Jeremy Beckwith: A new drachma may be the only way to Greek rebound

THE second quarter ended with markets rallying on the news that the Greek government had managed to deliver its parliamentary majority for the further austerity measures that the IMF and the EU demanded in return for continued access to bail-out monies that means it can avoid defaulting on debt repayments.

For Greek politicians this means they keep their jobs and the goodwill of other European politicians for a little while longer.

And, meanwhile, German and French politicians can claim to be good Europeans (for helping out a fellow euro country in distress and ensuring that there is no crisis within the euro) and at the same time not be forced into providing a second bail-out of their domestic banking systems.

However, for the voters in the countries providing further bail-out monies, this is a blatant waste of money.

Greece has more euro-denominated debt than it ever can afford to repay and to supply them with more debt that does not have priority over the existing debt when that debt is trading at half of its face value in the secondary markets is in fact giving money away, and most certainly breaks the spirit of the Maastricht Treaty if not its letter.

For the voters in Greece, it is condemnation to a decade or more of total economic misery. The experience of the last two years shows that savage austerity has little impact on budget deficits because the cuts in spending and the increases in taxes have such a major effect on the overall growth rate of the economy that normal tax revenues fall sharply.

Greece's bigger problem (and the one which is commented on more rarely than its government finances) is its competitiveness within the eurozone.

The Greek private sector has become approximately 30 per cent less competitive relative to Germany since joining the euro - to correct this requires a 30 per cent cut in private sector wages in Greece or a 30 per cent increase in wages in Germany.

The latter is not going to occur, and the strength of the unions in Greece means that the former will only occur by severely reducing the number of people who are employed, as companies go bust.

For several decades the IMF has adopted a standard formula for dealing with countries who have gone bankrupt, as Greece is today.

This requires savage cuts to the public sector deficit but at the same time a market-led devaluation of the currency in order to stimulate the private sector by making it substantially more competitive.

In this way, the bankrupt economy, after a period of pain, finds an export-led path back to growth. However, given the political requirement that no-one is allowed to leave the euro, Greece is suffering public sector pain but generating no private sector boost to allow its economy to recover.Economic depression is the inevitable result of such a policy - little wonder then that the Greek people have taken to the streets.

By giving up euro membership, introducing a new drachma at 1:1 to the euro for all financial assets and liabilities within Greece and then immediately letting the currency float to find its market level, which would probably be at 50 per cent of its current level, tourists considering going on holiday to Greece would find that it has halved in price.

And many more will go there, boost the economy and set it back on a path towards growth.

In the end this will happen - though voters in Greece have to make their politicians understand this by voting them out (or overthrowing them), and this may take a little time.

The other, but slower, route is that voters in Germany, Finland and the Netherlands get tired of their politicians throwing away their hard-earned tax revenues in futile attempts to stop an insolvent borrower formally going insolvent, and instead vote into power politicians who focus much more clearly on their national interest than on some perceived European interest, and they force Greece to leave the euro.

• Jeremy Beckwith is Chief Investment Officer of wealth managers Kleinwort Benson