Photo: Dimitris Plantzos via Flickr
German chancellor Angela Merkel recently said it would be a political mistake to let Greece leave the eurozone, but many still expect it might happen. Now, Stephen King, HSBC’s group chief economist has written a hypothetical, futuristic tale for those who want Greece out of the euro. King paints a picture of Greece as a Hellenic tiger by the end of 2015, after it severs ties with calamitous Europe and establishes alliances with more dynamic economies like China and Russia
King says even during the crisis China showed its enthusiasm for Greece, with China’s COSCO Pacific Ltd taking control of container ports in Piraeus (which has happened) and making it a hub for Chinese goods headed for southeast Europe and North Africa. And Greece in turn cornered the Chinese market for olive oil (hypothetical) undercutting rivals from southern Europe because of a more competitive exchange rate.
In his futuristic fable King writes that Greece would move on from the eurozone after it felt abandoned by Europe and that after some pain would manage to rebalance its economy. Meanwhile, reforms in the Middle East and North Africa stemming from the Arab Spring would make the region an extraordinary investment destination and after the final debt swap, Greece could benefit from the changes in the region. But the Greek exit would have serious consequences for Europe:
After Greece’s success, all hell had broken loose in the eurozone’s financial markets. Germany was still demanding austerity from the likes of Spain and Italy, even as their economies faced a fourth year of contraction. As investors priced in the possibility of a Spanish or Italian departure from the euro, borrowing costs for the southern European nations rose dramatically. The contrast between Greek success and Spanish and Italian failure was obvious, so much so that the Spanish and Italians began to demand their own version of the Greek escape.
The Germans, meanwhile, began to wonder what had gone so badly wrong. They thought that austerity would fix all ills. They believed the fiscally recalcitrant could be brought to heel. The Bundesbank had vehemently opposed any programmes offering support to the weaker members of the euro, fearing fiscal backsliding. Yet, with the prospect of the euro disintegrating, the risk for Germany was obvious – a huge increase in the value of its currency on the foreign exchanges sufficient to wipe out vast swathes of German industry.
Angela Merkel, now the grande dame of European politics, recognised the danger. Forcing Greece out of the euro had, it turned out, been a mistake. The costs to Greece had been outweighed by the benefits. Parts of the eurozone, however, were still mired in recession. Ms Merkel faced a choice: push for a fiscal union that would lock in for ever the transfer payments that, in Greece’s case, she had so strenuously opposed; or head for a euro exit, with all that entailed for German industry.
Germany’s gamble had failed. In the attempt to punish Greece, it had ended up with an impossible choice: creating a fiscal union or huge currency upheaval. Berlin had taken aim at Greece but shot itself in the foot.
King argues that while there is no real reason why these events should take place, the notion that Greece can leave the euro and the rest of the eurozone will be fine is wrong. “Departure might eventually be an answer to Greece’s difficulties but it only asks questions of everybody else.”
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