Hamish McRae: Eventually Greece will have no choice but to leave the eurozone


Hamish McRae
Thursday 20 October 2011 00:00

The Greek strikers have a point. If anyone – a person, a company or a country – cannot repay its debts it is better to acknowledge the truth, work out what can be paid and accept a loss as part of the reconstruction package.

The first Greek rescue assumed that debts could be repaid in full. When it became clear that this would be impossible, the second rescue plan – still to be implemented – provided for a 20 per cent write-down of much of the debt. Now it is clear this is not achievable and so a write-down of the debt to something like half its face value seems inevitable.

That would cut the stock of Greek debt from some 180 per cent of GDP to perhaps 90 per cent, high by European and international standards but maybe sustainable. Greece, however, has three other problems aside from the scale of its sovereign debts. These are the size of the budget deficit, poor prospects for growth, and weak tax-collection and public administration.

The budget deficit last year was more than 10 per cent of GDP; this year it may have come down a little but is still likely to be more than 9 per cent of GDP. At this rate of progress, even with a halving of the existing stock of debt, Greece would be back above 100 per cent of GDP. In any case no one is prepared to lend it the money at an acceptable rate. But even tighter fiscal measures – tax increases and spending cuts – would be likely to damage prospects for economic growth.

Already there is no growth. Normally a country finding itself in this position would depreciate its currency. That is the classic policy: a weaker currency would make exports cheaper and imports more expensive, thereby increasing demand for home-produced goods. Tourism responds quickly to currency changes: people would take their holidays in Greece rather than, say, Italy or Spain. But this cannot happen while Greece remains in the euro, leading to speculation that eventually the country will have no option but to leave the eurozone. The final issue is poor public administration. There has been widespread tax avoidance and evasion. The latest plan to collect a one-off property levy has been to impose it on electricity bills, on the basis that people have to pay for electricity. It remains to be seen whether this will work. Nor has the country been effective at cutting bureaucratic costs.

There will surely be another rescue package for Greece in the next few weeks. Whether it will be sustainable in both economic and political terms is another matter.

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