Orderly Greek Exit is Only Option for Europe

“It is extraordinary that the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse their interest,” wrote John Maynard Keynes in his polemical classic, The Economic Consequences of the Peace. Keynes was referring to “the big four”, the leaders of main allied powers that had defeated Kaiser Wilhelm’s Germany during World War One – including British Prime Minister David Lloyd George. A Treasury official at the negotiation of the 1919 Treaty of Versailles, a 36-year old Keynes then resigned in disgust, to rapidly write one of the most influential books of the 20th century.

The terms of the Treaty were far too harsh on Germany, Keynes argued. The leaders of America, Britain, France and Italy were imposing massive financial penalties to appease their compatriots, he said, that crushed Germany’s ability to recover. “Reparation was their main excursion into the economic field,” Keynes boomed, in a work that became an instant bestseller. “They settled it as a problem of theology, of politics, of electoral chicane, from every point of view except that of the economic future of the state whose destiny they were handling”.

These words were famously prophetic. The spiteful Versailles terms would renew Germany’s appetite for war, Keynes said, and that’s what happened. I’d say we can learn lessons from Keynes’ warning today – despite being almost hundred years on and with Germany in a somewhat different position.

Eurozone governments met in Brussels at the end of last week to examine Greece’s request to extend its €172bn financial rescue programme. Proposals tabled by Athens were quickly rejected, though, with Germany leading the charge. Berlin was determined Greece stick to the precise terms of its existing bail-out before be granted any “bridging finance”. The new Greek government, meanwhile, led by the radical-left Syriza party since last month’s dramatic election, pointed to its democratic mandate calling for softer bail-out conditions.

Negotiations are now stuck. Chancellor Angela Merkel knows her voters are sick of paying for a profligate Greek public sector that, in their eyes, provides more generous employment and pension conditions than its German equivalent. Prime Minister Tsiparas, on the other hand, is aware that unless the detested bail-out terms are modified, with government spending rising quickly, Greece will see more of the civic unrest that has periodically erupted since this protracted Eurozone crisis began in May 2010.

Athens will pay €17bn it owes creditors over the next 9 months, it says, while running a primary surplus, before interest payments, of 1.5pc of GDP in 2016 and 2017, rather than the 3pc and 4.5pc initially agreed. To do this, additional funding is needed, or due creditor payments mean Greece run out of cash as early as next month. That would spark default and a bank-run across the systemically-important state-owned Greek banks, with the country crashing out of the eurozone. Contagion would then spread, upending financial markets worldwide. That’s why Greek Finance Minister Yanis Varoufakis is now regularly on the phone to his US counterpart Jack Lew, providing updates.

“The Greek government is trying to agree bridge-financing without meeting the conditions of its existing rescue program,” the German Finance Minister pronounced on Thursday. This stone-faced press release appeared soon after a senior European Commission official said Syriza’s proposals were “a reasonable compromise”. The day before, Germany similarly rejected a preliminary agreement drafted by the European Finance Commissioner, Frenchman Pierre Moscovici, which Athens said it would sign. The document was ostensibly agreed by eurozone governments. But then, apparently, it wasn’t.

I maintain my long-standing position on this absurd Greek-German showdown that threatens to spark another “Minsky moment”, derail the global recovery and undermine the economic fortunes of several billion people. Germany will eventually blink because, for all the huffing-and-puffing, Germany has blinked during every previous euro crisis. Berlin has too much political capital invested in monetary union to allow “Grexit” – which could then see other “Club Med” countries leave, threatening not just the euro but the entire “European project”.

Having said that, while a deal will done, and “extend and pretend’ will work for a while, a Greek settlement won’t mark the end of eurozone’s woes, but merely the end of the beginning. Once Athens changes its bail-out terms, voters in other countries that also received assistance contingent on tough reforms, but saw those conditions through, will be furious.

Portugal, Spain and Ireland binged on cheap credit, suffered bank meltdowns and then, like Greece, endured the “austerity” linked to a bail-out. All three countries took the medicine and are now growing again, with economies approaching their pre-crisis size. In Greece, though, GDP remains 25pc below were it was in 2008, the country enduring a depression similar to that of America in the 1930s. But that’s not what bothers most voters in Portugal, Spain and Ireland. What they see, understandably, is double standards – and future incentives for eurozone members not to pay their way.

During 2015, elections are due in Italy – the real GDP of which remains 10pc down on 2008, in part due to being trapped in a high-currency straitjacket. Italy’s three main opposition parties are now all campaigning on a platform to leave the euro. Spain and Portugal will also hold elections this year – and, again, anti-euro parties look set to make significant gains.

Then there’s Germany’s Alternative Fur Deutschland, which just won seats in elections in Hamburg, the deeply-eurosceptic party’s first victories in a west German regional assembly following its recent successes in the east. Merkel’s conservative CDU, in contrast, registered its worst ever Hamburg result. For now, only the Greek government has a truly anti-Brussels mandate. Over the coming months, though, particularly if Athens is seen to be let of the hook, other disgruntled electorates will return governments that similarly want to push the limits of single currency membership, and maybe quit altogether.

The reality is that the euro is entirely incoherent. It’s impossible for a range of countries, each with its own electorate, to share a common currency unless fiscal resources are entirely pooled. That amounts to political union – which will never happen in Europe. That doesn’t stop the eurocrats trying of course, that army of self-important, unelected, overpaid and historically-illiterate bureaucrats whose entire careers are tied to “ever closer union”. So what if Greece rigged its own national accounts, having been given the nod by Brussels, to meet the conditions to join the eurozone? Who cares if Germany itself was the first member state to break the hallowed fiscal rules?

The best outcome of these negotiations would be for the two sides to agree to differ, acknowledge the single currency is a dangerous nonsense and make all efforts to secure for Greece, and whichever other countries want it, the closest we can get to an “orderly exit”. Political vanity prevents that happening, but doesn’t make it wrong.

The euro will eventually break-up. But, before it does, we’ll see a lot more democratic transgressions as big countries, aided by the Brussels machine, impose their will on smaller neighbours.

“If we aim deliberately at impoverishment, vengeance, I dare predict … will not limp,” Keynes wrote in 1919. “But who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?”

I’m not predicting war in Western Europe. But I am saying the eurozone will generate ever-rising tensions and spiraling financial instability until it finally implodes or is deliberately dismantled. Some of us predicted that years ago – and now it is coming to pass.


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