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Andrew Lilico

Andrew Lilico: Greek €uro membership - It's about time to put Frank Sinatra on the record player

Barring an extraordinary and improbable last-minute capitulation by the Germans, the Greeks are going to leave the euro, sooner rather than later. It's not impossible that they don't make it as far as the next Elections in June - the Greek authorities appear to believe that the bleed of deposits (which has been rapid over the past two years) has accelerated in recent days to around three times its previous fast pace. That will very quickly place the ECB in the position of deciding whether it wishes to continue to accept Greek government bonds as collateral for borrowing (despite the fact that the party most likely to win the next Election - SYRIZA - is committed to a moritorium on all debt repayments) or to pull the plug. Overnight reports indicate that the ECB is already restricting some forms of funding to some Greek banks.

But let's suppose the Greeks get to their election. And let's suppose there is a coalition led by the quasi-communist SYRIZA umbrella group (it isn't one party; it's a kind of coalition), as opinion polls suggest is likely. SYRIZA claims it doesn't want to actively leave the euro. It simply plans not to repay anything on any of the Greek government's loans, including in particular the loans it received from Germany, Britain, and others under the first bailout of May 2010, and Germany and others (including the IMF, but not Britain directly) in the second bailout of March 2012.

The first thing I'd like to remark about this is that the May 2010 loans transparently and explicitly violated the Lisbon Treaty, and for example the European Scrutiny Committee of the House of Commons has deemed them to be in violation of Article 125 of that Treaty (which forbids Member States from assuming responsibility for the debts of other Member States). They violated them so explicitly that in December 2010 an amendment to the Treaty was agreed (including by Britain) to try to change the Treaty so that these bailouts were indeed in (at least partial) compliance with it. Since the decision of Alistair Darling, the Treasury officials involved, and subsequently George Osborne and subsequent officials to violate a Treaty of which the UK was a signatory, and hence act in ways that were clearly against the law, will, if the Greeks default on their May 2010 bailout loans, result in a loss to UK taxpayers, I believe there is a case for pursuing personal malfeasance action against the officials and policymakers concerned. It cannot be acceptable for UK bureaucrats and ministers to act in clear defiance of the law, and then lose billions of pounds as a consequence of their nakedly illegal acts. That isn't just "one of those things". It is, in principle, actionable in much the same way as if the chief executive of your council acted clearly against the law and lost money by doing so. Ministers are not above the law, and are not entitled to defy Treaties, losing billions of pounds in the process, just because it seemed convenient to do so at the time.

Moving on, if SYRIZA refuses to pay back the loans Britain and others made to Greece, it will not automatically follow that Greece will thereby leave the euro. If the Greek government raises enough in tax, over the months following its debt moritorium, to cover its current outgoings (e.g. public sector salaries) and did not itself choose to leave the euro, it could in principle continue. There would, however, be two connected routes by which such a default would indeed be likely to result in euro exit.

First, as soon as the Greeks do not have enough tax revenue to cover their government spending (which would be likely to happen some time in the next few months, even if it resorted to desperate measures such as privatising assets to cover current bills), there will be no-one left to borrow from to cover the gap. Private sector bondholders were burnt in the March 2012 default. Official sector creditors (Britain, Germany, the IMF, etc) would be most unlikely to agree to send even more money to a country that had just declared a moritorium on repaying debts to them. No-one would lend Greece money at that point. So if it needed money, the only way it could get it would be to print it. And it could only print it if it had its own currency to print - i.e. if it left the euro.

Another mechanism could be that the ECB could start refusing to provide liquidity support to Greek banks. That might happen if, for example, the ECB decided that because Greece had declared a debt moritorium, Greek government bonds could not be regarded as sufficiently credit-worthy to be used as collateral for ECB loans. The withdrawal of ECB support would mean the collapse of the Greek banking system. If the government wanted to recapitalise the banks, it would have to print money to do so. Either way, once ECB support were withdrawn, Greece would no longer be a proper member of the euro anyway - it would, at most, be a "euro-ised" economy after the fashion of Montenegro. The creation of a new currency would follow immediately.

What are the implications for the UK of a euro exit? There are three key routes of "contagion", of which I believe the third is much the most important. The first is that if Greece exits the euro, that effectively imposes default on all Greek companies and individuals that have borrowed abroad. One route of contagion could be that there is a cascade of default - defaults by Greek companies on, say, French banks could lead to the collapse of French banks that had borrowed from British banks, so the British banks come under pressure in turn. There has been some wild talk of the "killer losses" from Greek default. I suspect this mechanism is wildly exaggerated, in particular because Greek euro exit will have been "priced in" to some extent for some time. Many people suggested that Greek default in March 2012 would induce collapse of the euro via this cascade-of-defaults route. It didn't. I don't believe a Greek euro exit would be all that much worse.

The second route of contagion discussed might be called "contagion by analogy". If Greece (and presumably Cyprus) leaves the euro, perhaps Portugal and Spain and Italy might? So Portuguese, Spanish and Italian depositors might withdraw deposits from their banks, destroying their banking sectors. I suspect that this route is, again, exaggerated in significance, not least because there has already, for some time, been a rapid bleed of deposits from some of these banking systems and it did not mean they left the euro.

The route I do believe is important is this. If Greece leaves the euro, and then six months later is growing at a reasonable pace (even if it from a very low base), whilst Portugal, Spain, etc are in recession, the voters of other weak Eurozone Members will place heavy pressure on their governments to leave in turn. The consequences would be disastrous. An Italian euro exit would entail an effective default by the Italian government and much of the business sector in Italy - a country with an economy comparable in size to the UK. The French banks are heavily exposed to Italy - even more so than Austria is to Hungary, or Portugal to Spain. Italian default could well mean French default. But even if it did not, the Italian route alone would be likely to result in the collapse of much of the Western banking sector. We should expect such a scenario of widespread and disorderly Eurozone breakup to result in GDP losses for the UK of 5-10 per cent - or around the same to twice as much as in the recession of 2009.

That places us in the rather ghoulish position of hoping that, if the Greeks exit the euro, matters go very badly for them - civil war, perhaps; social unrest following the collapse of the banks; food exported to pay for energy imports, leaving Greeks hungry (a la Romania in the 1970s). That is the invidious position we are likely shortly to face. Mercifully for us - though not for the Greeks - I suspect things in Greece will go very badly indeed. But in due course, from such a low base, they are eventually bound to see some kind of bounce. Will the voters of Portugal remember the grim times in Greece before things looked up, or will they just see the good new headlines and hope to copy? That remains to be seen.

This was avoidable. A Greek exit from the euro, and hence probably the EU, with their country led by communists into decades of new wilderness, would be the direct consequence of the bailouts. One of the worst things is that the communists are right. Like them, I have railed against the bailout strategy these four years. I am ungracious enough to declare: I told you so. How fans of the bailouts will excuse themselve to their consciences, I cannot say.


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