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The case for a Greek euro exit

 Greece would be better off defaulting and leaving the common currency area, FT analyst Wolfgang Munchau tells Kathimerini
Wolfgang Munchau, associate editor and European economic columnist at the Financial Times, seen in a file photo.

By Eurydice Bersi

Greece would be better off by defaulting on its debt and leaving the eurozone, Wolfgang Munchau, associate editor and European economic columnist at the Financial Times, said in a recent interview with Kathimerini on Sunday.

Munchau, an expert on the single-currency bloc, argues that the success of a eurozone exit would depend entirely on Greece's ability to achieve a very large, real devaluation.

“My expectation is that investors would return to Greece relatively soon after because they would consider the new equilibrium more sustainable than the old one,” he said.

You wrote: “‘he Greek economy is not in recession. Nor is it recovering. It has collapsed.” Investors who bought Greek bonds see things differently. How would you comment on that?

I don’t think investors see this differently. Investors took the view that a five-year Greek sovereign bond, due before the first tranches of the official sector credit, is a safe proposition, especially since it is under English law. It is not a statement on the Greek economy. That bond would only be in trouble if Greece were to leave the eurozone, an event these investors do not believe is likely to happen in the next five years.

Before the troika even came to Greece, you calculated that the program would not reduce Greek debt and that a haircut would be absolutely necessary. Four years later, as someone who closely follows the German debate on Greece, do you think there are any chances of an agreement for a meaningful form of debt relief – for example by means of an international debt conference?

There have been calls from within Germany for a debt conference, including from [former Chancellor] Helmut Schmidt, but the position of the German government is that this is politically not acceptable, and legally not possible. The position of the German government is that any form of debt forgiveness has to come through maturity extension and possibly reductions of interest rates.

You have said that thanks to its primary budget surplus, Greece is now in a position to default on its debt and leave the eurozone. What would the economic and geopolitical implications of this be for Greece? Would a Greek euro exit lead to the dissolution of the eurozone itself?

A primary surplus is indeed a precondition for a country to default – but one has to be clear that this primary surplus is for real, not just some accounting trick. Once you have a real primary surplus, you are no longer dependent on foreign credit to meet your fiscal obligations. The success of a eurozone exit would depend entirely on the ability by Greece to ensure a large devaluation, and to keep the real benefit in place. If wages were to rise in line with the devaluation, then the effect would be zero. In that case, Greece would be better off inside the eurozone. Another consideration is that exports of traded goods only constitute a small part of the economy – though tourism is over 15 percent. Both sectors would benefit from a devaluation. The benefit would come if Greece were to default on all foreign debt, including official debt, and through a very large real devaluation. My expectation is that investors would return to Greece relatively soon after because they would consider the new equilibrium more sustainable than the old one.

Domestic audiences in EU countries tend to underestimate the broader, systemic character of the crisis. What is your opinion on this? How can we overcome the crisis in a way that does not involve massive sacrifices from the most vulnerable people?

The acute phase of the crisis is over for now. That means electorates are getting more complacent again. To deal with the systemic issue, the eurozone requires genuine insurance mechanisms, which, like any insurance, involve a degree of transfer. That did not happen in any sufficient way.

Is the banking system the elephant in the room? What is your view on the recent agreement on a banking union?

Yes. The establishment of common supervision is welcome. But the resolution fund agreement is almost pointless because it has created no backstop facility. In a crisis, the fund will not be able to act. Its relatively small size confines it to a fair-weather type bank resolution.

In Italy, Prime Minister Matteo Renzi decided to openly flout the fiscal discipline rules. What happens next? What will the implications be around Europe when the fiscal compact comes into effect?

He has not openly flouted [the fiscal discipline rules]. Formally, Italy remains committed to the agreed targets. The danger is that Italy will miss those targets if the rather optimistic assumptions of the budget are not met.

The moralistic view of the southerners that need to suffer because they sinned is still very much alive in German discourse across the political spectrum. Is there any chance that people in Germany will come to see things differently?

I doubt it very much. The moralizing attitude makes it very difficult to achieve a rational debate. The Greek crisis was indeed the result of fiscal profligacy, but much of the result was the result of private sector imbalances, in which Germany was a co-perpetrator.

You have described widespread economic illiteracy as a key influence of policymaking. If you could shoot down one misconception, what would that be?

That external surpluses are necessarily desirable.

How will future historians judge German Chancellor Angela Merkel's handling of the crisis? Are we experiencing a repeat of the 1930s?

Not quite. The 1930s brought Hitler. But this crisis could weaken or destroy the EU. My guess is that historians will view Merkel more critically than her adulating contemporaries.
 

ekathimerini.com , Wednesday May 14, 2014 (17:53)  
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