Greece: bad news whatever happens
IT was cruel but brutally effective. In 1487, John Morton, the Lord Chancellor, devised a new way of collecting taxes. If he spotted somebody who was living in luxury, he assumed he had enough wealth to spare some for his King, Henry VII, and hit him with higher taxes. If he encountered somebody living modestly, he assumed that he was a prudent individual quietly building up vast savings, and also hit him with higher taxes. We face a similarly depressing Morton’s Fork with Greece: whatever we do, whether we bail it out or not, we will be hit. Those who support bailouts claim that the taxpayer needs to shell out to avoid contagion, a collapse of the Eurozone house of cards and a massive recession. They are broadly right about the consequences – but what they fail to see is that we will end up with a variant of this doomsday scenario whatever we do. Chucking billions at the problem won’t make it go away.
Greece’s net government debt is 140 per cent of GDP. As Lombard Street Research points out, under any likely cost of borrowing its interest payments will be well over 10 per cent of GDP. To achieve the 3 per cent deficit limit laughably set down in the Maastricht Treaty – yes, there was a time when naïve City folk actually thought such constitutional limits on borrowing meant something – would involve extreme belt-tightening. Excluding interest payments, the Greek government would have to run a surplus of 7-10 per cent of GDP, against a deficit of 4-5 per cent last year, also excluding interest. To believe Greece – and its ever shrinking economy – will ever bring its deficit back under enough control to meet debt payments is to accept Alice in Wonderland economics. It is completely, utterly impossible.
The choice is not between handouts or a default. The real options are either a massive, uncontrolled default today, triggering contagion and panic; or a managed, organised massive default involving some temporary assistance and a proper plan to show how other countries will be dealt with; or an even larger default in the future, together with social unrest from a population that rejects economic reality. Option two will be tough to pull off, may still trigger contagion, could end up costing UK taxpayers but it is the least bad one. Bailouts with no real strings attached will only buy time and eventually lead to the disastrous option three.
It gets worse. For Greece to become viable again, it needs to slash its unit labour costs by at least a third. The efficient way of doing so would be to cut wages – or at least allow them to stagnate for a decade, implying zero growth in consumer spending, as happened in Germany. Athens’ establishment will never deliver such a policy so Greece needs to quit the euro, devalue, adopt a new currency and deregulate and open its economy.
The EU and IMF need to find a way to manage its bankruptcy and withdrawal from the euro in an orderly fashion – a tough task which will take months of work if we are to have a chance of avoiding an Argentinean-style implosion, hyperinflation in Greece and chaos around Europe. There is no good solution, just a range of more or less bad ones. The UK government’s job is to try and minimise the contagion, reduce the hit to the UK economy and limit the cost to taxpayers. It will be a thankless task but one which it must focus on urgently.
allister.heath@cityam.com
Follow me on Twitter: @allisterheath