Greece has been through the trauma of default and currency collapse before. It went horribly wrong.
The sequence of events in the inter-war years have a haunting relevance today. In 1932, Greece turned to the League of Nations and British bankers in a last-ditch effort to defend the drachma under the Gold Standard as reserves drained away.
The creditors dithered for three months but ultimately said “no”. Greece devalued and imposed a 70pc haircut on loans. Debt service costs fell by two-thirds at a stroke.
It seemed like a liberation at first. The economy was growing briskly again – at more than 5pc – within a year. Then the sugar-rush faded. The credit system remained broken. Greek industry was too backward to exploit a cheaper exchange rate, unlike Japanese industry under Takahashi Korekiyo at the same time. .
The government never regained its credibility. There were four attempted coups d’etat, ending in the military dictatorship of Ioannis Metaxas. Political parties were abolished. Trade union leaders were killed or imprisoned. Greece fell to Balkan fascism.
The cautionary episode is dissected in a seminal paper by the University of Athens. “The 1930s should perhaps be given more attention by those currently advocating the ‘Grexit scenario’,” it said.
The University of Athens’ paper
Nobody should underestimate the political hurricane that will follow if Europe proves incapable of holding monetary union together, and Greece spins out of control. The post-war order is already under existential threat from a revanchiste Russia.
State authority has collapsed along an arc of slaughter through the Middle East and North Africa, while an authoritarian neo-Ottoman Turkey is slipping from of the Western camp.
To lose Greece in these circumstances – and to lose it badly – would be an earthquake. Yet that is exactly what Greek prime minister Alexis Tsipras evoked in a blistering outburst in Le Monde, more or less threatening an economic and strategic rejection of the West if the creditor powers continue to make “absurd demands”.
Yet as a matter of strict economics, nobody knows if Greece would thrive or fail outside the euro. None of the previous break-up scenarios – ruble, Yugoslav dinar or Austro-Hungarian crown – tells us much.
The chorus of warnings from EMU leaders that Grexit would be ruinous for the Greeks is a negotiating ploy, or mere cant. Each of the sweeping claims made by EMU propagandists over the last twenty years has turned out to be untrue.
The euro did not enhance growth, or bring about convergence, or displace the dollar as the world’s reserve currency, or bind EMU states together in spirit, and refuseniks such Britain, Sweden, and Denmark did not pay a price for staying out.
To the extent that they believe their mantra on Greece, they risk misjudging the political mood. It leads them to suppose that Syriza must be bluffing.
Costas Lapavitsas, a Syriza MP and an economics professor at London University, thinks the new drachma would plunge by 50pc against the euro before rebounding and stabilising at 20pc below current levels. The trauma would be over within six months. “Greece would be growing at a 5pc rate in a year and it would continue for five years,” he said.
There has only been one ‘hard’ study on the macro-economics of Grexit, by Theodore Mariolis and Apostolis Katsinos at Panteion University in Athens. It concluded tentatively that a 50pc devaluation would not ignite rampant inflation – contrary to widespread claims – and would quickly restore trade competitiveness.
Gabriel Sterne, at Oxford Economics, said huge sums of money are sitting in foreign accounts, waiting to return to Greece as soon as the EMU boil is lanced and the devaluation risk removed. Accumulated capital flight has reached 60pc of GDP.
“The first few months would be absolutely chaotic but the money would come back. Hedge funds would be all over Greece buying dirt cheap assets,” he said.
It happened in Mexico after the Tequila Crisis, and in East Asia after the 1998 currency crash. The pattern is well-known to anybody who follows emerging markets.
“In our view, Greece is probably economically better off outside the euro, except in the very short run, and so long as it pursues sensible policies.”
This is, of course, a big “if”.
The matter is coming to head fast. It is understood that the Greek finance ministry has enough cash to pay the International Monetary Fund €300m (£220.7m) on Friday but cannot cover a €750m deadline next week.
While default is theoretically possible inside EMU, Greece would almost certainly be forced to impose capital controls, nationalise banks and create its own lender-of-last-resort. It turns into Grexit in short order.
Mr Tsipras met with the heads of the Commission and the Eurogroup on Wednesday night. EU officials were confident Mr Tsipras was angling for a deal, and that the meeting was the long-awaited breakthrough after four months of brinkmanship.
Perhaps. The creditors are giving ground for the first time, having refused to engage in any substantive negotiation since Syriza won a landslide in January. They have cut their demands for a primary budget surplus to 1pc of GDP this year and 1.5pc next year, yet there is still no debt relief.
Mr Sterne said the Greek leader may already have concluded that he has more to lose by betraying his core election pledges than he does by holding firm and precipitating Grexit, but must convince his own people that rupture was forced upon him.
My own view is that Syriza’s leaders do not yet know themselves what to do. Their illusions have certainly been shattered. A nine-hour “war council” three Sundays ago was a pivotal meeting; the moment when the party leadership swore fraternity and vowed to fight.
You could argue that Greece has already been through an internal devaluation, a brutal policy of breaking the back of labour resistance to pay cuts through mass unemployment. The real effective exchange rate has been cut by 24pc since 2009, according to the ECB. The worst is over. Why leave now?
Yet at the end of the day it comes down to emotion. I do not wish to rehearse the morality of this drama, but from the Greek point of view the loan package imposed by the EU-IMF Troika in 2010 was designed to save the euro and European banks at a time when EMU had no defences against contagion.
Leaked documents from the IMF buttress their claim. As such, the loans foisted on Greek taxpayers could be construed as “odious debt” under international law..
Troika policies have self-evidently failed. Greece is more bankrupt today than it was at the outset of the crisis, with a debt now of 180pc of GDP. EMU creditors continue to insist on a regime likely to leave the country just as bankrupt in the 2020s, with nothing to show for a decade of depression and austerity.
Whether or not you accept this line of thinking, it is Syriza’s deeply-held view. It lies behind Mr Tsipras’s angry words in Le Monde, when he accused creditors of creating an authoritarian monster to enforce the “doctrines of extreme neoliberalism”.
He alleged that their true goal is “make an example out of Greece” so that no other country will dare to follow suit, and implicitly warned tha his country will retaliate. “If some think or want to believe that this decision concerns only Greece, they are making a grave mistake.”
How this unfolds is anybody’s guess. Paddy Power has put odds of Greece adopting its own currency by the end of 2017 at evens. That sounds about right.
Whether or not a return to the drachma would end in ruin for Greece greatly depends on the post-Grexit policies of the EMU powers themselves. They could choose to stabilize the Greek exchange rate and the Greek banking system, or they could make matters worse.
What is certain is that if they deliberately sought to hold back Greek recovery – out of pique, or to warn others that EMU exit leads ineluctably to disaster – they will destroy the EU’s morality credibility altogether and set in motion the collapse of the project. They have to save Greece, drachma or no drachma.