Why Greece should abandon the Euro and maybe even walk away from the EU This note is the product of the recycling of a note I wrote last year (but did not publish) and a number of more recent observations on the subject. About a year ago (Sept 2014) I attended a panel discussion entitled “What next for the Euro”, which reinforced a number of previously held beliefs: (a) that countries like Greece (and other PIIGS) should abandon the Euro and maybe even walk away from the EU (despite the shortterm pain) and (b) that if one wants to know whether and when the EU might break up, perhaps one should pay more attention to developments in cities like Athens, Nicosia, Lisbon and maybe even Madrid and Rome, instead of what happens in London, Paris or Frankfurt. The panellists were mostly former heavy-hitters: Lord Lamont (former UK Chancellor of the Exchequer), Professor W. Nölling (former Bundesbank), Professor N. Thygesen (University of Copenhagen), Vicky Pryce (former joint-Head of UK Government Economic Affairs) and Roger Bootle (former Chief Economists at HSBC). So I was looking forward to some behind-thescenes insights and lofty wisdom. By way of context, it is worth remembering that at the time, the Greek saga was much more in vogue than it is these days. Although the panellists were all well informed and the quality of the debate was of a high standard, the discussion suffered from the fact that only one of the discussants was in the «pro» camp, while the rest bore varying levels of hostility towards “The Project”, as it was called. During the discussion, much was made of the fact that the Greek economy and its society were crushed; that youth unemployment had reached up to 50% in countries like Spain and Greece; that the debt levels of the worst offenders had reached up to 175% of GDP, while even more fiscally prudent countries like Ireland and Portugal had seen their debt levels increase three-fold in the previous 15 years. We also heard sympathetic concern expressed about the poor people of Cyprus, whose bank bailout had effectively forced them to trade default for depression. We heard much more but in summary, the shared view seemed to go something like this: The Project was ill-conceived and had clearly failed to deliver on the promises that were originally made by the architects of the Union, to the people of Europe; that this was clear from the empirical evidence (i.e. dreadful current economic conditions and outlooks; debt burdens; the gap between north and south, which had widened instead of narrowing etc.)… and worse still, that the EU was then drifting towards an undemocratic union. Therefore, the more hawkish members of the panel suggested that the whole thing should just come to an end. As I was listening to the discussion, I began to wonder… if the whole thing had been such an epic failure (as it seemed patently clear)… then why persevere? If the wealthier and more powerful countries of the EU were so unhappy with the southerners’ mistakes and misdemeanours… then why force them to stay in, at whatever cost? (I was specifically thinking of the way in which Greece was coerced into not having a referendum back in 2011). Of course, one understood that the referendum had to be avoided at all costs… lest the Greeks
voted the «wrong way», which might have caused the unravelling of the Union itself. But if the whole thing had been such an epic failure anyway… why did it matter? Was it because of the fear of the unknown possible costs of a breakup? But then an unexpected question popped up in my head: Was it really that much of a failure? Yes… the Greeks (and other PIGGS) may have suffered untold economic turmoil and social hardships, but what if The Project was not about them anyway? When we think about the Eurozone and ask ourselves what might have inspired the original architects of the Union, we instinctively clump together all the citizens of Europe. This may be natural, but is it realistic? I looked at the EU website, from which I read that the aim of the Union was to end “the frequent and bloody wars between neighbours, which culminated in the Second World War” and also, that it was about making “the countries of Europe” stronger and more able to compete in the more difficult global economic environment. So it does seem, as if the original architects of the Union did indeed have all of Europe in mind... But I do not buy this romantic depiction of a fraternal spirit imbuing the original architects of the Union, perhaps I have read too much European history. I would like to digress for a moment. I recently read a comment from a LinkedIn contact (who I imagine to be in the «pro» camp) who basically questioned whether one should conclude that the EU had been a failure, when in the context of history the EU and the Euro had only been going for a relatively short period of time. To give context, he pointed out that when Italy begun to debate whether to abandon the Lira in the 90s, there was still an ongoing debate about whether Italian unification had been a success; and he pointed out that this union had been some 150 years in the make! So he posited that perhaps it was too soon to conclude anything concerning the Euro and the European Union… I have a problem with someone suggesting that we should wait 150 years or more, before being able to… even consider, whether the EU and the Euro have been a success. But the reference to Italian unification did tickle my interest. As I looked into it, I was astonished at how many broad similarities there are between Italian unification and the current EU efforts. At a basic level, both unions are about an economically powerful north merging with a much weaker south; about a north whose economy is much more industrial and a south whose economy is much more agricultural; and there are also some similarities in terms of broad cultural and societal differences between the north and the south. If anything… one of the main differences between the two unification efforts (apart from scale of course) might be that there were stronger cultural reasons for … the Italian, effort to succeed. Therefore, could Italian unification, with its long trajectory, provide any useful lessons to those of us pondering about the EU and the Euro? Standard economic theory used to justify the Euro suggested that various channels would help narrow the gap between the rich northerners and the poor southerners: trade unencumbered by borders or exchange rates; capital and workers (protected by strong and common social laws) moving across countries etc.; we know the script. But the Italian unification experience seems to suggest that convergence between the rich and poor regions
