Sunday 23 October 2016

Greece's crisis today could well be our crisis tomorrow

Published 25/06/2015 | 02:30

The narrow partisan party interests of Fine Gael and Labour may hold sway. Their primary election concern is halting the growth of Sinn Féin
The narrow partisan party interests of Fine Gael and Labour may hold sway. Their primary election concern is halting the growth of Sinn Féin

Greece will default on its €324bn sovereign debt for a third time. What's at stake this week in Brussels is whether this is done by agreement or disagreement. Greece's first bailout - when only private investors got burned - left its debt/GDP ratio at 120pc. After five years of austerity displacing one-fifth of its economy, it hovers unsustainably at 180pc. You can't solve debt distress by piling on more indebtedness. Rolling over loans without write-offs only postpones the inevitable ultimate settlement, while putting Greece deeper in the mire.

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The Coalition's best economic initiative was the reduction of VAT for the hospitality sector from 13.5pc to 9pc. Since 2011, this notionally cost €644m; yet tourist numbers increased from 5.9 to 7.3 million, while 24,000 jobs were created directly in the restaurant and hotel industries, along with 11,000 indirect jobs. Meanwhile, our Government, along with the rest of Europe, insists Greece should immediately raise its compatible VAT rate from 13 to 23pc immediately (irrespective of holiday contracts).

Tourism is Greece's largest indigenous industry. Economic recovery is impossible if their tourism product is uncompetitive, relative to other European sun destinations. Greece can't repay debts without a vibrant holiday sector. Nobody cares about their vital national interests.

It's in Ireland's interests to support a Greek settlement that explicitly involves official institutional debt relief, unambiguously reducing overall sovereign indebtedness to sustainable levels - now they've a primary budget surplus, having slashed public sector wages and pensions by 37pc and 48pc respectively. Here's why.

You would then see cheaper national debt servicing costs. Our gross government debt stands at €205bn. For each year we continue to run current budget deficits this will continue to rise - at least until 2018. The cost to the NTMA of funding this annually is enormous: 2011 - €4.45bn, 2012 - €5.67bn, 2013 - €7.32bn and 2014 - €7.46bn; this equates to about 5pc of GNP and around 19pc of our total tax take.

If Greece is abandoned to the wolves and forced to self-finance on open markets, it's inevitable that Irish government bond rates will rise. Our treasury bonds were sold recently at as low as 0.8pc. These will escalate because of the risk premium associated with a vulnerable Eurozone state.

If Mario Draghi's previous promise that the ECB will do "whatever it takes" to ensure the 19-state membership of the euro single currency no longer holds, it's a certainty that divergent costs will then apply to the risk assessments of the more indebted weaker countries. We are a prime candidate to carry a risk burden of additional cost. There will also be more competitiveness with other currencies. The Irish economy is forecast to grow by 4pc this year and next - the highest in the EU; this will be primarily driven by exports into the UK and US, and there will be tourism revenues.

But the greatest competitive gains we've made relative to these strategic markets have been because of the declining euro value against sterling and the dollar.

The fact that euro values are as low as $1.10 and 72 pence allows our goods and services industries to expand market share.

If Greece is kicked out of, or departs, the euro currency, it's inevitable over the medium term that the currency will appreciate in value.

This was the German strategy (of a hard Deutsche mark), pursued over decades by the Bundesbank, enhancing values of savers' funds. We're an open trading economy, and the biggest beneficiaries of a lowly valued euro.

The combined effects of quantitative easing, which Germany resisted for years, and inclusion of weaker economies as part of the single currency mean both low interest rates and competitive currency costs. If the euro was to significantly appreciate in value, there would be a serious downside risk for us. Smaller countries are being sacrificed as democratic values are redefined.

Europe appears to be at an historic crossroads. Britain, the third-largest member, threatens to leave via the Brexit referendum in 2017; Denmark is also weighing up its future membership options. If democratic election results in member states are disregarded, irrespective of party political hue, it sets a dangerous precedent. At a future date, big central states can gang up on other issues and demand compliance. Imagine if there's mandatory tax harmonisation, over-riding a national veto or need for unanimity.

The cornerstone of industrial policy here is the competitive low 12.5pc corporation tax regime. We tell American multinationals (like Google and Apple) that they'll make more profits by availing of our tax concessions.

This results in about 250,000 jobs. France wants to scrap it (remember Sarkozy?). If it's acceptable for Eurozone finance ministers/EU summit leaders to simply submit to Herr Schauble's/and Frau Merkel's commands to reject Greece's pleas for debt clemency, then anything goes. We could be equally isolated and victimised into submission on tax policy.

This single currency crisis could be as significant as the fall of the Berlin Wall, historically. The narrow partisan party interests of Fine Gael and Labour may hold sway.

Their primary election concern is halting the growth of Sinn Féin. Syriza must be thwarted, they're the Shinners of Greece.

The Spanish government has also given the Greeks short shrift due to parallels with the anti-austerity Podemos party; the same applies to the Portuguese government and their main Socialists opposition.

There are no crumbs of political solidarity amongst peripheral states; they can forget about achieving the same scale levels of domestic consumption and investment as Germany and France. Evidence from the Banking Inquiry shows the extent of the ECB's insistence (2008 to 2011) that Irish taxpayers must avoid at all costs a repeat of the Lehman bank collapse and fully repay bondholders of insolvent banks; Greeks are condemned to either EU debt servitude or banishment. French and German banks were saved; the tab was put onto Irish national debt.

Berlin rule benefits Germans. From the get-go, critics of Eurozone architecture maintained it would only survive on a two-tier basis - one monetary size not fitting all 19 economies.

Greek debt reduction is the only way to avoid breakdown of what was to be an 'irreversible' process. Moody's warns Athens' fragility today is Dublin's vulnerability tomorrow.

Irish Independent

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