4 May 2015

What Greece should do if it leaves the eurozone


The case for Greece’s withdrawal from the euro is straightforward. Countries in Greece’s situation normally devalue. Devaluation makes their goods cheaper, pricing them into the market and allowing them to export their way to recovery. A devaluation doesn’t solve everything – indeed, in the long-run, it doesn’t solve anything – but, it buys the stricken country time to make necessary economic reforms.

Greece, being in the euro, can’t make its currency cheaper. Unable to accommodate a devaluation in its exchange rate, it has had to suffer a devaluation in output and jobs. The results are almost indescribable: GDP is down by 24 per cent from peak, 56 per cent of young Greeks are unemployed, and there is no recovery in sight – only years more of poverty and emigration.

I have been arguing since 2010 that Greece should default, decouple and devalue. Returning to the drachma won’t be easy – there are no easy options for a country in Greece’s situation – but it’ll be less damaging than the existing policy of permanent immiseration.

But here’s the thing. In order to make a success of life outside the euro, Greece would need to make use of its new opportunities. The two biggest sectors of the Greek economy are tourism and shipping. Both stand to benefit enormously from a devaluation (imagine Greek holidays suddenly being half the price of their equivalents in other Mediterranean countries); but only if the government in Athens pursues pro-enterprise policies.

An independent Greece should deregulate its economy, undercutting its neighbours. It should make its taxes flatter and simpler, so disincentivising the avoiders and evaders who played such a big part in creating the deficit. It should privatise state assets, raising funds in the short term and boosting productivity in the long term. It should rebalance its economy from the public sector (which consumes revenue) to the private sector (which produces it). Get these things right and Greece could become a Switzerland on the Aegean.

The trouble is that Alexis Tsipras’s government was elected on the basis that it would do precisely the opposite. It promises to reverse the reforms made under the previous government – which is a pity, since those reforms have, after much hardship, left Greece with a primary surplus. That is to say, once you strip out the debt repayments, the government in Athens is at long last raising more than it spends.

Greece, in other words, has reached the point where it could successfully go it alone, provided it made a clean default. But, under its current leaders, it seems determined throw those advantages away and return to the tax-and-spend policies that caused its crisis in the first place.

Like most observers, I have been stunned by the ineptness of Syriza ministers. I’m not talking about their policies, which I obviously disagree with, being a free-marketeer. I’m talking about their day-to-day blundering, their tendency to contradict themselves, their ability to alienate the people whose goodwill they need through clumsy leaks and briefings, their belief that the best way to bargain is repeatedly to threaten to blow yourself up.

Inside or outside the euro, Greece won’t begin to recover under its current leaders. Which is a shame. Because those leaders may end up discrediting the anti-euro case for those who would make a better fist of it, including Ireland, Portugal, Italy and Spain. What an opportunity looks like being lost.

Daniel Hannan is a Conservative Member of the European Parliament and blogs at www.hannan.co.uk.

This article is an exclusive for CapX, and is available for syndication. Please contact [email protected] to discuss details.