will neither happen automatically nor can it be brought about by government policy. According to a recent article by The Economist magazine, “The country is, in effect, made up of two economies”. To quote just a couple of the statistics from the article: aggregate unemployment in Italy is 13.6% but in the south it stands at a staggering 21.7%. “The south accounts for just over 10% of Italy’s annual exports”, much of which just goes to other European countries anyway. The annual GDP per capita of Milan is 2½ times that of Naples (i.e. US$ 55k versus US$22k). To quote from an interesting paper on Italian unification by James Foreman-Peck from Cardiff Business School: “Despite internal free trade… income and productivity gaps between the north and south did not narrow after unification and may have widened”; “continued monetary independence would have meant a different monetary policy for the South”; “Even the north would have been better off with a different monetary policy but the north had more opportunities and its economy was more resilient”; “A monetarily independent south would have lacked the credit rating to pursue the irresponsible fiscal and monetary policy of the Piedmont-based kingdom”; “Prices would not have risen so much, the nominal exchange rate could have fallen in response to New World agricultural imports and, in conjunction with enlightened infrastructure policies, convergence with the north would have been encouraged” and finally “For the nineteenth century Italian south, the view that monetary union contains the seeds of its own discomfort is more appropriate than that the union can create the conditions for success”… sounds familiar? One could go on, but I believe you get the idea: even after 150 years of trying to unify Italy… the last 50 of which have seen a concerted political effort and hundreds of billions of Euros of aide, the Italian south–north divide remains wider than ever. This kind of historical precedent would not have gone unnoticed to the original architects of the European Union and yet they proceeded anyway… Why? We may never know for sure… but what if we change the above-mentioned sentence (taken from EU website) from “the countries of Europe” to “some countries of Europe”… thus making it read: the aim of the Union was about making “some countries of Europe” stronger and more able to compete in the more difficult global economic environment… Maybe the calamities which Greece and the other PIIGS have had to suffer do not render The Project a failure, because maybe it was never about them in the first place. Of course, this would go against everything we know about the EU, against everything we have been told… but since when polititians have told common folk what they are up, mostly behind closed doors; and particularly polititians whose kilt was cut from the cloth of the old Ancien Régime. Let us examine this possible alternative scenario. As the EU website tells us “The EU was created in the aftermath of the Second World War”. Until then, and without interruption for more than 500 years, the main countries of Europe had been the arbiters of global affairs. The “top-dog” tag was sometimes worn, particularly in the earlier days, by Austria or Spain… but most of the time, and particularly in the more recent history, it was worn by Germany, or by France, or by Great Britain. But basically, these European nations and coalitions of them, ruled the world unchallenged. But what else did the old European powers come to understand, as they looked over the ashes of old Europe in the
post-war era? Perhaps they understood that Europe’s time was passing… that perhaps, it had already passed. There was certainly a new “top-dog” in the playground (the United States) and a new burly pretender (the Soviet Union) against which none of the old European powers would be able to stand up to… alone. Of course, they might still be able to sit at the top-table for some time, because the new “top-dog” was their friend and therefore, they would be able to ride on the crest of his wave… but for how long? Far-sighted politicians, that the old architects of the Union were, they would have realised that even this favourable state of affairs was unlikely to last for ever. They would have known that a slow-rising but enormous China (politically aligned with Russia) would eventually demand (and get) a seat at the top table; and how long before countries like India (at the time, with a population 2½ times the size of Germany, France and Britain combined) or some others staked a claim too? This would be a problem because… having a seat at the top table allows one to ensure that the world pursues global agendas that are aligned with one’s own national interests. I believe that the architects of the Union would have seen the writing on the wall. They would have understood that, in the long run… we would not be able to sit at the top table; that we would slowly but surely drift into irrelevance, as slowly and as surely as the old Roman Empire did more than a thousand years ago; because in a world in which, size matters most, none of the European powers cuts the mustard. So the vision of a unified Europe begins to take shape, but in this vision… The Project is a race by the main powers to stay globally significant and more importantly, in this vision the smaller European countries may be there, just to make up the numbers. So now we have an EU that, albeit dysfunctional… can compete in size: on a GDP basis for example, we are bigger than the United States, twice the size of China and eight times the size of Russia; and on a population basis, we are 40% bigger than the United States and three times the size of Russia. So we can continue to demand a seat at the top table and thus, continue to play a key role in the shaping of world affairs. This helps us, for example, ensure that our multinational corporations can continue to grow and punch far above our weight. Take the example of China, which has an economy 3½ times bigger than the UK economy (on a GDP basis) and 20 times our population and yet, there are near as many British companies in the top 50 worldwide (Forbes) as there are Chinese companies; and in a world in which global markets, business and power (diplomatic and economic) go hand in hand… this is very important for Britain. Therefore, perhaps The Project has been a success after all; perhaps it has delivered on the promises that were made by the old architects of the Union… The point of all this is that, if this is the case… then, when it comes to thinking about a possible EU breakup, we should forget what happens in London, Paris or Frankfurt and pay more attention to what happens in Athens, Nicosia, Lisbon and even places like Madrid or Italy. Because I firmly believe that, no matter what they say, none of the major European powers will ever want to go it alone and risk losing a seat at top-table; because, in the new global world that we live in, we cannot compete alone.
