Financial commentators have been queuing up to tell us that an early Greek exit from the euro is as certain as Manchester City spending a lot of money in the transfer market this summer. Citibank puts the chances as high as 75%. Bookmaker William Hill has stopped offering odds. The markets view it as practically a done deal – and possibly before the summer is out.
In reality, a Greek exit – or ‘Grexit’, as it has been dubbed – is a lot further away than most people imagine. You need to remember just how small the Greek economy is. It can be bailed out again and again without it putting much of a dent in anyone’s wallet. The eurozone leaders will chicken out. It is easier to reflate the Greek economy than face the completely unknowable risks of a disorderly break-up of the single currency.
The Greeks have had enough of the austerity package imposed by the International Monetary Fund and the European Union – and rightly so. The economic collapse is becoming a social catastrophe. The economy shrunk by another 6% in the latest quarter, and is now 20% smaller than when the crisis began. Youth unemployment is above 50% and total unemployment over 22%. In the 1930s Great Depression, American GDP fell by 30% over four years. What’s happening in Greece is on a similar scale.
Perhaps the Greeks did spend too much in the first decade of euro membership. And maybe they should make welfare cuts, get better at paying their taxes, and liberalise their economy. But it is crazy in a growing global economy (the IMF says global growth will hit 3.5% in 2012) for a country to endure this kind of collapse – and completely self-defeating. As the economy shrinks, the deficit goes higher and the bail-out terms force the government to cut spending even further. You don’t need to be John Maynard Keynes to realise that this will never work.
There is a lot of tough talk from Berlin about how the Greeks must stick to the austerity deal. The papers are full of anonymous briefings from German government officials about how there can be no going back. Preparations have been made for a Greek exit, we’re told. The banks have been ring-fenced to prevent a continent-wide collapse. Firewalls have been put in place to stop Portugal, Ireland and even Spain from being forced out of the single currency a few weeks later. No one wants the Greeks to leave, it is said. But if they go, they go. It’s their choice. The euro will carry on.
The trouble is, no one can be that confident. Currency zones have broken up before, but not usually ones with the eurozone’s degree of financial integration. No one knows how it will play out. Confidence in the peripheral nations may collapse quickly. Trade may seize up. Banking systems may crumble. A ‘Grexit’ is a very high-risk event.
It’s easy to forget just how small Greece is. Its total GDP is only 230 billion euros (and I’m writing this on Monday – it will be a bit less by the end of the week). The austerity package might not be up for negotiation. But if a new government in Athens ripped up the agreement, the rest of the eurozone would face a stark choice.
Very little of the bail-out money has been used to help the Greek people. Most of it has gone to ensure Greece keeps paying the interest on its debts – and has ended up in the pockets of the banks and hedge funds that own Greek bonds. A modern-day Marshall Aid plan to reflate the Greek economy need not cost that much. A package equivalent to 10% of Greek GDP would only amount to 23 billion euros – small change for the entire euro-zone economy.
But it would make a huge difference in Greece. The economy would start to stabilise. Unemployment would stop rising – perhaps some new jobs would be created. If the money was aid rather than a loan, then even the deficit might stop rising as tax revenue steadied.
By the end of June, the eurozone political leaders will decide one way or the other. Take a huge step into the unknown, involving unquantifiable risks, or throw a relatively trivial sum of money at the problem – and make it go away for a while? Politicians work on short time-frames so they will go for the bail-out.
Of course, it won’t work in the medium-term. Greece will remain fundamentally uncompetitive with Germany. And so will Portugal, Italy, Spain and France. But it will work for a while. The single currency will collapse one day. But it won’t be this summer. And a ‘Grexit’ won’t be the trigger.
• This article was originally published in MoneyWeek magazine issue number 590 on 25 May 2012, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.