If Greek prime minister Alexis Tsipras had a couple of drachma for every time someone had predicted that his country was about to tumble out of the eurozone, he could probably keep its beleaguered economy afloat all by himself. Even so, with the dramatic events of the last few days, it looks closer to the exit door than at any moment since the crisis began five years ago.
Capital controls have been introduced and a referendum is scheduled for this weekend on whether or not to accept the latest bailout deal offered by the European Union. Yet the bad blood between the Greeks and the rest of its partners in the eurozone now seems so deep, and there is so little willingness to help the country, that an exit from the euro seems more likely than ever before.
There will be pain in Greece, then growth
There will be plenty of dire warnings about what will happen to Greece if it does leave. There is no question that the transition to a new currency will be chaotic, and will involve a lot of hardship. The Greek banks may well be insolvent, and the country will be desperately short of foreign currency. There won't be many people wanting to swap a barrel of oil, or a new Toyota, for a bundle of newly minted drachma. Times have been tough for the Greeks for some time, but could be about to get a lot tougher.
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And yet, history suggests that Greece will in fact make a fairly swift recovery, as have many other countries when breaking out of failed currency unions particularly if we assume that there will be some help from a shamefaced International Monetary Fund. For example, in 2001 Argentina was forced to end its currency peg to the dollar, and massively devalued its currency during a banking crisis. But between 2003 and 2007 growth averaged an impressive 8.5% a year. Greece could do the same. A Grexit will likely be followed by a 'Gre-covery' with these four features.
1. Tourism will boom. Greece has a lot of sunshine and a lot of beaches, and that is always a good combination in the travel industry. Tourism is hugely price elastic, to use the economists' jargon, which means that cuts in prices boost demand a lot. The troubles in north Africa, an alternative destination for cheapish package holidays, are also going to help. If Greek resorts are the cheapest in Europe, they will easily attract a lotmore visitors and the industry willgrow very quickly.
2. Domestic demand will rise. Luckily for Greece, tourism is a labour-intensive industry. Hotels, restaurants and bars have to employ lots more people as they increase their turnover, and since Greek unemployment is above 25%, it is not as if they will be short of applicants. As lots of new jobs are created, those people will have money to spend again in the shops, and that will give the economy a second big boost. Most of Argentina's recovery came from rising internal demand, not exports and Greece will be the same.
3. Shipping will head back to the high seas. Like tourism, shipping is fiercely price competitive. Greek shipping accounts for 16% of the world's merchant fleet, the largest in the world. No one really cares whether their Toyota gets from Asia to Europe in a Greek, Korean or Dutch cargo vessel. They just want it to get there as cheaply as possible. Once costs come down, the Greek shipping tycoons should be able to push up their market share very quickly, bringing hard currency into the country and creating more jobs as well.
4. Industry will grow. Greece doesn'thave a highly skilled workforce, nordoes it have much in the way of infrastructure to create a manufacturing base. Then again, neither did Turkey,its close neighbour. What it does have going for it, just like Turkey, is lots of cheap young workers and a great location, right in the middle of the trade routes between wealthy core European countries and the booming economies of Asia and the Middle East. If Turkey can be the 27th biggest exporter in the world which it now is there is no reason why a dirt-cheap Greece can't be a manufacturing centre as well. Turkey has done well in textiles and heavy manufacturing, such as building materials, where speed and proximity to the market count for a lot. Greece can do the same.
The dangers of contagion
Put those factors together and the speed of the recovery will be striking. Any economy that has contracted by 25% over five years, as Greece's has done, has a huge amount of spare capacity just waiting to get back to work again. All it needs is a revival of demand and with its own central bank under its control again, Greece can provide that. It might not grow quite as fast as Argentina did, but no one will be surprised if it grows at 5%-plus from 2017 to 2022.
In fact, the real danger for the eurois not the losses inflicted by its bankruptcy. It is that Greece may be so successful once it leaves the euro that it will encourage others to get out. Portugal, Spain, France and Italy willall be eyeing it enviously. And investors who get into the Greek market soon after the Grexit will do surprisingly well.
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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.
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