February 15, 2015 by Paul Goldsmith
At the end of an outstanding article by Hamish McRae on whether it would really matter if Greece left the Euro (Grexit) he sets out a paradox that illustrates what McRae rightly calls “the endless fascination of economics.” What looks like a disaster at first can turn out to be a triumph – such as sterling’s ejection from the ERM in 1992, which led to the UK not joining the Euro. What looks like a triumph at first can turn out to be a disaster – such as Greece’s acceptance into the Euro, despite their fiscal discipline being so out of control at the time, showing that. McRae uses that paradox to leave us with the idea that Grexit might be good for Greece, and for Europe.
This has become an urgent issues because the finance ministers of the Eurozone are meeting to decide how they might ease Greece’s debt obligations whilst retaining sufficient fiscal discipline for its other creditors to be satisfied. Given the structural adjustment programme that came attached to the loans that bailed out Greece have helped to take its GDP down from $340bn in 2009 to $240 in 2014 whilst leaving over a quarter of its workforce unemployed, the present programme hasn’t worked. You try paying back debts to your bank if it forces you to also exist on an income down 25%. So, either we negotiate a way to restore prosperity to Greece, or they default on their debts and leave the Euro (Grexit). To decide how much that matters, we need to look at the alternatives first.
Bail-out calculations rely on a sustainable growth rate of about 2.5% up until 2025, double the rate of the rest of the Euro. This would put them, in 2025, back where they were in 2005. So, two lost decades. THAT, is apparently, success. So, we haven’t yet found a way to restore prosperity to Greece.
McRae then point out that the consequences of Grexit need to be thought about by orders of magnitude. Greece’s GDP is about 0.3% of World GDP ($250bn out of $75,000bn). China creates an economy the size of Greece every three months. Greece is about 2% of the Eurozone economy, which means that in a good year the Eurozone can grow another Greece. That good year may be coming soon, given the fall in the oil price is predicted to add up to 0.5% to real growth (GDP growth on top of inflation) this year – which, applied over such a large area, is massive. Add the quantitative easing programme the European Central Bank is starting and you have more growth likely.
McRae’s central point is that we should care about Greece on a human level. The exit of Greece from the Eurozone would matter to us on a political level, not an economic one, as it is so small, but more importantly we have to think about the human side of the question on how much Grexit would actually matter.
Imagine what could happen if Greece left the Euro. Given they would have control over their own monetary policy, and have a currency that can devalue to encourage exports, they would have the opportunity to create a benign climate for inward investment that they can’t do inside the Euro, and in particular if they continue with austerity. McRae believes there is a ‘wall of money waiting to come into the country’. The economic boom that could result might, for instance, allow Greece to both raise their population’s living standards above the hand-to-mouth existence too many of them are dealing with right now. It could even mean they are able to pay off some of their debts in the future.
I believe that people are making a mistake thinking that Syriza are just a bunch of irresponsible Marxists who want to tell us where to put the debts they owe us and are desperate to simply relaunch the corrupt, welfare-hungry Greece of old, funded by EU largesse. The policies they have announced already involve putting money in the hands of the poorest, who will spend it – raising demand that should in turn lead to jobs being created. But, and we are back to the humans again, it may also stop us looking on as the people of Greece starve, freeze and lose all hope. Good luck to them.