Merryn's Blog

Greece should ditch the euro, and default

Greece should go for the nuclear option – get out of the euro and default on its debt at the same time.

You wouldn't want to be trying to get anything done in Greece today. Its trade unions are launching another 24-hour strike in protest at the austerity measures being introduced to try and deal with the country's ludicrous levels of debt.

Schools will be closed, as will most hospitals and government offices. Domestic flights will be hit, and the banks will be closed. In fact, just about the only thing still operating will be the media there isn't much point in making a major political statement if no one is reporting it to the rest of the world.

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It's perfectly easy to understand why the Greeks are striking. They are being asked to downgrade their lifestyles significantly, and no one ever likes that. "We want an end to the freefall of our living standards," said the head of one of the nation's biggest unions at the beginning of the last strike earlier this month.

The problem is that stopping a fall in living standards in Greece simply isn't possible, regardless of how often and how long the Greeks might be out on strike for. The austerity option might bring lifestyle downgrades with it, but so do all the other options.

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There is much talk of Greece dumping the euro. But that won't help much in the immediate term. The idea is that a return to the free-floating drachma would mean that the cost of Greece's exports would plummet and its GDP rise accordingly. But what are these exports? There are only so many beach holidays the rest of Europe can take and - as CLSA's Russell Napier puts it - only so much feta the Germans can eat.

Sure, over time, a low currency and the relatively cheap wages that implies will draw in corporates and prompt growth. But prior to that, the fall in living standards would just go on and on. Note too that leaving the euro would make little difference to the debt it would in the main continue to be denominated in euros. So the austerity measures would have to keep going too.

The other option is simply to default on the debt. But that comes with difficulties too. Defaulting might dispose of part of the national debt. But it can't do away with the fact that running Greece costs more than Greece currently charges its taxpayers. At the moment, that gap is plugged via the international debt markets. But if Greece defaults, those markets will close. Then the austerity will be even worse.

Add it all up and there seems little point in striking there is no way for the "freefall" in living standards to be stemmed. So what should Greece do? If I was striking today I think I'd give up on the lifestyle whining and call for the nuclear option getting out of the euro (this seems hard but it is really just a matter of complicated legal procedure) and defaulting at the same time.

It might seem slightly extreme. But it's clear that the eurozone can't exist in its current form anyway (particularly now that the Germans have started panicking with their daft short-selling ban). And it is also pretty clear that Greece will be defaulting at some point regardless of bail-outs.

So why shouldn't Greece exit and default at once? It will still get the inevitable lifestyle downgrades. But it will also dispose of the worst of its debt burden and get its monetary flexibility (along with any growth this might encourage) back at the same time.

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And it will at least own the process, getting out before either Germany forces it out or leaves itself. The rest of Europe might not be keen (their banks may find coping with the fallout tricky) but I can't imagine the Greeks are in any mood to care. They should just do it now.




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