It is a pretty difficult period for the world economy. The new BIS Annual Report (on which more later) keeps repeating that world growth has been back at around long-run averages. But a quick glance down the headline stories on MacroDigest this morning (and it is much the same on the FT or the WSJ) reveals this collection:
Puerto Rico “can’t pay $72bn of debt”
Greece threatens top court action to block Grexit
Double bubble trouble in China
A failed euro would define Merkel’s legacy
BOE’s Haldane: Record-low rates necessary for continued recovery
My 12 year old has asked me to start teaching him economics, and we are bombarded with stories to discuss. This morning, at least, there are no good-news stories.
Of course, most focus is on Greece. I’ve recently lost a long-running wager on Grexit. Three years ago I bet a senior official who was much closer to the politics of the euro area that at least one country would have left the euro by mid-June 2015. His story was, essentially, that the European authorities would do whatever it took to hold the euro together and make it viable for the long run, partly because the alternative was so awful. My story was that the economic stresses were sufficiently severe, and choices would ultimately be made in individual nation states, that euro was most unlikely to hold together, at least with anything like the number of countries it had then.
In 2012 I certainly underestimated the political determination, and probably also the extent to which Greek public opinion would want to stay in the euro, no matter how bad the economy got. Getting into the euro seems to have been a mark of a successful transition to a modern democratic state. This was, recall, a country that had been ruled by the colonels as late as 1974, and had had a civil war only thirty years prior to that. Even now, there is no certainty that a “no” vote this Sunday – in respect of a package which is no longer even on the table – will lead to Greece quickly leaving the euro. With tight enough capital controls, and the rudiments of a parallel currency, perhaps they will limp on for a while yet. The political imperative still seems to be that if Greece is going to leave, the narrative has to be one in which “other countries forced us out”. Greece doesn’t seem to be ready to positively embrace exit – political dimensions aside, the path through the first year or two beyond exit is pretty difficult and unclear. For those of you who have read Pilgrim’s Progress, it is perhaps reminiscent of Christian’s fear as the river rises around him – the river he must cross to enter the celestial city. Grexit is no path to nirvana, but it does promise something better.
Because if exit looks frightening, going on as things have been in the last few years shouldn’t be remotely attractive either. The simple mention of 27 per cent unemployment should really be enough. Add in no sign of any sustained growth in the external sector of the economy, and it is a picture of any economy that has made no progress at all in reversing one of the very deepest recessions of modern times. None of that is to deny that there have been useful reforms. But, as I’ve said before, there is no sign of any politically acceptable deal (politically acceptable to creditor countries and to the Greeks) that in consistent both with Greece staying in the euro, and with securing a strong rebound in economic activity and employment in Greece. “Tragedy” is an over-used word, but surely this is one?
Part of the sheer awfulness of the situation is realising the part that other countries played in bringing this about. And here I include even remote countries like New Zealand, which did not speak out – or even speak quietly – against the IMF involvement in the deal. Without the bailout package in 2010, this crisis would have come to a head five years ago. It is now hardly controversial to suggest that the case for the 2010 bailout package, rather than a widespread Greek sovereign default, was mostly about the French and German banking systems, and concern with the possible ramifications for the wider world economy and financial system. None of this absolves the Greeks of some responsibility. Technically, no one forced them to take the deal. But as the Irish and Italian authorities also found, it can be very difficult to resist the pressure to accede to the wishes of the ECB and core euro-area governments.
Where to from here? As Gideon Rachman put it in his FT column today
If the Greek people vote to accept the demands of their EU creditors — demands that their government has just rejected — Greece may yet stay inside both the euro and the EU. But it will be a decision by a cowed and sullen nation. Greece would still be a member of the EU. But its European dream will have died.
And if Greece does leave, who will be next, and when? It might take some time, but with no sign of a strong or sustained rebound in European growth, it is difficult to see the euro surviving in anything like its current form. It probably isn’t a risk in the next few months – the ECB and the Commission can deploy support mechanisms to manage any resurgence of external market pressures. The threat is more from public opinion – of realising, a year or two from now, that there is viable life outside the euro. Places as badly managed as Argentina didn’t lapse into permanent economic depression after default and the abandonment of a fixed exchange rate.
The euro has not delivered the promises of its advocates and founders. Further integration of national policies seems increasingly unlikely to happen. Breaking up is hard to do, and in this case could be very disruptive to the wider world economy (with so little policy firepower left anywhere) But the end of the euro, one of the more hubristic policy experiments in the modern West, would probably be good for the longer-run health of the member countries, and especially for their ability to respond to future shocks. What it might mean for the future of the EU itself is a bigger question. One could envisage very bad outcomes – a reversion to the controls of 1957, before the EEC was first negotiated. That doesn’t seem very likely – trade barriers are much lower now than then around the world. Perhaps over time what might emerge is something more like a free-trade area without the overlay of other controls and bureaucratic apparatus of Brussels. For citizens, even if not necessarily for officials, politicians, and lawyers, that might be rather a good thing. It might even make membership of a much more modest EU attractive in the UK.