Would it matter to the world - or Europe - if Greece left the euro?

For those of us who know and love Greece, the human side matters more

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The Independent Online

It is, we are told, crunch time today. The finance ministers of the eurozone meet to see whether a deal can be thrashed out with Greece. The aim will be to ease its debt obligations sufficiently for the new Greek government to sell the deal to an angry electorate, but retain sufficient discipline on the country to satisfy its creditors in the rest of the eurozone.

It is presented in pretty stark terms. Obviously, there can be face-saving tweaks for Greece, and there is a good intellectual case for finding ways of easing the debt burden. The present programme has not exactly been a wild success, crushing the country’s GDP down from $340bn in 2009 to $240bn last year and leaving more than a quarter of the workforce unemployed. But being a member of a single-currency zone imposes obligations, a loss of sovereignty in fact, and the other members of that zone (interestingly including one other bail-out state, Portugal) have the right to insist on Greece meeting those obligations.

So either there is a deal, if not today, then within a matter of weeks, or Greece formally defaults on its debts and may be forced out of the euro. This, we are told by just about everyone including our own Chancellor, would be a disaster. That is the conventional view and it is fine as far as it goes. But it does beg two questions. One is whether even notionally successful negotiations would restore prosperity to Greece. The other is would it matter to the world – and Europe – if Greece were no longer part of the euro.

On the first question, you have to ask what growth rate Greece might attain in the next 10 or so years. There are various projections in the bail-out calculations but a realistic forecast would at most average 2.5 per cent through to 2025. That would be nearly double the rate of growth expected for the eurozone as a whole. If that were to happen, then by the middle 2020s Greece would be back to the level of wealth it was at in the middle 2000s. The country would not have had a lost decade; it would have two lost decades. If that would be considered success, what would be failure?

Now take the second question, the impact of deadlock in the negotiations. A lot would depend on quite how these broke down, but assuming it was really messy how would that affect the rest of us?

The important thing to be clear about is orders of magnitude. Greece’s GDP is roughly 0.3 per cent of that of the world – $250bn out of $75,000bn. As Jim O’Neill, former head of economics at Goldman Sachs, calculated, China creates an economy the size of Greece every three months. The performance of the eurozone as a whole does matter, but to be brutal, that of Greece does not – or more precisely, it matters in human and political terms but not in economic ones. 

That applies to Greece’s relationship with Europe. It is a bit over 2 per cent of the eurozone economy. In a good year, which it has not had for a while, the eurozone would grow another Greece. So what matters, and remember this is in purely economic terms, is whether the eurozone at last has a good year, not whether Greece has another bad one.

As far as the eurozone is concerned, there are welcome signs of uplift. They are quite muted, but you always sense recovery in individual items of data, such as a slight recovery in car sales, or a stabilisation in house prices, rather than official GDP figures. The fall in the oil price will add somewhere between 0.25 per cent and 0.5 per cent to real growth this year. That may sound small, but actually it is massive because it applies over such a large area. Moreover this modest upturn seems to be happening before the quantitative easing programme of the European Central Bank gets going, so there will be some further push there.

Seen in this context the negotiations about Greece are a distraction. It is huge political issue, while for all of us who know Greece and love the country, the human side perhaps matters even more. But I suggest that we should all question the orthodox view that it would be a disaster were the talks to fail. It would be a shock, to be sure, but it might also prove to be just the wake-up call the eurozone needs to shake it from its torpor.

And Greece itself? Well, were it to leave the euro there would be a wall of money waiting to come into the country. Were the new government to create a benign climate for such inward investment, which would include protecting property rights, Greece could experience something of the boom that the later accession countries in central and eastern Europe have enjoyed. Remember that Poland was the only country in the EU to avoid recession in the recent downturn.

There lies the endless fascination of economics. What looks at first sight a disaster so often turns out to be a triumph, sterling’s ejection from the ERM being a prime example. And what looks a triumph turns out to be a disaster. I guess Greece’s acceptance into the eurozone, notwith- standing the adverse maths, counts as that.

India takes baton from China in race to top

India is growing faster than China, indeed is the fastest-growing country in the G20. This may come as small comfort to Narendra Modi, for his BJP party has lost spectacularly in the Delhi state elections to the Aam Aadmi Party, which fought on an anti-corruption ticket. We will have to see quite what this means for Indian politics, and it may turn out to be helpful. But it coincides with clear evidence of the economic success that Modi was elected to deliver.

In the final quarter of 2014 India grew at an annual rate of 7.5 per cent, while China grew at 7.4 per cent. This is not only an India/China story, though that is where it starts. It is about rebalancing growth within the emerging world. For the past 20 years, China has been the frontrunner, delivering a stunning performance, lifting hundreds of millions of people out of poverty, but also hitting barriers to growth, including pollution and degradation of land.

Now, China will inevitably grow more slowly. Its population is ageing and as the one-child policy kicks in, its population will shrink. By contrast Indian growth is likely to steam on, driven partly by demography but also by what is described as catch-up. India is doing the various things it has to do – invest in infrastructure, improve education, cut bureaucracy – to narrow the wealth gap between it and the developed world.

As other emerging economies pick up pace, expect the Chinese to be overtaken in growth, though not in overall size, by countries such as Nigeria and Indonesia, both with increasing populations. It will become the world’s largest economy, but the baton of growth has been passed to other faster runners, with India at the head of that pack.