Thursday, 17 May 2012

To bail out or be bailed out. Greece and the euro.

Having spent the best part of six months writing, reading and thinking about road design and cycling policy, I’m back to thinking political economy for a moment.

This was brought about largely by the increasing likelihood of Greece leaving the euro, with anti-bailout parties looking set to perform well in next month’s Greek elections.

David Cameron gave an entertaining speech in response to developments, asking for Europe to provide “a committed, stable, successful euro zone” that he doesn’t want any British involvement with anyway. Cameron also proposed the need for “well-capitalised and regulated banks, and a system of fiscal burden sharing” that he has shown no great enthusiasm for introducing within the UK. Bear in mind that our own plan for bringing the banking sector to heel, Project Merlin, is named after a magician.

All this is only context. The most striking thing about the prophecies of doom surrounding Greece is what they omit to mention. Reuters ran a report on the hundreds of billions of euros that a Greek exit will cost the euro zone. The Centre for Economic and Business Research gave an upwards projection of $1tn (€786bn) as the cost of an exit.

Neither mentions that the European Central Bank (ECB) is exposed to half a trillion euros of debt in Greece, Portugal, Italy, Ireland and Spain. The ECB sits on less than €100bn of capital, and €240bn of existing bailouts have obviously failed to move Greece into financial safety. What we have is talk about the potential losses of a Greek exit from the euro, without mention that Greece’s continuing presence in the euro zone is also riddled with losses that have failed to bring any improvements in the situation.

Key to the idea of a Greek exit is that a return to the drachma would bring an approximately 50-70% depreciation against the euro-denominated value of Greek assets. What this does not factor-in is that with unemployment at 21% and the minimum wage down 20%, the fewer monetary units people have, the less important the value of each of those units becomes. A 40% increase in the suicide rate suggests that the Greek population is not exactly being well-served by the status quo.

One of the few positive stories to emerge recently from Greece was its so-called Potato Revolution, in which farmers have begun selling directly to customers, enabling cheaper prices and higher profits for themselves. The good news is that potatoes grow irrespective of currencies, and given the fact that so many Greeks are receiving fewer and fewer euros, preserving those as euros rather than drachma is helping financial institutions rather than people. The less you get out of an economy, the less you suffer when it loses money.

The problem for the ECB now is that it needs Greece. The anthropology of markets is rarely discussed, but the mantra of financial discipline needs a pariah. A Greek presence in the Eurozone maintains the veneer of a system that is hard-going, but that ultimately works. If Greece leaves the euro then it will be evidence of the fact, only recently acknowledged, that such a thing is possible at all. The experience of Iceland, with 3% post-crisis growth, suggests that the Greeks could stand to benefit from bailing on the Eurozone, rather than being bailed out by it. The ECB will then have to grapple with increased financial pressure on Spain, Portugal, Italy and Ireland, with each of these nations no longer convinced of the permanence of the single currency.

A final consideration worthy of mention is that of the European Financial Stability Facility (EFSF), set up to help Greece (and others) with debt obligations. This week saw Der Spiegel begin discussing the possibility that it will be diverted to help Greece’s creditors in the event of a default. This returns us to a scenario in which banks are let-off the hook for bad lending, even after the debts themselves have been formally defaulted upon by the initial debtor. What will become clear in such circumstances is that priority was never a rescue of the Greeks, but further taxpayer subsidy for the failures of Europe’s banking institutions.

If Greece does leave the euro, the most significant result will not be the numbers and percentage points attached to that event, but the statement that options exist outside the religion of international financial institutions. For the Greeks neither path will be pleasant, but some courses of action are less hopeless than others.

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