Grexit hasn’t been cancelled – it’s just been delayed

Greece could well yet decide to leave the euro, says Matthew Lynn. And if that happens, the markets will be caught unawares.

The sun-drenched beaches should be packed with British and German tourists enjoying cheap holidays. The factories should be buzzing with orders for exports for northern Europe. And the fields should be teeming with olives to send around the world.

To read some of the commentary from 2011 and 2012, you'd assume Greece would be out of the euro by now, and that, freed from the shackles of the single currency, it would be booming again.

A dramatically devalued new drachma would create an export boom and the holiday trade would soar as it became the cheapest destination on the Med.

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There is just one problem. It hasn't happened. Instead, Greece is grinding its way through the fifth year of a terrible recession, with output still falling, and unemployment still rising. The markets have stopped worrying about a Greek exit from the euro the so-called 'Grexit'. Indeed, there has even been some talk of a Greekcovery' getting underway.

But the Grexit' has not been cancelled, merely postponed. It was not possible for Greece to leave the single currency in 2012 or 2013, but it will be in 2014 or 2015. It may happen and if it does, it will come as a huge shock to the markets.

Four years on from the first signs of the eurozone crisis, the Greek economy is still in a terrible state. It is forecast to finish 2013 with output 4% lower than it was at the start of the year. The economy is one quarter smaller than it was when the recession started for a comparison, the US economy shrank by just over 30% in the 1930s Great Depression, so although Greece is not as bad as that yet, it is getting close.

Unemployment has soared to 27% and youth unemployment is up to a terrifying 55%. The government is forecasting a modest recovery in 2014, but the OECD, a rich-country think tank, thinks the economy will still be shrinking next year and while the EU and the IMF have been predicting a turnaround, they have done so every year since 2011. It has not materialised yet, and there is not much reason to think it will do so this time either.

So far the Greeks have stoically accepted their fate, and stuck doggedly inside the eurozone. In reality, a recovery remains as distant as ever. According to research by Renaissance Capital, for every Greek person who works, there are now two who don't the highest ratio in the world. In Britain, for example, the ratio is just one to one.

To get that back down to more normal levels or even the one to 1.5 rate recorded in slow-growth countries such as France would require a fantastic rate of new job creation.

True, wages are falling in real terms as a result of mass unemployment. But wages are still higher than they are in Poland or Hungary and as long as that is true, it is hard to see the major export revival that would be needed to bring the Greek jobless total down significantly.

As long as Greece stays in the euro, it faces years of grinding poverty and economic decline. Throughout 2011 and 2012, it was very hard for Greece to leave the single currency, no matter how obvious the economic gains.

It had a huge trade deficit, and the government ran a big budget deficit as well. It would not have had the hard cash to import oil, food or medicines, and the government would have run out of money within days if it no longer had access to bail-out funds from the EU.

It could have got out with financial help from the IMF, but since that wasn't going to happen, it was impossible to escape. It was trapped and most Greeks knew it.

By next year, that will have changed. Greece now runs a trade surplus. Tourism, a major Greek export, is up by 12% this year as the price of holidays falls (mainly because of falling wages in what is a labour intensive industry). At the same time, mass unemployment and falling wages mean Greece imports far less than it used to.

The net result? It now pays its own way in the world and doesn't have to rely on borrowing money in the global capital markets to stay afloat. By next year the government will be running a primary surplus as well.

It won't be raising enough in taxes to pay the crushing interest on all its debts, but it will be bringing enough in to meet its day-to-day running costs.

That changes the calculations. From next year, Greece can leave the euro without having to ask for help from anyone. The new drachma will be capable of paying for its imports. Indeed, the trade surplus will increase because a devalued new currency will boost its exports even further.

The government need not collapse either. It will have enough cash to cover its daily needs. The interest on its debts won't matter so much, since it can simply default on them, or else pay them back in drachmas rather than euros. If it needs more money, it can simply print it.

Will it happen? It is impossible for anyone to say. But the far-left Syriza party, which rejected the bail-out terms imposed on Greece by the EU, has been leading in the opinion polls over the past few months.

If it comes to power, it may lead the country out of the single currency. The most likely year for that is 2015, but 2014 is a possibility. The Grexit hasn't been cancelled it has just been delayed. And if it happens, it will be the one event the markets have not prepared for.

Matthew Lynn

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.