Kick Greece out of the euro to warn other reprobates that they face swallowing the same humiliating medicine
It wasn’t very nice to liken the Greek debt crisis to the Ebola virus but, as a former Mexican finance minister, Angel Gurria knows a thing or two about contagion and financial sickness. “When you realise you have it,” he said, “you have to cut your leg off to survive.” As the head of the Organisation for Economic Co-operation and Development was standing next to Angela Merkel, Germany’s tough-minded chancellor, at the time, his message will surely have got through.
The message is that yet more promises of emergency loans to Greece, from the International Monetary Fund and the European Union, are beside the point. Loans, whether the €45 billion already agreed or the rumoured €100 billion-plus soon to come, are just palliatives. They do not stop the virus from spreading. The only way to do that is to cut the euro’s Greek leg off: in other words, to expel it from the single currency.
This whole Greek tragedy must be galling to those Europeans who thought the post-Lehman recession was basically an American affair, one that showed the superiority of the continental way of doing things compared with those beastly Anglo-Saxons. Now America’s economy is rebounding strongly and it is Europe that looks like the world’s sickest continent. The European economy is weak, and a sovereign debt crisis that promises to spread from Greece to Spain, Portugal and, perhaps, Italy risks sending it back into another nasty recession.
Three painful truths lie behind the problems of Greece and the dangers of contagion. None is the issue most often cited by euro-fans — that Europe’s single currency faces these problems because monetary union was not combined with political union. No form of political union in Europe could have controlled Greek spending or accounting deceptions in the past decade, or prevented the economic troubles now being seen in Portugal and Spain; nor, now, would a European political union have been better at maintaining political stability than the Greek Government itself.
No, the first painful truth is that if Greece is to be able to service its debts and to revive its economy without suffering political collapse, it will need both financial aid and something extra to enable its economy to adjust. The financial aid will have to be huge, meaning subsidised loans or, better, a negotiated debt restructuring. The something extra, to offer some growth to compensate for all the fiscal austerity demanded by the IMF and eurozone lenders (especially Germany) and to make Greece capable of earning its way in the world, can only be a devaluation. There are no other tools at Greece’s disposal.
The second painful truth is that the more generous that the IMF and the EU are to Greece, the likelier it is that Portugal and Spain will want the same; and that if Greece’s debt is restructured (that is, if, like in Latin America in the 1980s, both the principal and the interest costs are cut), then markets will sell Spanish and Portuguese (and, perhaps, Italian) bonds in expectation that these countries too will soon renegotiate. Such a deal for the whole of Southern Europe would be far too costly, both for governments and creditors. So a way has to be found to impose a condition on Greece that the others would prefer to avoid. The best candidate for such a condition is exclusion from the euro.
Such exclusion would be politically humiliating but, for Greece, economically beneficial. That might also apply to Portugal. But it is very unlikely that either Spain or Italy would want to follow suit, for politics and status would weigh more heavily with them.
The third painful truth, however, is that all this is not just a result of Southern European weakness. Greek borrowing was made possible by lax lending by European banks: about 60 per cent of Greece’s loans came from German, French and other euro-area banks, which will suffer badly in the event of a debt restructuring. The Greek crisis also reflects the weakness of all the European economies, for if demand was lusty in Germany, the Netherlands and France, there would be a chance for Greece to export its way out of trouble even without a devaluation. With stagnant demand and deflation looming, no such chance exists.
Like it or not, the richer Northern Europeans are going to have to bear the cost of Greece’s adjustment, and probably at least part of the costs in Spain and Portugal too — both directly through financial aid and restructuring, and indirectly through the losses in their own banking systems. They will also have to grit their teeth and accept the need to exclude Greece from the euro, at least until such time as it is able to meet the single currency’s rules. Even more importantly than that, they are going to have to find a way to boost their own economic growth.
Germany, proud of its strong export industry and its relatively austere government finances, is finding it hard to accept any need to, or responsibility for, boosting European economic growth. Making Germans consume more is never easy. But in time Germany will have to face the facts: strong exports do not make a national economy or society strong. They make exporting companies strong, but do not raise incomes or productivity in the rest of the economy. Just look at post-1990 Japan. Just think what will happen to the whole European economy if all the southern countries are forced to contract.
What Germany and the rest of Northern Europe will need is something that sounds dreadfully Anglo-Saxon: deregulation, greater flexibility, more room for enterprise right across the economy, not just in export industries. Only by creating new sources of wealth in service industries and more room for innovation in all industries will Europe find the strength and resilience it needs.
It is a familiar agenda, but one that has generally been consigned to the wastebasket. Germany obstructed freer European trade in services earlier this decade, and few countries have done much, despite EU exhortation, to open up their economies. For a while, as the storms blew around Wall Street and Lehman Brothers, it looked as if the Anglo-Saxon way was dead anyway. Not so. The danger is that it is the European way that is truly on its deathbed.