‘Grexit’ is a very high-risk strategy

published 25 May 2012

Financial commentators have been queuing up to tell us that an early Greek exit from the euro is as certain as Manchester City spending a lot of money in the transfer market this summer. Citibank puts the chances as high as 75%. Bookmaker William Hill has stopped offering odds. The markets view it as practically a done deal and possibly before the summer is out.

In reality, a Greek exit or Grexit', as it has been dubbed is a lot further away than most people imagine. You need to remember just how small the Greek economy is. It can be bailed out again and again without it putting much of a dent in anyone's wallet. The eurozone leaders will chicken out. It is easier to reflate the Greek economy than face the completely unknowable risks of a disorderly break-up of the single currency.

The Greeks have had enough of the austerity package imposed by the International Monetary Fund and the European Union and rightly so. The economic collapse is becoming a social catastrophe. The economy shrunk by another 6% in the latest quarter, and is now 20% smaller than when the crisis began. Youth unemployment is above 50% and total unemployment over 22%. In the 1930s Great Depression, American GDP fell by 30% over four years. What's happening in Greece is on a similar scale.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Perhaps the Greeks did spend too much in the first decade of euro membership. And maybe they should make welfare cuts, get better at paying their taxes, and liberalise their economy. But it is crazy in a growing global economy (the IMF says global growth will hit 3.5% in 2012) for a country to endure this kind of collapse and completely self-defeating. As the economy shrinks, the deficit goes higher and the bail-out terms force the government to cut spending even further. You don't need to be John Maynard Keynes to realise that this will never work.

There is a lot of tough talk from Berlin about how the Greeks must stick to the austerity deal. The papers are full of anonymous briefings from German government officials about how there can be no going back. Preparations have been made for a Greek exit, we're told. The banks have been ring-fenced to prevent a continent-wide collapse. Firewalls have been put in place to stop Portugal, Ireland and even Spain from being forced out of the single currency a few weeks later. No one wants the Greeks to leave, it is said. But if they go, they go. It's their choice. The euro will carry on.

Very little of the bail-out money has been used to help the Greek people. Most of it has gone to ensure Greece keeps paying the interest on its debts and has ended up in the pockets of the banks and hedge funds that own Greek bonds. A modern-day Marshall Aid plan to reflate the Greek economy need not cost that much. A package equivalent to 10% of Greek GDP would only amount to 23 billion euros small change for the entire euro-zone economy.

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.