November 8, 2011

Once Greece goes, the whole euro project will unravel

Robert Jenkins, a member of the Bank of England's Financial Policy Committee, does a good job in setting out the potentially disastrous economic and financial consequences for Greece and the wider European Union if Greece is allowed to default via exiting the eurozone in this morning's FT (£).

That possibility was admitted for the first time by eurozone leaders at the Cannes summit last week. Obey or leave the club was their message. But, as Mr Jenkins explains, the consequences, not just for Greece but everyone else in the eurozone, would be potentially catastrophic. Once Greece goes, the other PIGS would sit there like ducks in a row, waiting to be picked off one by one, or perhaps all in one go.

However, there are two problems with the implication of his analysis, which is that Greece must be restructured within the single currency, since the economic consequences for all of it exiting are too awful to contemplate.

One is that the realpolitik of the eurozone is preventing the application of sensible policy to ease the plight of the periphery and allow the resumption of reasonable economic growth. It cannot be right to accept inappropriate economic policy simply because you fear the alternative might be even worse.

The other, related, criticism is that though the short term consequences of a break-up may be extraordinarily traumatic, the long term costs of staying together look pretty unappetising too.

Far from promoting growth and political solidarity, which is what the single currency was supposed to do, the euro is in fact achieving the opposite effect, by condemning the eurozone to long term recession and now extreme political infighting. Again, it cannot be right to persist with something which is achieving the opposite of what it was meant to simply because the alternatives are thought to be worse.
By suggesting that there will be no support for Italian bond markets until Italy reforms itself, the European Central Bank is playing god in a way which is almost certain to end badly.

Whatever Silvio Berlusconi's faults, which are undoubtedly many, since when was it thought acceptable for the central bank to effectively decide on what the government in Italy should be?
The now repeated imposition of supra-national policy by an unelected elite on the citizens of the eurozone has got to be ultimately unusustainable. The dangers of extreme populist backlash followed in short order by Balkanisation are all too obvious. If the euro goes, so does the European Union, Angela Merkel keeps saying. Actually, it is the other way around. Persistence with the euro is straining the whole EU to breaking point

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