Europe Should Call Greece's Bluff

FEB 2, 2015 2:00 AM EST

By Guy Hands

Bloomberg

In November 2011, I hosted a dinner for senior German bankers that was dominated by heated debate over the continuing Greek financial crisis. They were adamant that Greece should not again be rescued by Germany and its European partners or the International Monetary Fund. I argued that a further bailout was the only option.

It wasn't because I disagreed with their view that the Greeks were largely the authors of their own misfortune. I simply believed the European banking system was too weak to survive a Greek default. The turmoil that would follow, I argued, would pose a direct threat to the euro and the world economy. Contagion was simply too big a danger -- a view European Union leaders seemed to share when they announced the second Greek bailout a few days later.

Three years on, infection remains a serious risk. But the disease is different, and the patient is stronger. While the European economy remains in the doldrums, its banking system and the world economy are in a better state. That's why it's now essential for Europe’s leaders to insist that Greece’s new government stick to its financial commitments, regardless of what it promised the electorate.  

Thankfully, an immediate post-election crisis was avoided when the new Greek Prime Minister Alexis Tsipras stressed that his country would not default on its debts. But in demanding a renegotiation over the terms of repayment, he hopes to achieve the same ends through different means. Europe’s leaders cannot afford to let him have his way. They have to be clear and firm in requiring Greece to pay and do what it promised.

This is not from any desire to punish the Greek public. They have experienced severe declines in living standards in recent years. But they have also benefited hugely from their adoption of the euro and, since the crisis hit, a huge write-off of their debts and the enormous sums poured in from hard-pressed taxpayers in northern Europe.

It is true Greek gross domestic product has fallen by 25 percent since 2009 -- an almost unprecedented reduction for a developed economy. But GDP remains close to twice the level it was when Greece adopted the euro in 2002. Real wages may have fallen over 20 percent since the crisis -- but they, too, are still above 2001 levels.

Times are very difficult for Greece. But the impact of default and abandonment of the euro would be far worse on Greek living standards in the short term. Its government would struggle to meet public sector salaries or welfare payments, the country’s banking sector would be thrown into crisis, savings would plunge in value and the cost of imports would soar.

This explains why, despite all the difficulties, a continent-wide survey late last year found that 59 percent of Greeks still believed the euro was good for their country compared with 29 percent who were against it. This is a higher level of support than in Italy, France or Spain. The latest EU poll also found the proportion of British citizens who believe they would have a better future outside the EU is higher than the proportion of Greeks who think the same.

The surge in support for anti-EU parties across the rest of Europe further underlines the dangers of allowing Greeks to back out of their commitments to repay loans and reform their economy. Far from helping support the EU and euro, it could fatally undermine both.

It is not just that financial markets would rightly believe that if Greece could be let off its debts, the same forgiveness might be shown the much bigger and important economies that remain in trouble, such as Spain and Italy. (The result of which would be exactly the contagion that the Greek bailouts were intended to prevent.)

Allowing Greece to escape its commitments would also give a huge boost to far-left and far-right parties elsewhere in Europe who have been peddling easy solutions to their countries’ problems, while deepening cynicism about the EU throughout the continent. The fall in support for the EU in northern Europe is not because of austerity, but because the public in those countries believes they are being taken for a ride.

Brussels is increasingly seen as the political equivalent of FIFA -- a corrupt institution that bends the rules and is run more for its own benefit than for any wider good. Giving Greece another free pass with Europe's money would only deepen this distrust. The ultimate beneficiaries of helping Greece would be the anti-EU parties such as UKIP and Le Pen’s National Front in France.

This would, of course, delight those who want to see the European project fail. I don’t. The longer I have been away from the City of London and the partisan views of the Murdoch press, the clearer I see its success in bringing prosperity, stability and peace to the continent.

I want my children and grandchildren to continue to enjoy these benefits. But they can only be guaranteed by a strong Europe, not a weak one in which rules don’t count. Giving in to the demands of the new coalition government in Athens, made up of of one far-right party and one far-left, would create a Greek tragedy likely to engulf us all.

To contact the author on this story:

Guy Hands at guy.hands@terrafirma.com

To contact the editor on this story:

Cameron Abadi at cabadi2@bloomberg.net