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Five years on, Greece is still stuck in the muddle with EU

All sides lack political courage to break the deadlock, writes Colm McCarthy

Published 07/04/2015

Negotiations: Greek Finance Minister Yanis Varoufakis
Negotiations: Greek Finance Minister Yanis Varoufakis

When a piece of equipment fails, the options are to fix it, scrap it, or patch it up with half-measures. The eurozone is clearly not working, and the strategy is to devise one temporary fix after another.

Europe's political leaders have spent 10 weeks wrestling with the Greek crisis, five years after it erupted in 2010. There is no sign of a resolution, and the period since Syriza's victory on January 25 has been wasted on a dialogue of the deaf, interspersed with leaks and counter-leaks. No path to a recovery has been set, and both the EU and Greek leaders appear content with blame-games.

The eurozone was meant to be forever, and for every country that joined. It has instead been revealed as premature, poorly designed, poorly managed, a burden on economic recovery and a fruitful source of new divisions. There is evidence of this dysfunction in the eurozone's airy self-description ("Economic and Monetary Union"). Bits do not fall off in a proper monetary union.

Europe has achieved a substantial degree of economic integration. There is free trade and free movement of labour. Until the euro crisis came along, there was also free movement of capital. This has been suspended for two years now in Cyprus and capital controls are being touted as a part of the 'solution' for Greece. The notion that the fruits of monetary union include the suspension of capital mobility would be funny if the stakes were not so high.

The eurozone is not a monetary union. It is just a common currency area. This matters because of the shape a Greek exit from the euro could take. Deposits in Greek banks account for most of the money supply in that country. If convertibility is suspended - prohibiting payments abroad, as was done in Cyprus - a euro in a Greek bank ceases to be equivalent to a euro outside Greece.

Thus, Greece could end up with a new currency (the Greek euro) in advance of the government printing notes. Some commentators think this is what will happen. The public thinks so too: there have been large outflows from Greek banks, with funds transferred abroad or into cash.

This is a key distinction between a monetary union and a common currency area. In a full union, such as the US, the location of solvent banks does not matter. Nobody fears that California will be leaving the dollar zone.

Creating a common currency for Europe in advance of closer political union, including a banking union, was a gamble, and the gamble has failed. The Greek government could run out of cash in a matter of days, barring another temporary fix. Even if a deal is done, Greece's place will be uncertain. Eurozone leaders have been dropping hints that there are firewalls in place to prevent problems in other countries if Greece is ejected. In effect, they are saying that the impermanence of the zone's membership is seen as a valuable new design feature.

Official interest rates in the eurozone are at all-time lows and the ECB has commenced purchases of government debt. This makes it feasible for heavily indebted governments to fund their deficits at low cost. But nobody thinks this sticking plaster solution will work forever. A natural development would be for interest rates to move back to a margin above the rate of inflation.

The preferred policy is to pretend that the inherent weaknesses in the eurozone have been addressed and to muddle through. This policy could work, at least for a while, in the sense of keeping the show on the road. But the weaker members will be at permanent risk of low growth, high unemployment and persistent budget deficits, and there will be more rows over adherence to budget rules. If the next country to elect a non-cooperative government is a large state, the experiment could come to a catastrophic end. Ditching Greece might be survivable, but the euro will not last long if a large country questions its own place.

That risk is magnified if Greece is thrown to the wolves. If Greece goes, membership itself, and not just the terms of membership, ceases to be guaranteed. If one of the 17 surviving members gets into trouble, the outflows from the banking system will be enormous. But the problem is not Greece, it is the attempt to have a monetary union without making the political decisions.

A less accident-prone system with a full banking union could have been implemented in 1999 when the euro was introduced. The on-the-hoof reforms introduced since the crisis broke do not add up to a durable re-design. It could still be done but change has been resisted, principally by Germany, and the political will to pool sovereignty has diminished. The polar alternative is to admit that a proper monetary union cannot now be constructed and to plot a return to national currencies. But this would be disruptive and would require even more political courage. Muddle through it is then.

Belfast Telegraph

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