Britannia Radio

Greece out of the euro: good for everyone,

especially the Greeks and the Germans

This just in, from Charles Dumas of Lombard Street Research, one of my favourite experts on eurozone economics.

I will remind you that in 2006 Dumas said the eurozone would begin to unzip in five years, starting with Greece. He's so smart it's spooky.

Today he asks, who would lose if Greece should default, leave EMU [that's economic and monetary union, in other words the euro] and call in the IMF?

Now, I know that Boris Johnson wrote today that Greece should be allowed to default

on its debts and leave the euro, and that Greece would be no more worse off with its own currency again -- see the news pages for the details -- and he is quite right (though what took him so long to see it?).

But listening to economics from Boris is like listening to economics from Tigger. I'd rather listen to Dumas cover the same ground. It's like listening to economics from Beethoven.

So, according to Dumas, the answer to 'who would lose if Greece should default, leave EMU and call in the IMF?' is: 'Nobody need lose -- it is not a zero-sum game.'

And his reasoning is worth listening too, since the British government has repeatedly been sucked into the multi-billion bail-out schemes that are supposed to 'save the euro.' Which means, keep all the member states of the euro in the damned currency, no matter what it costs.

But as Dumas says, if Greece gets out, nobody need lose: 'The answer is utilitarian, of course, It assumes the purpose of economic policy is to achieve the maximum economic/welfare benefit to the population. In reality, the losers would be the bulk of the continental European elite, which has hitched its wagon to a "falling star" -- a "black hole" would express it better -- since the early 1990s. This elite would be shown up for the arrogant blunderers they have always looked like, and have proved to be. Pride, guilt and fear are some of the most powerful motivations on earth -- hence the resistance to shrinking or dissolving EMU.'

'In welfare terms, the current Greek government policy makes no sense at all, for Greece. It is hammering its economy with domestic deflation that is now cratering tax revenue, ensuring that reduction of the deficit is slowing to a crawl while the denominator of the relevant ratios, GDP, is sliding way, increasing the task of debt stabilisation.'

'Default will not be avoided...By staying in the euro, Greece ensures it has no chance of generating external growth, to offset domestic deflation. Yet everybody knows that only with growth can excessive debts be repaid -- or, more realistically in the Greek case, be defaulted on by fewer cents in the euro.'

Equally Germany would also grow better if Greece were out of the euro: 'Over the nine years since the last recession (2001), German GDP is only up 10%, well behind Britain and France, for example, let alone the US, despite its greater cost competitiveness, and contrived undervaluation through linkage to its more inflationary "partners" in Euroland. And the suppression of wages that has achieved this...results in real consumer spending only up 3% over the same nine years...'

'Shedding Greece from the euro might be far from a sufficient cure for the gross distortions of EMU, but it would be a step in the right direction, and all the more important in signalling that maximising the present value of potential Greek (and other) debt repayments is now the chief goal -- rather than punishing Club Med "bad boys" [Greece, Portugal, etc] for past sins, or driving Europa through intense economic pain to some presumed nirvana -- actually, chimera -- of a European super-state where everybody behaves like "good boys."'

Dumas is so right, so often, about so many things --and never more than today when he writes about the European elite 'being shown up for the arrogant blunderers they have always looked like.'

Exactly. I have always known the euro-elite were devious and dishonest, but I'd always given them credit for a kind of Jesuitical intellectual skill. But since the first fumbled, panicked Greek bailout a year ago, the euro elite have shown themselves to be the gang that can't shoot straight.