Greece’s exit from the eurozone: a poisoned chalice

In times like these not making a big mistake is half a battle won.
Dionyssis G. Dimitrakopoulos
28 June 2011

What unites the right-wing current Mayor of London, the Guardian’s economics editor and a London-based Marxist professor of economics? One correct answer is their vehement support for Greece’s exit from the eurozone. Johnson even calls it, “the greatest gift to the Greeks”.  However, what is remarkable is the fact that they are much less vocal about the implications of this move for the people they purport to care for, i.e. the inhabitants of Greece.

Let us – for a moment – ignore the financial and economic implications (be they primary or not) of this move for other countries. Let us also ignore the political implications of this move for Greece. Instead, let us focus exclusively on its economic implications for the Greek people.  One does not need to be an economist to realise that the picture in Greece would be one of the devastation and untold pain.

If Greece does leave the eurozone, its new currency will be significantly weaker - as well as cheaper - than the euro. This will lead directly to dramatic increases in the price of all imported goods. Crucial amongst these will be energy because Greece imports nearly two thirds of the energy that it uses, according to the World Bank. This will have two sets of consequences. On the one hand, it will lead to dramatic cuts in services such as transport where approximately 39 per cent of energy was consumed, according to 2004 figures. On the other had, crucially, it would also significantly reduce the benefits of having a cheaper currency for any remaining domestic industries capable of exporting their goods.

In addition, given that large amounts of Greek bonds are held by Greek banks (and pension funds), the Greek banking system would need to be effectively nationalized – this in a country where the public sector is notoriously inefficient (to put it mildly). Also, the default and exit from the eurozone would effectively freeze the country out of international money markets at a time when Greece still has a large primary deficit. As a result, Greece would either have to cut public spending (and thus boost unemployment) or pay punitive interest rates of 12 per cent according to one economist - assuming it were able to find willing lenders. Alternatively, it would have to create (i.e. print) money to pay salaries or unemployment benefits (or both) but this – when coupled with significant increases in the cost of imports – would create powerful inflationary pressures. Moreover, the exit from the euro would not resolve a key problem, namely the inability of the state to collect taxes to the extent that other European states do. Exit from the eurozone would also mean that Greek politicians would be in charge of the Greek economy. For many Greeks, this would be tantamount to trusting the wolf to look after the (if truth be told, not so innocent) sheep.

This, then, is both a rather clear picture of what Professor Lapavitsas calls – with studied understatement - “a major blow to the economy” and a scenario that Greeks themselves reject. Indeed, according to recent opinion data, 58 per cent of Greeks have a positive view of the euro and 66 per cent (including more than half of those who are unemployed) expect things to become worse if the drachma returned.

All of this does not mean that the current course of action pursued by the Greek government and the leaders of the main members of the eurozone is fit, optimal, or effective. Quite the opposite is true but this is not a reason why Greece should leave the eurozone. Several proposals aiming to (a) help Greece reduce its debt burden and then recover – whilst remaining in the eurozone – and (b) fix the design faults of EMU have been put forward. Crucially, many of them come from the country that matters most – Germany – where left-of-centre parties, leading politicians and public intellectuals have been castigating the stance of the Merkel-led government whilst supporting the pursuit of further political integration as a way of resolving what – as Helmut Schmidt rightly argued - is ultimately, not a currency crisis, but a crisis of the EU’s capacity to act. Even important market players too see it that way.

Just like the euro itself, support for Greece’s exit from the eurozone is part of a political project: for some the EU should be no more than a free market area whereas for others it is little more than a capitalist plot. That in a period of acute crisis the Greeks themselves and the vast majority of Greek political parties are against Greece’s exit from the eurozone is a positive, yet insufficient step in the right direction. In times like these not making a big mistake is half a battle won.

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