Paul Krugman Is Right; Greece Should Leave The Euro

JUN 20, 2015 @ 6:40 PM

Forbes

Tim Worstall ,

What with the nearing denouement of the Greek debt crisis the real question is, well, what actually should be done? And that in turn means that we’ve got to decide whose interests should be paramount. There’s perhaps three groups that we should be thinking about and how we weight their interests is going to tell us what should in fact happen.

The first group are those who insist that the European Union is the culmination of history, that ever closer union is something near holy. I know that sounds excessive but having actually worked in EU politics there really are people who think that way. Absolutely anything can be, and is, justified by this need to keep the juggernaut rolling to one unitary state. The euro is of course an aspect of this and allowing a country to leave the eurozone would be a terrible betrayal of this dream. Given that I’m a eurosceptic (to give you a sense of my bias on this issue, I’ve worked for and been a candidate for Ukip, the British political party saying we should leave the EU altogether) I place very little weight indeed on the demands of the federasts.

The second group is the citizenry of the other eurozone nations. If Greece defaults and or leaves the euro then many billions (hundreds of billions of euros in fact) of theirs will disappear along with the country’s departure. And we might indeed place good weight on their hopes, desires and cash. However, the turth here is that this money has already been lost. All that remains is to work out when and how that loss is going to be recognised. That it’s gone is already known. There’s no way at all that Greece is going to pay back €330 billion or so. And that money is almost all owed (whether through the EFSF, ECB, Target 2 funds or whatever) to the citizens, the taxpayers, of other eurozone countries. It might be that the losses come as the result of inflation. The very long maturities and the low interest rates of the current loans are going to mean significant real losses over the decades. Or it could be that Greece leaves now, or defaults, and the losses are crystalised and made obvious right now. So while we might place weight on their desires and interests, it doesn’t really make much difference. That money is already lost.

And then there’s the Greek people themselves. They, obviously, would like to see an economy that was growing, one that can employ their children, create the tax revenues to pay pensioners and all the rest. And as Paul Krugman points out, that really does mean leaving the euro:

Suppose that there were a way to end this depression. Then Greece’s fiscal problems would melt away, with no need for further cuts. But is there any way to do that?

The answer is, not as long as Greece remains in the euro. It can pursue reforms that might make it more competitive, but anyone promising dramatic, quick results has no idea what he is talking about.

On the other hand, Grexit would produce a rapid improvement in competitiveness, at the cost of possible financial chaos.This is not a route anyone has been willing to go down, but one does have to say that as the crisis worsens it becomes a more plausible outcome.

Greece should never even have applied to be in the euro in the first place. The country’s then government fiddled the figures to get into it (and everyone else was complicit in not looking too closely at those numbers). The Greek government then connived with various banks (including Goldman Sachs) to paper over the numbers again after entry and even as late as 2011 were still being a great deal less than truthful about the budget deficit and so on. The bailouts were done the wrong way, alleviating not the unpayable debt burden but removing the risks from the commercial banks and on to the taxpayers’ books. It has simply been a series of extraordinarily bad decisions by all involved all along.

Time to disappoint the federasts, acknowledge that the money is already lost, and get the Greek economy growing again by a combination of default and exit from the euro. And yes, I agree that I’m hugely biased here: but still right on the economics as Paul Krugman is pointing out.

My latest book is "The No Breakfast Fallacy, why the Club of Rome was wrong about us running out of resources." Amazon and Amazon.co.uk. $6.99 and relevant prices in other currencies.