It’s time for Greece to put itself out of its misery. It must stop hoping for a miracle, default on its debts and exit the euro. In the short term, this would probably precipitate another cataclysmic relapse into recession for Greece’s long-suffering people. But it is the only way out of the current logjam and has become a necessary, albeit not sufficient, condition for the country to make an eventual recovery.
Ideally, the Greek government would choose to press the Grexit button itself. But if it decides instead to cling on indefinitely, the rest of the eurozone should find a way of forcing it out of the single currency as soon as possible. That would go against the EU’s imperialistic mindset, for sure, and would violate the infamous acquis communautaire rule: the view that EU integration should never be allowed to be reversed in any area and in any country. But it’s the only way to end the current nonsense, and the only hope for a country that has been suffering horrendously for years.
The most powerful arguments in favour of both default and Grexit relate to political economy and electoral psychology. Greece’s debt burden is too big: it can never be repaid. The sooner everybody accepts this, the better. Just as importantly, however, most Greek voters seem to agree with the current government’s ideology: they want, by and large, to remain in the euro but don’t want to have to abide by its broadly orthodox rules on tax, spending and markets. This is fatally inconsistent: the only way for the euro to work, in the absence of massive, permanent handouts from Germany and other rich countries, is for member states to embrace free markets and radical labour market flexibility.
The Greek drachma
Yet, if anything, many Greek voters believe that prime minister Alexis Tsipras has compromised too much with his creditors, and conceded too much when it comes to reforming the country’s economy. There are thus two other problems with the sorts of anti-market, collectivist policies that opinion polls suggest retain such support in Greece: they guarantee gradual impoverishment; and they are based on the nonsensical premise that there is such a thing as a free lunch. There isn’t, and no country should believe itself entitled to live off the generosity of others, including the taxpayers that are ultimately tapped up by international organisations such as theInternational Monetary Fund.
In theory, Greece could default on its debt but not leave the euro; but the rest of the eurozone and the European Central Bank should force it to readopt the drachma. The legal and practical path would be complex but manageable. With little or no debt and a new currency, and having moved on from the mistakes of its past, there would at least be a chance that Greece may, in time, elect an economically literate government committed to adopting sensible, pro-growth policies.
The best way for Greece to relearn the importance of economic orthodoxy is for it to test to destruction its own monetary policy, its own tax system and its own-self imposed rules. Blaming the rest of the world or “neo-liberalism” would no longer be possible once it exits the euro and walks away from its debts. Left to its own devices, there would be a decent chance that it would eventually rediscover the virtues of sound money, balanced budgets and a tax and regulatory system that attracts foreign capital and encourages domestic enterprise. Countries that vote for socialism, profligacy and class war don’t have the right to force others to pick up the bill.
The endless prevarication of the past few months is helping nobody: the financial system is crippled, the economy is in recession again (with GDP shrinking by 0.2pc in the first quarter of the year) and the country’s brightest and most hard working are fleeing, finding jobs and rebuilding their lives overseas. Every depositor with any sense has been busily withdrawing cash from Greek banks, in anticipation of capital controls and a new, potentially almost worthless, currency.
In desperation, some have splashed out on new cars (sales jumped by 47pc in April, as better a useful depreciating asset than nothing), those who can afford to have purchased property abroad and savers of more limited means have reverted to stashing the odd €500 note under their mattresses. Greek bank deposits have slumped to just €139.4bn in April, compared with €145bn in March, their lowest level since 2004.
Many companies and organisations are forced to keep some money in the bank to meet payments and to pay staff; but multinationals are doing their uttermost to keep this to the bare minimum. Greece’s increasingly desperate attempts to find alternative sources of cash to allow it to keep the show on the road for a little longer will end up isolating it geopolitically. As my colleague Ambrose Evans-Pritchard has reported, Panagiotis Lafanzanis, the energy minister, has secured a deal with Russia’s Gazprom to build part of a new gas pipeline through Greece, with Russia offering up to €2bn in up-front credit as part of the transaction. Greece should be entitled to play that geopolitical game, of course, and to continue to build closer ties with the Brics bank. But the West should cut off the funds: there is a time when all countries need to make a choice, and then to face up to the consequences of their actions.
The lonely voices that opposed the creation of the euro in the 1990s have been all too spectacularly vindicated. Economists such as Martin Feldstein and Milton Friedman rightly predicted that the single currency would fuel vicious intra-EU tensions. They knew that the eurozone wasn’t an optimal currency zone: labour markets would never be sufficiently flexible to absorb economic shocks, and cultural barriers would prevent enough workers from troubled countries finding work in the more successful nations. The only answer would have been to create a massive, pan-European welfare state, with huge amounts of cash taken from rich countries and given to poor ones. Such a solution, had it been feasible, would have created a massive dependency culture – but it was never politically possible in the first place. The eurozone isn’t a real country: there is no single demos, no single people, and therefore no support for fiscal integration.
The way forward for Greece is fraught with difficulties. But, while leaving the single currency would be a massive gamble, it is one Greece must now take.