Ex-Bank of England boss sees a way to a ‘rapidly growing’ Greece

Published: Apr 3, 2015 1:19 p.m. ET

By SILVIA ASCARELLI SENIOR NEWS EDITOR

NEW YORK (MarketWatch)—If Greece were to leave the eurozone, it would face “pretty horrendous” times in the short term, a former head of the Bank of England said.

But after 2 1/2 to three years, it would have a “rapidly growing” economy and falling unemployment, said Meryvn King, who ran the Bank of England from 2003 to 2013. He spoke before an audience of mostly Princeton University professors and students Thursday.

King was careful to avoid forecasting how cash-strapped Greece and other members of the eurozone would resolve the country’s long-running financial problems, saying it is a political decision. The Greek government elected in January on an antiausterity platform needs an extension of the country’s bailout but hasn’t delivered a plan that satisfies its creditors. Meanwhile unemployment is above 26%, similar to the peak for the U.S. during the Great Depression, and the economy has contracted sharply over the last four years.

Some other members of the have stretched finances and high unemployment, although not all have been forced to accept bailouts.

The U.K. is part of the 28-member European Union, but not the 19-member eurozone. Indeed, its own efforts to tie sterling to a broad exchange-rate band against other European currencies ended in September 1992, during another European currency crisis. Sterling quickly plummeted in value but soon recovered, as did the economy. Of course, in that episode the U.K. still had its own currency. Greece would essentially be forced to start from scratch in re-establishing the drachma.

King made no mention of that history but said he saw four possible solutions, either on their own or in combination, to the eurozone’s problems. All, he acknowledged, are “unpalatable choices,” which is why politicians prefer “muddling through.”

Here are his four:

— Continue with high unemployment in some eurozone countries until wages and prices fall enough to restore economic competitiveness. That, he noted, would be quite painful.

— Encourage higher inflation in Germany, perhaps 5% for five years, and restrain wages and prices elsewhere to eliminate the competitiveness gap. While it would be the least painful, it would be the hardest to achieve, he said.

— Accept indefinite transfers of cash to weaker eurozone members in southern Europe. But it’s unclear how that could be done without conditions imposed by countries providing the cash—which he forecast could exceed 5% of gross domestic product—and resistance to those conditions by the recipients.

— Accept a partial or total breakup of the eurozone.

Also read: Mark Mobius says ‘no question’ Greece will remain in the eurozone

Were Greece to leave the eurozone, an idea that has been dubbed a “Grexit,” it likely would need to impose capital controls to keep money from fleeing the country, nationalize its banks and restructure its debt, King said.

King noted that he would never underestimate the political commitment to making the eurozone work, “but that makes me more worried than the other way.”