GREECE HAS NO FUTURE WITHIN THE EUROZONE / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

July 4, 2011 3:37 pm

Greece has no future within the eurozone

By Sir Martin Jacomb

The Greek parliament has voted, but the crisis goes on. The European Union’s current policy has been driven by the political imperatives of preserving the euro and avoiding another banking crisis – but it will not yield an enduring solution. The EU’s future depends on enabling its poorest member countries to regain their competitiveness – and this requires a very different approach.


Everyone knows that lending more money to someone who is already heavily indebted, and has few realisable assets and woefully inadequate income or earning power, creates problems. Putting the repayment date off for 30 years simply ensures that no one in authority today will be around when the time comes.


Moreover, it is plain that a large part of the new lending to Greece, which obviously cannot possibly be repaid by Greece, is in substance going to repay Greece’s existing creditors. New official lending is public (taxpayers’) money, and it is going to bail out Greece’s creditors; in particular banks with exposure not yet written down. There is certainly a need to prevent another crisis. Hence the motive for the proposed “rescue”: to prevent banks, including the European Central Bank, being hit by losses large enough to be embarrassing.


So the process of putting off the evil day is likely to continue. Anyone still holding or buying Greek government debt is relying on this; and there are indeed some people buying because the discount on Greek bonds is now so large that the price has almost arrived at a market clearing level and may be thought worth a speculative bet for those who believe the policy of postponing default will continue.


This policy is firmly entrenched, thanks to eurozone leaders’ focus on preserving the single currency and avoiding further turmoil in the banking system. But unfortunately, it will not be sufficient.


Economic distress in Europe’s periphery is real and will continue. The worst manifestation of this is unemployment, particularly among young people, inevitably bringing with it misery and the danger of unrest. This is the human cost of bad policy governing the management of the euro, combined with bad lending. This seems to have been forgotten or pushed to one side.


Greece cannot earn its way out of this mess. Its adoption of the euro made it uncompetitive and, so long as the euro remains its currency, this state of affairs will go on.


This outcome was predictable – and was predicted as inevitable by some of us a dozen years ago when the euro was first introduced. These warnings were ignored. The euro gave the peripheral countries a standard of living above their earning power and, at the same time, took away their ability to correct this by devaluation.


It is the same process which led to the permanent impoverishment of southern Italy, when the lira became the national currency after Italy was united under the Risorgimento 150 years ago.


At the turn of the 19th century Naples was the largest city in Italy and the region was relatively sophisticated. But its economy declined relative to the north. Although it had started to build railways in the 1830s, before any other part of Italy, the effort was soon discontinued. Moreover, railways were unable to reach the length of the country because Pope Gregory XVI forbade their construction in the Papal States. He called them “chemins d’enfer”.


The economies of north and south thus became progressively divergent. Southern Italy’s economic decline continued but, with the introduction of the lira, it lost its ability to correct its uncompetitive position. Able and enterprising people moved to the north or emigrated, and the situation became permanent, as it remains today. This tragedy endures.


Those in charge of eurozone governments and the ECB are trying to avoid disruption to the banking system; an important objective. But it is, at the very least, equally important to focus on how the poorer countries can regain their ability to become competitive once more. This is vital for the success of the EU as a whole – including the UK. Since half our foreign earnings come from trade, visible and invisible, with the rest of the EU, the success of the eurozone economy is vital to the UK. This is no time for schadenfreude.


Regaining competitiveness is bound (as it always does) to involve a temporary reduction of labour costs and living standards and, in practice, the only way this can be done with relative harmony is through devaluation. We ourselves in the UK have been reminded of this very recently. As our own currency has depreciated over the recent past, we have regained competitiveness.


Accordingly, unattractive, expensive and messy though this is, dismantling the euro is the least woeful course of action. Otherwise social as well as economic trouble lies ahead and the economic future of the EU itself will be threatened.


The writer is chairman of Share plc and former chancellor of the University of Buckingham

Copyright The Financial Times Limited 2011