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#Greek #euro exit may not be so horrifying

May 23, 2012

Gideon Rachman says that Greece should leave the euro. He’s probably right, because the currency was badly-designed from the start. Investors were never likely to shift funds quickly to economic black spots. Workers wouldn’t move to areas with lots of jobs on offer because they couldn’t speak the language and they wouldn’t fit in with the culture.

To compensate for the resulting inequalities, the eurozone had no central authority that could redistribute funds. The strictures on government spending were so anal that not much could be done to stimulate demand or help the unemployed — but in any case the lack of law-enforcement meant that most governments periodically thumbed their noses at the rules. As I noted in this post, a paper by the Graduate Institute in Geneva found that France breached the spending limits in seven of the 12 years after the euro began and Germany five.

A low interest rate that helped the sluggish north was never going to suit the more volatile economies of Greece, Portugal, Ireland or Spain. Cheap money helped inflate housing bubbles and allowed governments to escape the need for proper tax systems.

In a kind of collective neoliberal wish-in, the eurocrats hoped blindly that their scheme would somehow work. They blame the Greeks, but it was always going to be one of the poorer fringe countries that would come off worst. The Germans and French like to forget their own misdemeanours.

Because the euro is so flawed in so many ways, it almost certainly can’t continue in its current form. Rachman’s probably right to call for an ordered break-up rather than a messy balls-up. “Better an end with horror, than a horror without end.”

I’m not convinced, though, about the extent of the horror. The FT writer says that:

the exit of Greece would unleash contagion, by making it clear that membership of the euro need not be permanent. Markets would inevitably round on the next vulnerable countries.

Yes, an unplanned exist would be disastrous, and one of the only predictable outcomes is higher borrowing costs for the remaining eurozone. But surely everyone can already see that membership isn’t permanent? In that mangling of language so beloved of financiers, pundits have been worrying for weeks about the ‘Grexit’.

Markets are already rounding on the vulnerable. Bond yields periodically surge to levels that can only be associated with a euro break-up. Hundreds of billions have already been whisked from Greece and Spain. Greek shares are lower than in 22 years, while the Spanish stock market is at its lowest level in nine years.

And as Rachman points out, the long-term costs of sticking with the euro for Greece, and maybe others, may outweigh the temporary catastrophe that accompanies exit. In a country like Spain, every week with the euro is another week of misery for the quarter of adults who have no job. It’s  more erosion of skills, one more young person’s potential squashed.

Germany and France could inflict as much austerity as they wanted in a smaller core eurozone — and they wouldn’t have to worry about bailing out the periphery. What the core eurozone leaders and bankers are really scared about when they talk of contagion is losing the money they’ve lent and having to pay a higher interest rate on their debt. They’d no longer benefit from the free money that’s washed around the continent for the last couple of decades.

Meanwhile a devalued south could default on its debts and work on restoring growth and building exports. Other recent defaulters and devaluers — Indonesia, Argentina, Russia — have rebounded quickly after crisis. Better to get the pain over with quickly than to inflict death by a thousand cuts, and better to think first of the poor rather than the bankers who got us into the mess in the first place.

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