Will Greece become the first country to abandon the Eurozone and return to the drachma? My money is on Spain or Italy. Greece’s debt is too small to be of concern compared to the giant collapses about to happen in these two countries. But money from any nation’s printing presses is still fiat currency. Until the people hold the governments’ central banks accountable, we will continue to see inflation erode the savings accumulated over the course of a lifetime.
It’s a tradition of Greek theatre that the real action takes place off-stage. Much the same might be said of the euro drama.
A second bailout and last week’s repayment of a €14.5bn (£12.1bn) bond has produced a dramatic lull in proceedings. Even the president of the European Central Bank said last week that the worst of the crisis is over. But does anyone actually believe there is not another Act to come?
Not if you look at what is going on behind the scenes. Whatever the politicians may pretend, governments, banks and companies continue to make contingency plans for a Greek exit from the euro. And, arguably, the terms of the latest bailout make one easier.
A quick recap of the state Greece is now in highlights the challenges ahead. Athens has got its debt down from €368bn – or a ruinous 163pc of GDP – by strong-arming the private holders of €206bn of bonds into accepting an effective 74pc loss on their loans, once lower coupons are taken into account.
That’s been enough to trigger a second bail-out from the European Union and International Monetary Fund of €130bn – on top of the €110bn already advanced to Athens. But there the good news ends. The quid pro quo for all this dosh is the promise from Athens of unprecedented budget cuts. But, even after all the money and pain, by 2020 Greece’s debt will still top 120pc of GDP, according to official estimates from the EU, IMF and European Central Bank troika.
That is, as Open Europe puts it, “more or less where Italy is today”, which is “not exactly a hugely positive result after a decade of adjustment and hundreds of billions in taxpayer-backed bailouts”.
Worse, the troika’s estimates look horribly optimistic because, as the think tank points out, “the austerity targets are wholly unrealistic and kill off growth prospects”.
Already into its fifth year of recession, more than half of Greece’s under 25s are now out of work. Yet the government is promising to cut another 150,000 public sector jobs over the next three years. With protests on the streets and an election in April, who knows how much austerity is even deliverable.
The ink on the bailout terms is barely dry, but Germany’s finance minister, Wolfgang Schaeuble, is already openly remarking that this is “perhaps not the last time that the German Bundestag will need to address the question of financial assistance for Greece”.
Open Europe believes a third bailout or full-scale default is all but inevitable within “three years’ time” – the price for Greece remaining in a currency it can neither print nor devalue.
The euro, says US economic researchers Variant Perception, is like a “modern day gold standard, where the burden of adjustment falls on the weaker countries”, forcing changes “in real prices and wages instead of exchange rates”. Growth becomes “unlikely if not impossible within the euro straightjacket”.
Hence the planning for an eventual Athens exit – not least by the Greeks. Some €16bn has been sent abroad since 2009, with Britain the favoured destination – as the mini-boom at the top of London’s housing market might testify. Meanwhile, bank deposits in Greece have fallen by €70bn over the same period.
As the country’s outgoing finance minister Evangelos Venizelos noted, while this is partly due to families or businesses raiding savings to cope with the crisis: “Many billions are kept in homes. They are, as we say, in mattresses or boxes.”
Greece represents just 2pc of eurozone GDP. Yet, thanks to the interwoven capital flows of monetary union, extricating even a tiny member from the currency bloc has some Rumsfeldian “unknown unknowns”. For starters, it’s illegal, thanks to 1992’s Maastricht Treaty compelling all euro members to transfer “irrevocably” monetary sovereignty to the European Union.
There are contagion risks – to other countries and banks – and funding issues for the ECB, Bundesbank and IMF, among others. Politically, it would take a huge swallowing of euro pride. And then there’s the cost – though probably much less than the €1 trillion bandied around by scaremongers.
But, at least it would not be the current sticking-plaster solution. And, though less complex, both the break-up of the USSR’s rouble zone (1992-95) and Czechoslovakia (1992-93) provide blueprints for how Greece’s exit could be handled.