The more I read about the economic disaster in Greece, the more I wish they would let them out of the currency straight jacket that is part of the problem.
Greece has five main economic troubles. Its government has borrowed too much in the past, and wishes to carry on borrowing too much. The economy is declining year after year, as austerity bites with no currency depreciation or easier money to offer some relief. The balance of payments remain out of balance and difficult to finance, as Greece is not competitive with the more successful north of the Euro zone. Greece is mired in high unemployment, increasing its deficit and depressing its tax revenues. The banking system is weak. People afraid of the future are taking money out of Greece to put it into safer havens, doing more damage to activity in Greece.
The official answer to all this is to raise taxes and cut public spending. The aim is to cut the deficit, hoping that the debt and deficit can be financed in the normal way. So far this has neither succeeded in cutting the deficit by an encouraging amount, nor has it impressed the bond markets. Greece remains miles off being able to finance itself in the usual way.
The EU and IMF make heavy weather each time of lending more to Greece. The endless public arguments over how much more austerity Greece has to enforce to justify more borrowing undermines confidence more and leads to further money flight from the blighted country. An IMF programme for an indepenndent state with its own currency usually entails a devaluation to price the country back into export markets and to cut the value of outstanding debts, and a sensible domestic money policy to allow private sector led expansion. Greece is denied both these features of a normal IMF programme by being in the Euro.
The EU, IMF and Greece should make private decisions to move rapdily to a Greek exit from the Euro. There will be one off effects on debts, banks and the economy, followed by a real chance of econ0mic recovery. Greece needs growth. It needs more tax revenue to come in from more profit and income to tax. It needs more rich Greeks to keep their money at home or bring it back home. Only a new currency sensibly valued can bring forward that confidence.
Tomorrow we will look at how this could be done politcally and legally. It would be a much better option than doubling up the austerity as the economy continues to fall over the cliff. I do not accept that this would cause economic disaster. The price of Greek government bonds has already collapsed, Greek banks are already weak reflecting that and Euro area banks have already written down their positions in Greece. I do not see how Greece returns to decent growth on current policies, and growth is what it needs to give hope amongst the cuts. A devaluation, properly organised, merely acknowledges losses already recorded by investors in Greece, whilst starting the process of adjustment necessary to rebuild the economy.