The case against a ‘Grexit’

15th May 2012

Economists say Greece must leave the euro. The media pick up on this as it has more drama implications than the status quo. Besides, quoting the views of eminent economists makes them look clever.

Just one example is Allister Heath in CityAM who repeats his long-held mantra that Athens and the single currency are as compatible as the old feminist image of a fish on a bicycle.

But economists are always right about the last crisis bar one – they have remarkable hindsight, while their ability to predict is all too often limited by their imaginations (generally far from Mindful)  and their need to come up with a story that their trading desks can profitably run with. The sub-prime property loan disaster which caused the banking crash which directly led on to where we are now is just one example.

Obviously, the gainsayers may prove to be right one day – like a stopped clock they need only be correct once to justify their case. And from their economics tower, they could be right about Greece.

Grexit – easy to call, tough to implement

There are two problems. The first is that it is dead easy to call for a Greek euro exit (or Grexit as the markets now inelegantly call it). Anyone can do it, whether they are economists or media commentator quoting economists.  There is, however, a wide gap between the theory of the call and the practice of its implementation. The second could work out more costly than the problems the theory is designed to solve.

Last September, when there were also daily calls for Greece to be booted out of the single currency, Mindful Money first questioned the logistics of such a move, which then as now had received little if any notice.  It said: "Outside of police states, all currency changeovers need planning and notice."  Europe is not a police state, so the change from Euro to New Drachma could be difficult.

By now there may be stockpiles of New Drachmas ready to go – but the changeover would still be difficult as there is no experience of any group, let alone one in a currency union, abandoning a strong money for a weak one.

And who has spoken publicly with a formula to manage the risks of the changeover?

The second problem is the socio-political aspect, something which economists routinely ignore.  While the richer Greeks have already set up their euro accounts in Frankfurt, less well off Hellenics are only now moving their money – out of the savings banks and under their mattresses. All this "flight" and "flight risk" only serves to make the Greek situation worse – again a consequence unforeseen by many economists.

Rioting and worse

The social aspect is civil unrest in Greece – it is coming up to the summer riot season – which could see German banks and other institutions burnt and looted.

Greece is small in economic terms –  only 2.2% of eurozone GDP – but being expelled from the euro could unleash chaos in the country, and have severe knock-on effects. It is possible (but by no means a given) that a Greek exit would be followed on a domino effect by, possibly, Portugal, Spain, Ireland, Italy and who knows where else.

Debt traders and the need to trade debt

Debt traders need to occupy themselves with their hours in front of their multi-screen desks. Up to now, they have been pre-occupied with Greece. But a bankrupt Greece will be of minimal or zero interest to most except vulture funds, so their attention might switch to the next weakest nation or nations as the new profit opportunity. 

A Greek collapse and the threat of more in southern and peripheral Europe could be the cue for further public unrest in major cities across Europe. This might be what many in markets want – certainly those who are shorting the single currency and debt instruments will gain. Greeks and other Europeans in indebted areas will compare the cost of putting their economies back to growth with the amounts consumed in bank rescues.

The euro is nothing else if not a political construct which economists ignore at their peril.  The rights and wrongs of this now matter little compared with the unity perception at the heart of the European Union. The EU wants to build a world where political barriers between Athens and Amsterdam, Bucharest and Berlin, break down. While these two pairs of cities are not likely to enjoy economic parity in this century, they should be able to co-exist in the way that the very disparate Missouri and Manhattan do in the United States.

This is a dimension that has to be factored in to the perceived costs of buttressing Greece against the markets. Failing to do so could be even more expensive if the domino effect kicks in. The Institute of International Finance estimates the cost of backing Portugal and Spain against euro exit at around €1trillion (or about €3,000 for each EU citizen in or out of the euro).

Voting down austerity

Many European nations have voted against the "austerity" solution, most notably in France and Spain.  Other than acknowledging the increasing of risks associated with uncertainty, some economists tend to dismiss these signals, saying that electorates have no choice other than to do what they are told by the markets. This is not an argument that tends to work with those who have been impoverished by the self-same markets which claim ownership of the solution – seen as misery for ordinary people and continuing bonuses for the elite (paid in the currency of their choice to the offshore tax haven of their preference).

With all these negatives, pro-exit economists need to explain how pushing Greece further into financial and political chaos helps either the Greeks or anyone else.

It is an argument clearly put by former IMF board member Miranda Xafu. She writes that "Greece's exit from the Eurozone would be all pain, no gain." She adds that with "Greece in deep recession for the fifth year running, several prominent obs
ervers have been calling on it to exit the Eurozone. This column argues this would not help Greece's economy recover faster from its deep recession. Greece will still be the most heavily regulated country in the OECD and returning to a drachma would only add to the debt burden."

Let slip the dogs of war

As investment bank UBS told The Guardian, "The costs of breakup go way beyond the economic. To quote Shakespeare, in the event of a fragmentation of the euro, economists will have little to do but 'cry havoc, and let slip the dogs of war.'"

Economists and their followers must show pay attention to the old saying: "Be careful what you wish for, you might just get it."

There are few easy questions and no easy solutions. One way out could be to end the whole Euro project – for all the countries to return to their original currencies. But how would that benefit the cross-border trading that increasingly cements the continent together?


More on Mindful Money:

MM's case for a 'Grexit' 

The logistics of Greece leaving the Euro

The aims and failures of the eurozone

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