Greece should not be sacrificed for the euro

  • Εκτύπωση

 According to Greek mythology, the noble Iphigenia was sacrificed so that the warships could have a fair wind to Troy. According to eurozone mythology, Greece should become the Iphigenia for the euro to sail ahead. However, this sacrifice would fail to do the trick. Since Greece cannot access capital markets and Greeks have no appetite to leave the eurozone, a “Grexit”would have to be a decision made by Brussels and Berlin. Would the eurozone be justified in ejecting Greece? And would it be wise?

A familiar argument in favour of a forced exit is that Greece has failed to reduce its budget deficit. True, the deficit remains high and public sector reform is struggling. Yet, if one focuses on the improvement so far, a different picture emerges. For example, Greece cut its total primary budget deficit by 8.2 percentage points of gross domestic product over two years (2010 and 2011).


Doomsayers also look at Greece’s trade deficit and predict it will never restore competitiveness. However, labour market liberalisation and steep wage cuts are delivering the “internal devaluation” required. If labour costs are included, Greece’s effective exchange rate is at its most competitive for more than a decade.

Even if they accept some change in economic conditions, critics often still complain that political resolve is lacking. Yet the most painful adjustment programme in recent European history (including a 22 per cent minimum wage cut) was passed by the Papademos government in February with a two-thirds majority. An additional €11.5bn in budget cuts are being finalised, even if they will take longer than initially thought, as the Financial Times suggests in a recent article.

Greece’s adjustments so far do not justify its image of failure. However, its fifth year of recession is a sign that the status quo is not an option. GDP fell by nearly 7 per cent in 2011 and another 7 per cent decline is expected in 2012. The unemployment rate is 23 per cent. Greece is in economic depression.

But of all Greece’s many problems, including austerity, the threat of leaving the eurozone is the most damaging. Even healthy, efficient Greek companies have suppliers demanding cash for imports. Foreign clients are turning their backs, saying, in effect, “we are happy with your business but don’t know whether you’ll be around for long”.

The same goes for their attitudes to Greece’s privatisation programme. Yes, it has faced serious political and bureaucratic impediments. Yet investors keep away in large part because they fear currency redenomination. This reluctance then accentuates that very risk.

There is another absurd argument put forward by some in Brussels: Greece must go because its public debt is not sustainable. But most of its public debt is held by the non-private, official sector. Exit would render this debt unserviceable. Greece would be forced to default, generating large capital losses in other European countries and poisoning relations for years.

The solution is not a Greek exit but growth. A two-year extension of fiscal adjustment, as reportedly sought by the Greek government, would moderate the impact of austerity. Greece can return to growth through a double boost of faster structural reforms and a direct investment stimulus. EU instruments such as structural funds and more money from the European Investment Bank and the European Investment Fund would help.

But isn’t uncertainty surrounding Greece in itself destabilising? Perhaps, but a Greek exit from the euro would be even worse. If Europe were to accept a Greek exit it would raise the risk of full eurozone break-up. The claim to an irreversible monetary union would be shattered. The eurozone would surrender to endless speculation over which country would be next. Depositors would start a run on banks in other peripheral countries and panic could ensue. Bailout programmes would be overwhelmed by the instinctive response of frightened investors.

The sacrifice of Iphigenia would turn out to be the ritual beginning of a collective suicide for the euro. As her sacrifice led to a decade-long Trojan war, a “Grexit” could bring years of horror to the eurozone.