An 'Orderly' Greek Exit Is Not Possible
Are we talking our way to a Greek exit from the euro? As more and more pundits and politicians and economists start to talk about how it might be done, and the Greeks themselves struggle to form a viable coalition government (it looks like there will have to be another general election next month), perhaps it is time to think the un-thinkable and start to draft policy for a post-exit world.
EU leaders shouldn’t throw the towel in just yet. We should be under no illusions that a Grexit (who thinks these expressions up?) will be very, very painful for the European Union and indeed everyone else, it will generate a banking crisis that will reverberate around the world and will take many years to sort out. It will be 2008 all over again but raised exponentially in severity.
“Why?” those advocating a Drachma revival ask. Because of the way the banking market is connected. Capital flight out of Greece – which could be prevented by government fiat, by the way, although this won’t stop the crisis – will create a bank run which will mean that the Greek banking system will have to be nationalized.
The knock-on effect on the rest of the EU will be severe and the interbank market will dry up. Central banks would have to supply more funding and some banks will simply fall over. To remind me that the Greek economy is only a very small percentage of the total EU economy is to miss the point; it wasn’t only banks that were holding Lehman debt or who were direct Lehman counterparties that experienced funding trouble in 2008. Just about every bank did.
That the Greek economy is in a straitjacket and cannot progress while in the euro is not argued; that it is structurally unfit for it to be a member of a currency union with (say) Germany and Holland is also irrefutable. But the latter is no different to the state of affairs that existed back in 2001 when Greece entered the euro. The original sin was then, now it’s time to suffer the consequence.
As we noted in this column a few weeks back, to save the EU economy and the euro in its current form, the euro zone taxpayer will have to pay for it, which means ultimately writing off Greek sovereign debt and starting again (presumably under some form of fiscal union to make monetary union long-term viable).
Is the euro worth saving in its current form? Not necessarily per se, but most definitely yes in order to avoid an economic depression that could last a decade.
The euro zone taxpayer will have learned a lesson though. Next time, don’t vote for politicians who wish to proceed full speed ahead with “ever closer union” but don’t demonstrate how they are actually going to make it work.
Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.
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