The apparent beauty of the way the euro was designed was that there was no way out written into the legislation. Its founders believed, rightly, that having an exit sign would make it more likely to be used; they preferred to keep this uncharted territory.
This was one of the crucial ways in which the euro differed from its predecessor, the European Exchange Rate Mechanism (ERM). The latter could be bet against, as Britain saw to its detriment in 1992. The euro itself can be sold – as has happened aggressively this past week – and so can the euro-denominated debt of its constituent nations, but the currencies themselves cannot be separated by the markets.
This suits Greece. The lack of emergency exit signs will increase the negotiating clout of the anti-austerity government that most likely will be elected following fresh elections in June. The Greeks have no desire to leave the euro and the current legal basis of the EU means that nobody can force them to do so, even if they do end up defaulting on their debt.
This point is largely being missed in the hysteria that surrounds reporting the Greek debt crisis. There is a world of difference between defaulting on debt and the currency in which debt is denominated. If you lent me a tenner and I didn’t pay you back, it would be understandable if you decided never to lend to me again – but would I really have to leave sterling? Similarly, if a listed company or a local authority decided not to meet the interest payments on its bonds, it would also be unable to borrow privately for the foreseeable future. But would it have to abandon the pound as well?
Bath runs out
Greece makes up less than 2 per cent of the EU economy. The present uncertainty is hugely destabilising to the markets, but in economic terms if it refused to honour its current debts the long-term economic effects on the EU wouldn’t be much different from the effect in the UK if one of our smaller cities – say Carlisle or Bath – hit financing woes.
That doesn’t mean countries can’t decide to leave the euro of their own volition. After all, despite what the Eurosceptic voices in Britain may assert, they are still sovereign, even if, as part of that, they have decided to cede some powers elsewhere. Nobody would send in the army if the country concerned passed a law to revoke the relevant section of the EU Treaty within its borders and make the euro illegal tender. There may be a risk of legislative uncertainty around the operation of the EU treaties for a period but given the continuing benefits to all parties of being part of the same single market, there are easy ways to resolve them once diplomatic tempers have cooled.
There is no legal basis for a country to be kicked out against its will, though. Forcing a country out would require a change to the EU treaties, which by definition would need to be agreed by all EU members, giving the country in question a veto.
This is why the anti-bailout parties in Greece are on to something. They can refuse to continue with the austerity programme in its present form, safe in the knowledge that their desired position in the euro is safe. And what’s more they know that when push comes to shove, their creditors can be flexible – following the debt restructuring deal that took place earlier in the year, they consist primarily of the same international institutions that have an interest in things remaining orderly.
If a Syriza-dominated Greek government could not persuade the EU, IMF and ECB troika to suspend their demands for austerity and reschedule once more the debt-servicing payments, they could simply refuse to honour the debts of their predecessor governments and pursue an independent economic policy designed to stimulate the economy in the short term. The hope would be that, by redeploying the fifth of their national budget that has been historically spent on debt repayments, they could stimulate economic growth and so rebuild their tax base.
Naturally, if they failed, pressure might grow to be able to print more money to pay wages, which would then and only then require leaving the eurozone (and cause a devaluation-inflation spiral in the process), but that is not an inevitable outcome of the rejection of the austerity package. For now, the anti-austerity politicians are simply prepared to free-ride within the single currency.
The consequences for the rest of the global financial system are well understood. It would drive a spear into the heart of the Washington consensus that support for countries in financial trouble is contingent on austerity. It would give succour to the attempts of François Hollande to persuade Angela Merkel of the need to shift emphasis from austerity on to growth. But most importantly it would shine a spotlight on the weakness at the heart of the euro project: that because its constituent nations are sovereign, the temptation for the fringes to free-ride is hard to eliminate – however intricately any “fiscal compact” or “stability and growth pact” is designed.
Until these matters are resolved there will be huge instability, with markets punishing other, weaker economies in and out of the eurozone for the perceived errors of the Greeks. All institutions – British included – will be polishing their contingency plans for a variety of Eurogeddon scenarios as we speak, and the negative effects on consumer and business confidence will only entrench recession further.
Up to now, I had been a lone voice arguing that the difficulties experienced in the periphery eurozone nations were an example of the euro doing what it was supposed to do. Before the discipline of needing to remain in the euro, it had been too easy for a weak political class to devalue and inflate its way out of difficulties, rather than pursing essential, if unpopular, structural reforms.
Now I am beginning to shift my view. Perhaps the beauty of the current crisis is that it will force Europe’s leaders to sort out the faults in the way the euro was initially designed.
Kitty Ussher is an economist and former Treasury minister who now works as a research fellow at the Smith Institute