, the consensus in Athens recognises the lack of logic – or support – for a euro exit. The only faction of parliament promoting an exit from the EU is the Communist Party of Greece (KKE), which has 21 of the 300 parliamentary seats. In the latest opinion polls, 60 per cent of the Greek population still favours the euro.

Greece, therefore, has zero interest in leaving. On the other side, while Greece may be in trouble with its eurozone neighbours, it will not be punished with expulsion. Indeed, the eurozone’s core countries have ample incentive to keep Greece in the club – and even bar the exits.

Why would Portugal or Ireland let Greece go, shifting the savage market spotlight to themselves? More importantly, why would Germany agree? German exports — the lifeblood of the eurozone — would decline as a result of the currency appreciation precipitated by a Greek exit. On a broader level, if Greece left the eurozone, it would set a very dangerous political and economic precedent for other debt-ridden countries — Italy in particular.

The end result of all this? Don’t listen to the doom and gloom merchants. Greece’s ratio of debt to GDP may have topped 150 per cent, but its eurozone status remains 100 per cent secure.

Greece will stay put. It is the smart decision. Indeed, it is the only decision.

The writer is the president of Eurasia Group, a political risk consultancy, and author of ‘The End of the Free Market’.

Response by Sony Kapoor

The Greek crisis has distracted us from the much more serious problems facing the eurozone’s banks

Like Ian Bremmer, and for many of the same reasons, I too have argued that Greece’s future is firmly within the eurozone. That said, however, thinking through the costs that Greece’s problems have imposed on the eurozone as a whole offers some insights into the stance euro-exit fantasists have taken, and highlights the urgency of decisively addressing these issues.

Some argue that without the revelation of Greece’s hidden fiscal problems the European sovereign debt crisis may never have happened. That is not entirely credible. While Greece did light the match, the European edifice was made of highly flammable material. With excessively large and under-capitalised banks, persistent structural imbalances and a governance structure that was designed to take decisions in peacetime, not handle crises, European financial stability was vulnerable to a host of triggers. With hindsight we might actually be grateful to Greece for highlighting these vulnerabilities before an even bigger crisis struck.

On a more serious note, it is now clear that the revelation of Greece’s fiscal problems was responsible for prematurely turning the European narrative of the crisis into a fiscal one, neglecting that fact that this was first and foremost a banking crisis.

It distracted us from addressing the vulnerabilities in our banking system, which have now come back to haunt us. Sensible options, such as imposing moratoriums on bank dividends and bonus payments so as to coerce banks into building up capital, were rejected as policy makers focused on sovereigns.

Having viewed all subsequent problems through the tainted lens of Greece’s problems, European leaders have wrongly concluded that fiscal profligacy is at the root of the crisis and that austerity is the right medicine. Banking, not fiscal, problems lie at the heart of the Spanish and Irish crisis. A lack of growth has driven Portugal over the edge. The now-standard prescription of and the single-minded focus on austerity is hugely damaging.

Even more damaging is the mistrust that has been built up and the waste of scarce political capital that has resulted from the complete failure of European Union’s policy makers to handle what remains a containable crisis. This has poisoned the atmosphere and made decisions on other more important issues harder to reach. It has also eroded market confidence, perhaps permanently. If policy makers cannot be trusted to handle the relatively small problems of Greece over an 18 month period, how can anyone trust them to handle the much bigger and more urgent challenge posed by Italy?

Greece’s problems have been eating away at the European project from the inside, like a cancer. But, like Mr Bremmer, I think that surgery in the form of exit from the eurozone is not an option. The cancer will respond to non-invasive treatment within the currency union. This needs to take the form a reduction in debt stock, EU support for investments and growth-enhancing reforms.

The writer is managing director of Re-Define, a think tank, and a visiting fellow at the London School of Economics.

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