A EURO EXIT IS THE ONLY WAY OUT FOR GREECE / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

A euro exit is the only way out for Greece

By Wilhelm Hankel, Wilhelm Nölling, Karl Albrecht Schachtschneider and Joachim Starbatty

Published: March 25 2010 22:34

Greece faces the threat of state bankruptcy. No longer is there any illusion that membership of Europe’s economic and monetary union provides protection from harsh realities. Since it entered the euro area in 2001, Greece has sacrificed competitiveness and amassed enormous trade deficits. Theoretically, to make up the economic ground lost in less than a decade, the Greeks would need to devalue by 40 per cent. But in a monetary union, that is impossible.
There is no shortage of proposals to help the Greeks, including assistance from other eurozone governments – a move that would contravene the “no bail-out” rule enshrined in the treaty setting up monetary union. There is, sadly, only one way to escape this vicious circle. The Greeks will have to leave the euro, recreate the drachma and re-enter the still-existing exchange rate mechanism of the European Monetary System, the so-called ERM-II, which they departed in 2001.

We do not make this statement lightly. As the four professors who took the German government to the German constitutional court in 1998 over Germany’s entry into the euro, we have a track record of straight-thinking and plain-speaking. In a landmark judgment in 1993, the constitutional court ruled that, once it came into force, monetary union had continuously to satisfy the full conditions of the “stabilisation treaty” concluded when the single currency was agreed. If it did not, the court ruled, Germany would be obliged to leave.

With this in mind, we would like to state clearly that, should eurozone governments provide assistance to Greece in a manner that contravenes the no bail-out rule, we would have no hesitation in lodging a new lawsuit at the constitutional court to enjoin Germany to depart from monetary union. In 1998, we took the government to court because we believed that some entrant countries had not sufficiently fulfilled the entry conditions and had, at least in part, manipulated statistics to secure membership.

In view of those conditions, and bearing in mind the 1993 judgment, in 1998 we called upon the court to prevent Germany from participating in monetary union. Then, our suit was rejected. Today, with the plight of the errant euro states and the statistical irregularities recognised by nearly everyone, we believe the outcome would be different.

It is reasonably clear that Greece has run out of options. The country has adopted an austerity programme of near-unprecedented severity, cutting government spending, raising taxes and depressing salaries. This programme completely ignores Keynes’ dictum that states must face crises with counter-measures to support demand. The Greek action is painfully reminiscent of Germany’s ill-fated moves to slash spending in the 1930s slump, which taught the world that cutting budgets to appease creditors in a downturn generates mass unemployment and radicalises society.

The European Union, too, has been discussing assistance, perhaps combined with a loan from the International Monetary Fund. The German government has put forward a suggestion that appears unworkable: a European Monetary Fund. Even if this were set up, it would come far too late to help the Greeks. It is in any case self-defeating. If the EMF ever saw the light of day, euro members in similar predicaments to Greece would slacken efforts to balance their books, because they would know the fund was there to help. Such an initiative would make monetary union a mechanism for throwing good money after bad.

So the Greeks have no way out but through the exit door. Restoring the drachma at a lower exchange rate would help exports and lift revenues from tourism. It would also send a message to other countries that they have to take serious steps to avoid landing in a similar predicament. Loss of confidence in Greek economics imperils all of Europe. Removing Greece from the euro provides a way of preventing a drama from becoming a tragedy – and of ensuring the survival of monetary union.

Wilhelm Hankel is emeritus professor of economics at the University of Frankfurt/Main; Wilhelm Nölling is professor of economics at the University of Hamburg; Karl Albrecht Schachtschneider is emeritus professor of law at the University of Erlangen-Nuernberg; Joachim Starbatty is ememeritus professor of economics at the University of Tuebingen

Copyright The Financial Times Limited 2010.