Brendan Keenan: Greece really needs the euro
Countries with big debt problems have every reason to stay the course with the currency
THEY reckon it is one of the great headlines of all time. When President Gerald Ford refused to bail out New York City, whose lenders had lost patience with its profligate ways, the New York Daily News ran the banner: "Ford to City -- Drop Dead!"
Mr Ford later relented. Even for a sovereign state like the US, there are unpleasant -- and, worse, unknown -- consequences from letting a region default on its debts. Even more so for a collective entity like the euro area in deciding what to do about Greece, and perhaps others.
But at least Ford had sent out a message -- that it was possible that you could lose money lending even to New York City; and that it was possible the cops would not get paid one day if the city did not manage its affairs properly.
After he relented, both lenders and citizens probably concluded that the possibility was remote. But that is not the same as non-existent. New York had to endure severe spending cuts as part of the rescue and, as far as I can make out, has never been quite so profligate since.
So far, Europe has sent out the opposite message: that there can be no default in a euro country. It is not entirely clear why EU leaders (in effect, those of France and Germany) took this view. They have left the public with the impression that Greece would have to leave the euro if it had to renegotiate its debts. Another version is that the euro itself would crumble if such an event took place.
There is no reason in principle why this should be the case. It is a question of debt, not currency. Greece's debt problems would be worse, not better, if it left the euro, because its borrowings from other eurozone banks would become foreign currency debt, to be paid for from export earnings.
One can see this trap very clearly from the figures for Ireland's recent borrowings issued by the National Treasury Management Agency. In the last big three syndicated loans, when €18bn was borrowed, Irish banks and institutions lent an average 15 per cent of the total.
The other 75 per cent is foreign debt, but it is in our own currency, the euro. This ability to borrow all one needs in domestic currency is trumpeted as one of the great advantages of being the US or the UK. But it is an advantage available to all euro countries.
Countries with debt problems therefore have a very direct reason to stay in the euro. Their creditors, mostly from the big euro countries, have every reason to keep them there as well; rather than face the extra currency risk on top of default risk. But there has to be some risk.
The greater threat to the existence of the euro would seem to come from rescuing Greece (or Ireland, or whoever), than allowing a country which can borrow no more to cut the best deal it can with its lenders. Apart from legality, the citizens in countries with sounder finances are simply unlikely to agree to rescue the others. It is not just Germany.
We have already seen the first claims here at home that all this fiscal pain is unnecessary, and the Greeks are showing us the way forward. Unless it is made clear that euro members are responsible for the consequences of their fiscal behaviour, the system will not hold.
The indirect arguments as to whether a fiscally challenged state should deal with its creditors inside or outside the euro are rather more complex. If a country left the euro, it could devalue its new national currency (in most cases, the markets would do it for them) and any resulting boost to exports and growth would help to reduce the deficit and service the large foreign currency debts it would acquire by leaving the single currency.
Supposing, though, the growth and exports boost did not live up to expectations? The second state of the country in question would be worse than the first. It depends on how sensitive its exports are to internal costs, and whether those costs rise quickly because of the increase in imported costs from the cheaper currency.
It would take a sophisticated economic model even to give tentative results for Ireland. History suggests that a new national currency might well see Irish inflation topping 6 per cent. Unless that was absorbed in lower living standards, the theoretical gain in exports could prove illusory. It would certainly not help consumer spending, on which most jobs depend.
Those countries which think the balance of advantage for them lies with euro membership will have to tailor their policies to achieve growth within the single currency. Ireland has not yet done so. We should worry less about debt and defaults and more about enhancing the economy itself.
- Brendan Keenan
Originally published in
