Monday, 11 July 2011

Greece must and will default

Greece is going to default on its debts.

There, I've said it. It's a cathartic moment, really - a bit like realising that you finally do have to do something about that long-running but troublesome toothache when it flares up.

Imagine, or remember, how much better you feel after having it removed. That's how the Greeks - and most other Europeans - will feel when this is all over.

But it's a tragic moment as well. For all the shouting, all the rioting (above), all the jobs lost and lives ruined have been for little. This lack of sensitivity and understanding is hardly surprising, when most of our international financial economic and financial mechanisms are so opaque and so undemocratic. It's a classic example of how boring men in nasty suits, talking jargonised nonsense, can crush the smaller players whose lives sound and feel far away. Talking about 'reality', 'retrenchment', 'reform' and 'restructuring' in the European Commission or Washington looks very different when you're a Greek worker who's always played by the rules and paid his or her taxes, only to be told you're a lazy freeloader on the European commonwealth who needs to work for another ten years for a much smaller pension. Or lose their job altogether.

But beyond that democratic deficit of both legitimacy and credibility, there's another reason why the Greeks should stop propping up the rest of Europe's broken budgetary system (for paradoxically, that's what their pain is doing). It's just this: there is just no way that the Greek state can impose the very, very deep austerity cuts it wants in the short time available to it. There is no way that German electors are going to keep on paying for it - though bearing in mind the massive advantages their economy gets out of exporting cheaply to the Euro-zone, and big profits their banks have made lending to the so-called PIGS (Portugal, Ireland, Greece, Spain), they should wake up and realise where their interests really lie. And there is no way that even further cuts would be politically credible or deliverable. So this is the end of Plan A.

Plan B? Look at Argentina's 2002 default, widely credited with putting the country on the road to recovery. Declare national bankruptcy. Use the catharsis. Reform your economy, but keep the process in your own hands and on your own terms. Ignore the crazy economics of slashing everything in sight and hoping that growth will save you.

As an economic historian of these things, I've watched many British governments struggle with a situation that was transparently not sustainable. Talking down the possibilities of devaluation in 1956-57, 1961 and 1964-67 only to bow to the inevitable in the end. Talking up the credit bubble of 1971-72, only to head straight into a secondary banking crisis. Trying to spend their way out of an inflationary spiral in 1974-75, only to call in the International Monetary Fund during 1976. Talking about 'making the pound the new Deutschmark' just weeks before a new devaluation in 1992.

Talking tough and cutting never works. The Greeks should default now, whether 'softly' within the Euro (via French and German banks' loan 'forgiveness') or by freezing everyone's assets and printing their own money again.

John Lanchester's excellent survey in this week's London Review of Books thinks that the former solution is more likely, but the latter is also possible. The Greeks would then have an even greater share of what international financial historians know as the 'strength of the weak', for who could really let Greece collapse? Answer: no-one, least of all the majority of Eurozone currency holders and nations whose assets and credibility would suddenly be on the line.

So watch out for a Greek default in the next few months - and, whatever you do, don't buy a Greek holiday home in sterling.