| 6.5°C Dublin

Neither a debt write-off nor a Grexit would spell good news for Ireland


Uneasy relationship: Greek Prime Minister Alexis Tsipras and European Commission President Jean-Claude Juncker

Uneasy relationship: Greek Prime Minister Alexis Tsipras and European Commission President Jean-Claude Juncker


Uneasy relationship: Greek Prime Minister Alexis Tsipras and European Commission President Jean-Claude Juncker

Never has so much been written over such a long period of time about such a small a country. And a great deal of what has been written on Greece is based as much on the prejudices of the authors as it is on a balanced assessment of the many factors at play.

For one group of commentators, the European and IMF side is wicked and uncaring, wanting sadistically to keep Greece in a permanent austerity trap. This side of the debate argues that Greece's debts should be written off and that lifting the burden would solve the country's problems in one fell swoop.

For another group of commentators, taking a diametrically opposing view, the governments which ran Greece until early this year were weak and unreliable, frequently backsliding on the promises they made. The current Syriza-led administration is not only even less dependable, but it also disagrees ideologically with most of the measures the rest of the eurozone believes Greece needs. The anti-Greece brigade argue that after five-and-a-half years of crisis, it should be drummed out of the euro, and this would solve the eurozone crisis.

Here in Ireland, the first view is much more common, in part I suspect because backing David over Goliath allows one to take the high moral ground. Speaking from that position and being on the side of the angels is always a safer place for a commentator, particularly in a country in which the tradition of displaying piety publicly is so strong.

The human urge to seek simple solutions is strong. Alas, many of the world's problems do not have simple solutions. The problems of Greece and the curozone not only do not have simple solutions; they have no good solution.

Consider first what would happen if all of Greece's debts were written off. Advocates of this course of action assume that Greece is weak economically only because of its debts. That is simply wrong: its export sector is small, foreign investment has historically been meagre, bad government has hampered business and the education system is poor, to name but some weaknesses.

A debt write-off would not do anything to make these matters better. And it would do less than its advocates believe to lessen austerity. That is because the burden of the debts is actually much smaller than is commonly understood.

Interest payments are expected to be 4pc of GDP this year, one-third the amount paid 20 years ago and only 1 percentage point above the euro area average (thanks to very cheap bailout loans). There is no doubt that diverting the money from interest payments to hiring more public sector workers and reversing pension cuts would boost the economy, but it would not be transformative even in the short term and certainly not in the longer term.

And then there are the political costs of writing off the debt. Although there seems to be little concern in Ireland about the €350m Greece owes us, public opposition to writing off Greece's debt in other countries is much stronger.

Anti-Euro parties in Germany and Finland would almost certainly gain in popularity at the expense of governments if their loans were written off. In countries such as Ireland and Spain, governments would also be likely to lose support. Sinn Féin would claim it was right all along to back tough-talking Syriza.

If the debt write-off option will not cause milk and honey to flow across the eurozone, nor will forcing a Grexit.

For long-suffering Greece, re-establishing a currency would cause another massive recession. Nobody, anywhere, disputes that.

The costs more widely would also be high. In the very short term - within hours or days of a Greek default and departure from the euro - another financial crisis could flare up if the shock of an event of truly historic proportions triggers a panic.

Although the European Central Bank is better equipped to deal with such a flare up in the market for government bonds, there are limits to its powers in that market. In the many other markets - for shares and bonds of companies and banks - there is less it can do.

With the prices of so many bonds and shares having risen very strongly in the past couple of years, there are fears that a bubble exists. If that is the case, a Greek default and departure from the euro could well burst it.

For Ireland, another big financial crash is the last thing we need. Given the inherent weaknesses in the Irish economy that linger as a result of the property slump, we are more vulnerable than most peer economies if financial panic follows a Grexit.

But that is not the only downside if Greece goes. Over the longer term, the departure of any country would fundamentally change the nature of the euro. The single currency would go from being a permanent union to a glorified exchange rate mechanism. And if currency unions historically have not had a strong record of holding together, the history of exchange rate mechanisms is worse, with countries periodically crashing out of them.

Ireland is so integrated into the European and world economies that any increase in the risk of leaving the euro would have negative implications for much of the wealth creation that takes place here. And if it ever were to come to pass that Ireland followed Greece out of the euro, the effects would lead to a recession as deep, if not deeper, than the property crash.

As of last night, it appeared as if a deal was in the making to keep Greece in the euro for now. If that is the case, then expect many more summits and crisis meetings to deal with fresh problems. It may be that the best that can be hoped for is more months and even years before Greece stabilises economically and politically - but all the while staying in the eurozone.

Irish Independent