The Guest Blog

The Euro and Taxpayer Choice

Moorad Choudhry|Treasurer, Corporate Banking Division, Royal Bank of Scotland

The old adage (borrowed from lawyers) that if one puts 10 economists in a room one will be confronted with 11 different opinions rings true in the euro crisis, which seems to shaping up for some sort of denoument with the Greek elections on 17 June. Is that the moment when we are faced either with the drachma resurgent, or with a new fiscally unified euro zone?

Aris Messinis | AFP | Getty Images

Well perhaps not as soon as the day after the elections, but one of those is what will occurr at some point afterwards.

On the one hand we have those calling for an “orderly” withdrawal of Greece from the euro (not possible), on the basis that staying in the euro and taking the austerity pill is damaging for the Greek economy as it places it in a straitjacket from which growth is near impossible (true).

On the other hand Greek exit would also precipitate mass capital flight, not just out of Greece but out of other southern euro zone countriesas well, and a collapse of the Greek banking system with knock-on effects on EU banks . (Incidentally, an interesting technical point relevant to those who suggest that imposing capital controls will address the bank crash issue — such controls are illegal under EU law. Would these laws be amended, or could a country opt out from them, or would the country also have to leave the EU as well as the euro?).

Another opinion I’ve heard is the “markets are nervous during periods of uncertainty — eject Greece from the euro and the uncertainty is removed, cue market recovery”. Again, wrong because Greek exit only moves uncertainty to Portugal, Spain and elsewhere. It just snowballs from there.

Whichever way one looks at it, the scenario plays out grimly. Far from lancing the boil, Greek exit could precipitate the end of the euro, not to mention a not insignificant economic contraction that could see the EU in recessionfor up to a decade.

This is where outsiders start to think too much in economic rather than political terms. Here is something I read in the “Huffington Post” today, about the current situation:

"For the last three years Europe’s politicians have promised to 'do whatever it takes' to save the euro. It is now clear that this promise is beyond their capacity to keep — because it requires steps that are unacceptable to their electorates."

It’s a compelling argument. But the EU has never been about democracy as such. During the last 30 years many things that might have been unacceptable to EU electorates have been made law by the EU. The EU taxpayer wasn’t exactly involved in the decision to set up the euro in the first place. A Greek sovereign bailout by the EU would simply be the latest in a long line of political projects that the taxpayer has funded but has never been asked to approve, not in any meaningful sense.

Which is why I’m betting a tray of baklava that the Franco-German EU leadership axis will pull back from the abyss and arrange a Greek rescue that may involve a wholesale write-off of its debt, allied with a Eurobond facility to pool sovereign debt , together with a new fiscal union. The euro was flawed in design from the start, which is why we face the problems we do now, but we need to keep it alive for some time longer because the alternative is unpalatable in the extreme.

The author is Professor Moorad Choudhry, Treasurer, Corporate Banking Division, Royal Bank of Scotland.

The views expressed in this article are an expression of the author’s personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment.