Published in The Australian (Sydney), 11 November 2011
With the dramatic spike in Italian bond yields, the euro crisis has reached the stage everyone always wanted to avoid. Contagion has spread from Greece via Ireland and Portugal to Europe’s third largest economy, Italy.
It is blatantly obvious all attempts to solve the crisis, or maybe just to contain it, have failed. It is equally clear that the medicines prescribed to Greece have caused more harm than good. After two years in intensive care, the Greek patient is sicker than ever. Greece’s economy is collapsing, unemployment is rising and capital flight out of the country is in full swing.
Europe’s crisis management has been an utter disaster and no sanctimonious gloss from European “leaders” (the term is used here very loosely) can distract from the fact the eurozone in its present form cannot work and will not survive. It is high time to draw the unavoidable conclusion from this analysis: Greece’s place is not in the eurozone. It should exit and introduce a new drachma.
European politicians, particularly in Germany, have long been kidding themselves about the nature of the crisis. German Chancellor Angela Merkel still insists the continent is not facing a monetary crisis but only a debt crisis in some countries on the fringes of Europe. She could not be more wrong. If Greece were only indebted, its problems would be easy to solve by transfer payments from richer European countries combined with budget consolidation in Greece through spending cuts and tax increases. Well, actually, tax collection would be a good start.
Unfortunately, this is only a part of Greece’s problems. What is far more damaging is that it is a low-productivity economy in the corset of a hard currency. Greece is not competitive enough to justify its high price level. This leaves it unable to export its goods and services, while constantly consuming more than it produces. With the euro as its currency, Greece cannot compete with its neighbours.
To illustrate the problem, consider the tourism industry. With historical sites and good weather almost all year round, Greece would be the perfect holiday destination for northern European tourists. But for a week at a five star-hotel on the Greek island of Santorini you should calculate on spending about €1300. The same holiday on the Turkish Riviera or in Croatia would set you back only about €700 for bed and breakfast.
Tourism, incidentally, is one of Greece’s biggest industries, accounting for 18 per cent of gross domestic product and holding up relatively well despite everything. Beyond this, however, Greece has little to offer in terms of a productive economy. Out of the 10 largest Greek companies, five are (struggling) banks. It is telling that the local Coca-Cola bottler is Greece’s fifth largest company. It is equally striking that agriculture’s share of Greek GDP is 12 per cent, when the European Union average is just above 2 per cent.
That Greece manipulated its way into the eurozone with forged debt statistics was bad enough. But even if it had had sound public finances it should have never been admitted because its economic structure was too different from that of the stronger euro countries. To condemn it to live under a high German exchange rate while allowing it to benefit from low German interest rates was always a recipe for disaster.
It was a mistake to make Greece a part of the eurozone. Even French President Nicolas Sarkozy has admitted this. But it is an even greater mistake to keep Greece where it is. By preventing a Greek exit from monetary union, the country would be condemned to decades of economic stagnation. It would also remain dependent on external funding.
For two years, European politicians have argued Greece needed to remain part of the eurozone to prevent the crisis from spreading to other countries. It is exactly the other way around: by ruling out the only possible way of putting the Greek economy on a path to recovery, they have allowed the Greek crisis to fester and spiral out of control. To be clear, a Greek eurozone departure would be painful for everyone involved. Banks across Europe would need to be recapitalised; the appreciating euro would hurt German exports; the transition period might create great uncertainty. But politicians have only themselves to blame that, after two years of bungling crisis management, there are only bad and worse options left. Cutting off Greece from the euro should have happened in March last year, and it would have saved hundreds of billions of euros.
The choice left to Europe’s economically illiterate politicians is this: will they finally admit the euro cannot work for Greece (and other periphery countries)? Or will they realise it only after burning another few hundred billion?