There are two sensible answers to the Euro crisis. Greece could leave the Euro, devalue its currency, and come to an accommodation with the markets over what it needs to do to enable it to borrow again. That would be the best answer for the Euro, and would enable Greece to take part of the cuts in its living standards through devaluation, as the UK is under its own version of an unsuccessful economic policy based on too much state borrowing. Alternatively, Greece could cut its public spending more substantially, until the markets believe it can then afford the debt it needs and already has.
Instead, the governments debate two dangerous answers. They take seriously the idea that Greece should fail to make payments on its debt – a form of government theft from the savers who have in the past supported Greece and believed its promises. They discuss lending Greece more money on easy terms, based on the absurd idea that the way to sober a drunkard is to give them another drink.
I find it suprising that so many governments, Euro commentators and so called experts expected the Euro scheme to work when they put several economies into it that had not come into line with the performance and costs of the core countries. I and a few others warned strongly about the dangers of the debt and the starting exchange rates when we made the case against the UK establishment, arguing that the UK should never enter such a scheme. In “Just say No: 100 arguments against the Euro” I pointed out the destabilising effects of the countries having different levels of debt and different levels of new borrowing. I said “Controlling budget deficits is central to this task” of creating a decent currency. It was quite obvious that for the scheme to work member states had to surrender domestic budgetary control to the EU, to avoid free riding on average interest rates or to avoid Greek style disasters. Indeed, in the founding paperwork of the Euro it was spelt out that member states had to keep their stock of debt to 60% of GDP and their extra borrowing each year to no more than 3%. The decision to allow relaxation of these necessary rules has led directly to the Greek crisis.
It was also clear that a country had to bring its private sector costs into line with the zone as a whole as well as control its state deficit. “If you cannot devalue your currency when your costs are too high, you have to sack people and close factories” – exactly what has happened to the olive belt economies.
It does no-one any favours to imply there is a quick fix, or to suggest lending Greece billions this year will solve the problem. The underlying problem is fundamental. The Euro can only work and be a decent currency if there is in effect one state budget for the Euro area. Germany needs to reinforce the rules over how individual members do borrow, not grant an easy loan and watch as Greece still fails to sort out her borrowing habit.
Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU