Greece needs to drop out of the euro to recover

Anthony Browne
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THE advocates of the EU like to claim that it helps promote democracy, but its record is decidedly mixed of late. Its biggest project, the euro, which no EU country has ever had a referendum on, is toppling democratically-elected leaders at the rate of roughly one a week and replacing them with unelected technocrats. Mario Monti, the new Italian prime minister, and Lucas Papedemos, the new Greek leader, have never been elected to anything worth putting on their CV. They are both trying to push through extremely unpopular austerity measures, demanded by other EU leaders and needed to stop a disorderly default and to stay in the euro. The Greek media, sensitive to Germany dictating their tax and spending programmes, are running riot with swastikas as they revoke memories of the Nazi occupation.

I wish Mr Papedemos well in his task, but it is I believe both futile and pointless. Whatever he and other European leaders do to tackle the debt crisis, they are not tackling the fundamental problem – which is Greece’s competitiveness crisis. Any country with Greece’s productivity and Germany’s exchange rate is doomed to stagnation, and it is only a matter of time before Greece falls out of the euro, devalues and gets back on its feet again. Devaluation – which makes imports expensive – is a way of making Greeks live within their means that doesn’t cause riots.

But there is another, more profound reason why Greece should be allowed to default, and shouldn’t be bailed out by German taxpayers, and it is one missed by the architects of the euro and most commentators. The one-size-fits all currency causes monetary crises by having inappropriate exchange and interest rates (booms in Ireland, busts in Greece), and it also, as we are seeing, causes fiscal crises.

This is because it removed – until recently – the mechanism which was forcing many governments to live within their means, and that was the power of the bond markets – and in particular the threat of rising yields if the bond markets thought there was a risk of default. Despite the no-bail out clause in the euro treaty, markets assumed (correctly) that in reality the EU’s bigger countries would do anything they could to stop weaker ones going bust.

This implicit underwriting meant that Greece, Portugal and others could freeride on the back of low German bond yields, living on the never-never, breaking unenforceable Maastricht fiscal rules with impunity, and not worrying about who was going to pick up the tab. Now that the markets have realised that this underwriting has limits, bond yields have started to rise in the more debt-ridden countries. But if Greece is allowed to go bust, then the bond markets would in future impose fiscal discipline on profligate EU governments by only lending to them at very high rates. It is the way that the US imposes fiscal discipline on its local governments – quite simply, it lets them go bust, and so the markets force them to live within their means. So Angela Merkel is right – she should let Greece go bust if it doesn’t get its house in order, sending a message to the world that the Eurozone is serious about living within its means. It will be short-term pain, but long-term stability.

Anthony Browne is former director of Policy Exchange: