Time to think about euro’s break-up
IT is finally all over for George Papandreou, the Greek prime minister. Barring yet another u-turn, he will step down and a so-called national unity government will be created with the help of opposition leader Antonis Samaras. It’s not as if the two men are strangers: astonishingly, they were roommates at Amherst College in the US in the 1970s. If you thought Britain’s political elite is insufficiently diverse, wait until you meet Greece’s.
Now that democracy has been suspended – it no longer matters which party won or lost the last election – the Eurozone will be happier to waive its chequebook. There will be smiles all around and even claims that the euro and Greece’s membership have been saved; hopes will be expressed that Italy’s ridiculous Silvio Berlusconi will be the next leader to be thrown out. It is all so pathetically predictable.
Yet even if Greece’s new coalition actually materialises and doesn’t collapse immediately, and even if it pledges to implement all the agreed measures, that doesn’t mean that the deficit will shrink as planned. And even if it does, that won’t be enough to save Greece: the original deal was flawed, with the Athens government still set to be saddled with debts of 120 per cent of GDP by 2020.
Italy’s woes are different. The country is richer; even though it is facing a liquidity crisis, it is not insolvent. Its problem is longer-term, one of competitiveness: Italy’s GDP growth has been negligible for years. Eventually, that will trigger either a painful readjustment or a crisis in the public finances. The rising yields on Greek debt are partly due to the markets assigning an increasing probability of a euro exit caused by the fallout from this longer-term, slow burning competitiveness and demographic crisis.
So what would happen were the Eurozone to break up? The Ernst & Young Item Club thinks it will be very painful; the CEBR is more relaxed. There are 15-20 per cent more euros than dollars in global circulation, though when it comes to metrics such as global reserves and use as a unit of account (for trade invoicing and commodities) the greenback remains dominant. But the euro has major significance for firms, transactions, central banks, pension funds, insurance companies and governments.
Yet nobody has worked out a proper, orderly break-up plan – just as nobody bothered to work out how large universal banks could be dismantled if they failed. Foolishly, it was assumed that the euro’s demise was either impossible or too grim to even contemplate. There was no Plan B.
The City was wrong to endorse and campaign for the launch of the euro in the late 1990s. In doing so it aligned itself with the Foreign Office and much of the UK establishment. This was partly because many firms genuinely believed the euro would boost growth – and partly out of self-interest. One economist once told me how he was sacked from a big institution for being sceptical. European governments also bullied banks, warning that they would only deal with supportive institutions.
But having got it wrong last time around, the City should now help devise solutions for an orderly break-up. There is an incentive for smaller players too: Lord Wolfson, Next’s enlightened boss, has kindly put up a £250,000 prize for whoever comes up with the best solution for how to organise an orderly break-up. Thinking caps on, please.
allister.heath@cityam.com
Follow me on Twitter: @allisterheath