If Greece leaves euro, we'll all pay for Syriza's false promises
Published 22/04/2015 | 02:30
If Greece defaults on its debts, and leaves the euro, the effects will be very hard to calculate.
The precedent, that of a eurozone country defaulting on its debts and leaving the euro, will eventually place upward pressure on the interest rates charged to small eurozone nations with substantial debts. Big countries with either large government debts or weak banking systems could also be hit hard. Financial markets are emotional and erratic and often fail to make distinctions that should be made.
The effect of a Greek default may not, of course, be felt immediately, thanks to quantitative easing, but the underlying precedent will tend to corrode confidence in government bonds generally and confidence in the irreversibility of the euro. Maintaining confidence, and doing what is just and rational in an abstract sense, are not always the same thing.
If , for legal, political or cultural reasons, banks have difficulty getting hold of properties given as security for loans that are no longer being serviced by borrowers, they will tend to charge a higher interest rate on such loans.
The gap between the rate of interest banks charge, and the rate they pay for funds, will be wider than it would be if they knew they could easily realise their security, if a borrower defaults.
The rules for capital adequacy of banks, set by global banking regulators, have treated government bonds held by banks as risk free, and this has meant that banks buy a lot of government debt. If, thanks to a Greek default, government bonds are no longer risk free, this will call these rules into question. That , in turn, makes government borrowing difficult.
The present Greek crisis was not inevitable. It is partly the result of a decision by Greek voters, and partly due to post-election time wasting by the new Greek government.
A few months ago, it looked as if the Greek economy was about to start growing again, admittedly from a low base. As recently as August 2014, Deutsche Bank forecast that the Greek GDP would grow by 2.2pc this year. This was to be almost twice the forecast growth for the eurozone as a whole, and second only to the forecast growth for Ireland of 2.3pc, which has proved to be a significant underestimate in the Irish case.
Under the previous government, Greece had put in place a lot of structural reforms, more than almost any EU country by some measures. The labour market reforms improved the competitiveness of the Greek economy, but the full benefit of these reforms was not achieved because of cartels protecting some professions and services.
Syriza won office on a false platform which asserted that the previous structural reform programme had been a "failure".
It had not been a failure, it had brought Greece to the point where its forecast growth rates for this year were second best in the eurozone. It had simply taken longer to work than it would have done if international conditions were more favourable, and if it had been extended as vigorously to the professions, and to tax evasion, as it had been to employees.
Syriza convinced Greek voters that "austerity" was a "failure", without saying what those terms meant in practice, but implying instead that others should pay Greece's debts for it, as part of some sort of moral obligation the rest of the world had to Greece.
If one is spending more than one is earning, "austerity" is inevitable, sooner or later, unless you can achieve a rate of economic growth that is faster than the growth in your state's obligations.
The tragedy is that modern election campaigns have become shouting matches, which do not lend themselves to the sort of informed discussion that would have led voters to see, in time, the fallacy of policies that imply that one can persistently consume more than one is earning, without eventually facing "austerity".
John Bruton is a former Taoiseach and EU ambassador