2 Nov 2011

Athens: the lessons of monetary history for Greece

I touchdown in Athens with the task of finding what on earth is going on in this country that unwillingly holds the future of Europe in its palm. Generals being fired, all-night cabinet meetings, capital flight and a plausible fall of the government within days.

The people of Greece are about to be taken on a nightmare journey. This is not to understate the unpleasant travels so far in an economy that is being crushed, by pay cuts and tax rises. But in order to win this national plebiscite, George Papandreou will have to scare the Greek people into choosing what he believes is the least worst option. He is going to take Greece to the cliff edge of hard default, destruction of savings, bank runs, capital controls, trade tariffs and leaving both the euro and the European Union, let Greeks peer over the edge and hope they don’t jump.

Because in the coming hours and days it will be made very clear to Greece by France, Germany and the ECB that there is no chance that their bailout deal will again be renegotiated.

Hotel California

The choice therefore will be “in or out”. Of the euro, yes, but also the European Union. There is no provision in European treaties for a departure from the single currency alone. It would require a treaty renegotiation (incidentally from all the EU27, not just the euro countries) that would be likely to see all the downsides of euro exit immediately, with the benefits far off. A new Drachma would require an almost martial effort to stop the use of euros, following the reintroduction of capital controls.

The 50 per cent plus devaluation that would follow a euro exit would destroy the value of savings in Greek banks. It’s no coincidence that UK banks are seeing an influx of Greek saving. Oh yes, expect massive trade tariffs from the remaining EU to make up for the devaluation.

To sum it all up, one economist, UBS’s Stephane Deo likened the euro to Hotel California “where you can check out but you can’t leave”, pointing out that, “almost no modern fiat currency union has broken up without some form of authoritarian or military government or civil war”. He calculates a cost of €10,000 per Greek person, followed by recurring costs of up to €4,000.

Will there be a referendum?

Of course those costs will fall proportionately on those with large savings, who have kept them in Greek banks. So if you are poor and young, and suffering from higher taxes and no job prospects, it may still be rational to vote “no”.

What is clear, is that, the Troika and Germany may have underestimated the sense of humiliation in Greece following September’s withdrawal of inspectors, and instigation of the electricity bill property tax on this month’s bills. Additionally for all the noise, it’s this month’s public sector pay packets that have seen the first really significant cuts, as opposed to withdrawal of bonuses.

Many judges are working to rule, which means leaving the courts at midday. I hear that many ministries aren’t functioning properly.

So that’s why opposition to the austerity package remains strong, even as euro membership is strongly backed. And it’s why no one knows if a referendum can be won. Whether or not there will actually be a referendum is another question however, that I’ll return to tonight.

Follow Faisal’s euro travels on Twitter: @FaisalIslam