17 May 2012
Francois Hollande, the Euro-fanatical new French president, must have wondered whether, like some unfortunate mortal in Greek mythology, he had angered the gods. His inauguration parade was drenched in unseasonal rain and, when he flew to an emergency summit with Germany’s Angela Merkel on how to keep the euro together, his plane was struck by lightning.
Like other EU leaders, he is learning how puny he is in the face of events. Again and again, the Euro-elites have declared the crisis to be over, only to find that the markets had other ideas.
The French and German leaders insist that they’re sticking to the original plan: Greece will implement its austerity programme, repay a portion of its original debt, and remain in the euro. Privately, though, finance ministers across Europe are reconciled to a default.
Even Christine Lagarde, the head of the International Monetary Fund, who has always been more interested in the survival of the euro than in doing her day-job, now says she is ‘technically prepared’ for Greece to welsh on its remaining debts.
Yesterday, the Governor of the Bank of England, Mervyn King, cut Britain’s growth forecasts and warned of higher inflation, saying the euro area was ‘tearing itself apart’ and there was a ‘risk of a storm heading our way from the Continent’. David Cameron stated bluntly that it was time for for the eurozone either ‘to make up or break up’.
Eurocrats are especially concerned that Greece might leave the euro – but not for the reason you might think. Their worry is not that Greece will sink into a state of Levantine poverty: that has already happened. No, their true fear is that, after a few wretched months, Greece would bounce back, using its newly competitive currency to price its way into the markets and export its way to growth.
If that were to happen, other countries on the periphery of the eurozone, also struggling with an over-valued exchange rate, might try something similar. The whole euro project would unravel faster than you could say ‘Jacques Delors’.
Eurocrats often liken the EU to a bicycle that has to keep moving forward or topple over. A ravenous shark that has to keep swimming or die might be a better simile, but never mind: the point holds.
Any rolling back of the single most important integrationist project would call the whole enterprise into question.
Greek politicians are banking – if that’s the right word – on this fear.
At first blush, their attitude seems incomprehensible. They insist that they want to remain in the euro, yet they won’t pretend to obey its rules. Greek politicians seem to be threatening from a position of weakness, insulting their benefactors while simultaneously expecting them to offer better terms. Yet such a strategy has so far worked beautifully.
Commentators often talk of Greece being ‘kicked out’ of the euro, but this is to misunderstand the nature of a currency. A government can proclaim any money it wants to be legal tender.
For example, Ecuador didn’t need to ask the United States when it adopted the dollar as its currency. Montenegro and Kosovo have adopted the euro without being members of the EU.
The question of a Greek exit from the euro – or ‘Grexit’ as market analysts, with their addiction to jargon, call it – is for the Greeks, not the other 16 eurozone states.
So far, almost all the politicians, as well as the Greek central bank, are committed to continued membership. And, bewilderingly, 77 per cent of Greek voters say they want to remain in the euro at whatever cost.
Why do they cling so fiercely to the currency that is pulling them under? For two reasons. First, the euro is a talisman, proof of Greece’s European rather than Ottoman status. Second, Greek politicians are now so distrusted that there is a genuine horror at the idea of letting them control a national coinage again.
The assumption in the markets is that Greece would have no option but to start printing a new drachma currency following a default. This is because, in the aftermath of a debt repudiation, no one lends you money. The Athens government wouldn’t be able to pay its basic costs: pensions, police wages and so on. It would, runs the reasoning, have no option but to devalue and print extra notes.
Yet, once you strip out the debt interest payments, Greece’s primary deficit is small. It is just conceivable that Greece might hang on to the euro while, as bankrupt governments have done in the past, failing to pay its public-sector workers on time. This would, of course, be the worst of all worlds: to take the hit of a default without the compensating gain of a currency devaluation. Then again, if the euro had been about economics, Greece wouldn’t have joined in the first place.
Soon, though, the effect of cheaper exports would start to tell. That is what has just happened in Iceland which, following a banking crash four years ago, is now comfortably outgrowing the eurozone.
Imagine, as you book your summer holiday, that the new exchange rate suddenly makes Greek resorts 40 or 50 per cent cheaper than their competitors. Now imagine every business making a similar calculation when it comes to sourcing goods.
The blood-curdling threats being issued by Eurocrats should sound familiar to British readers. We went through precisely the same experience 20 years ago, when we were stuck with an over-valued exchange rate in the Exchange Rate Mechanism.
As in Greece, our leaders – all the main parties, the CBI, the TUC, the Bank of England – assured us that leaving the ERM would be disastrous. On September 11, 1992, John Major solemnly told us that withdrawal was ‘the soft option, the inflationary option, the devaluer’s option, a betrayal of our country’s future’.
Four days later, we left the system, and our recovery began immediately. Inflation, interest rates and unemployment started falling, and we enjoyed 15 years of unbroken growth – until Gordon Brown came along and blew it away.