For example (using World Bank data)… the UK economy (on a GDP basis) was three times the size of the Indian economy 15 years ago… but by 2008 it was only twice its size and by 2010 it was less than 30% bigger. How long will it be before India, with a population 20-times that of the UK, leaves its old colonial master far behind? This probably accounts for the way in which the British political establishment, from turban-wearing David Cameron down, has been courting India hard these last few years. Similar comparisons could be made with Brazil. The British economy was 5 times the size of the Latin American nation, when the EEC was created… but by the year 2000 it was only twice its size and by 2011 Brazil (with a population the size of Germany, France and Great Britain combined) officially caught up and in fact, became bigger than Great Britain (on a GDP basis). So I believe that one should ignore all the anti-EU rhetoric emanating from the main capitals of Europe, the traditional spats between French and British politicians, and even the talk about a British referendum… When it comes to it, I am sure the British will stay in “by hook or by crook”. Of course, there will be «firm demands», «hard bargaining», «sensible horse trading» and «hard-fought victories»... and many dramatic performances, which in the end will ensure that Brexit does not come to pass. Although northern countries bemoan the financial burden they have had to carry these last few years, surely the Greeks (and other poor folk in the PIIGS) have paid the higher price. Their economy has been crushed, unemployment levels have exploded, pensions have been wiped out, social benefits and services have disappeared… these and many other calamities have led to riots in the streets and to many folk just giving up on life, because of the sheer weight of their personal tragedies. We cannot even begin to imagine what it must be like and remember… all of it because of a Project which perhaps was never about them anyway. The dream (because to them the whole thing was sold with dream-like imagery) has become a nightmare, in which poor Greek folk seem destined to generations of increasing austerity; and the worst thing that could happen (to the Greeks), as we have already seen a number of times… is for the rich countries to make more «concessions» and organise more «aide», because this will keep grateful Greeks inside the club, but the quid-pro-quo will be more than a «pound of flesh». The above-mentioned paper by Foreman-Peck finishes: “What then are the lessons of the monetary union of the north and south of Italy?”…“Once a political structure has been created, questions of economic optimality, if they were ever considered, are likely to be buried by concerns to maintain the status quo, largely regardless of expense”. Mr. Nouriel Roubini said in a recent article that the Eurozone needed enlightened leaders to survive and that “fortunately, enlightened leaders in Berlin know that Germany’s future depends on a strong and more integrated Europe”. This might be good for the Germans, but is it good for the Greeks?
In the long run, the destruction of its economy and its social fibre will only continue. Her increasingly tighter (fiscal and monetary) straight-jacket and the lack of money for
investment, will ensure she is unable to compete with her wealthier partners within the EU in industrial, increasing return activities; while at the same time, unless and until she is willing to suffer a murderously impossible reduction in unit labour costs, she will also be unable to compete with emerging market countries in agricultural and other decreasing return activities. For example, according to a recent comparison I found, hourly compensation costs in Greece manufacturing fell from over US$22 in 2010 to just under US$19 by 2013. This compares to just under US$11 in Brazil, under US$7 in Mexico, about US$2.00 in China, and about US$1.50 in India. So Greece will continue to be squeezed and choked by these two inexorable forces, and she will continue to see helplessly… as the future prospects of most of her children become a simple choice: emigrate and look for better prospects abroad, or stay at home impoverished and dependent. So I believe that, despite the short-term pain she will have to bear, Greece (and perhaps other PIIGS) should abandon the Euro and maybe even walk away from the EU. When I wrote this note last year, I could not have predicted the spectacular rise of Syriza. But I did caution at the time about the resentment there (and in many other places across Europe) and the hostility even, towards the EU and the major European powers; that despite the high human cost, the political elites (whether on the centre-left or centre-right) continued to bet on membership of The Club, which would only come at the expense of yet more pain and suffering; but that if austerity continued or worsened, the rising tide of anger would be exploited by the more extreme, radical political parties (on the far-left and far-right)… thus threatening the political existence of established political parties (as they did in Greece and have also tried in Spain). Although recently Greece has been off the radar, I do not believe that we are out of the woods… worse may be yet to come; and we would do well to remember that, when it comes to survival, polititians rarely go with convictions, they go with the (political) flow. The political elites in smaller European countries do not have a stake in the top-table; theirs is purely a local game. So there may come a time when even mainstream and «pro» EU political parties in small (and less dependable) EU countries, turn sides to save their political skins; and this may be the spark that triggers an EU breakup.