Greece should go: A carefully managed exit from the eurozone is, at this point, the least worst option for the Greeks


Tuesday 07 July 2015 10:43

We have reached the point when it would be much better for all concerned to end the madness and negotiate an orderly exit for Greece from the European single currency. Like marriages and commercial partnerships, what seemed a good idea at the time sadly sometimes turns out to be a contract made in hell. In those circumstances the best answer is to accept reality and move on.

In the case of Greece, it is difficult to avoid the conclusion that at least one of the parties – the Syriza government – has been guilty of unreasonable behaviour. Negotiating a deal with European partners and then recommending in a surprise referendum that the deal be rejected destroyed trust. As in a marriage, things are difficult to repair in such an atmosphere. To extend the analogy, the Greeks have been abusing the joint current account they hold with 18 other nations for some years now, and the others’ patience has run out – understandably. While we sympathise with the plight of the Greek people, their government is doing them no favours.

So the time has come for divorce. First comes the introduction of a new currency and supporting Greece as she becomes an ex-euro member, ironically, by offering more loans, probably from the IMF. Athens would be expected to convert all electronically held money – the bulk of it – overnight, at a rate of, say, one new drachma to one euro. The new drachma would then, presumably, be devalued successively, and the two currencies could operate side by side – but this time with the euro as a foreign currency and the new drachma an electronic currency only, until notes and coins are issued – the process for joining the euro run in reverse.

The great irony, of course, is that if the new drachma was hyper-inflated out of sight, then Greeks would choose to use euros as freely as they do now – except that they would be a “foreign” currency. A recent parallel might be Zimbabweans using US dollars when their currency became worthless. The currency reform in Argentina of 2001 also offers a precedent. Their adopted currency, the US dollar, could no longer be supported by Argentina’s economy. The Argentine peso was reintroduced and it and the dollar existed side by side for a time, albeit with the dollar swiftly rising in value. Overall, Argentinians lost perhaps three-quarters of the value of their savings when the dollar sign on their bank statements was replaced with a peso one. The nation rioted, but survived.

Greece’s vast euro-denominated debts would become foreign currency obligations, and even more unsustainable – as they would soon have to be paid in new drachmas. So an old-fashioned IMF-style remedy would be required – debt forgiveness and restructuring in return for tough economic reform. This is not simply a matter of “imposing austerity”. Indeed, it would be foolish to do so just when Greece is at its most vulnerable. What is needed, as it has been for decades, is some determination on the part of the Greek authorities to fix their public finances and their economy. Perhaps devaluation would encourage that – but, as the British and others have found in the past, it is not an automatic route to prosperity.

If the Greeks cannot agree a deal on their debts inside or outside the eurozone then they should face the consequence that they will never be able to borrow on international markets at anything like affordable rates. Sooner or later the harsh forces of economics will force the Greeks to live within their means. A deal with the IMF and the EU would be a lot less painful.

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