Patrick Minford: Greece needs to leave euro - and others should follow

THIS crisis is now a problem for the governments involved on the continent - mainly Germany and France. Whether they bail out Greece through the front door or suffer a default on the Greek bonds they are already guaranteeing, it makes not a lot of difference.

It is obvious to everyone Greece cannot pay the interest on its rising debts because it is too large a chunk of its national income and over half of it will go to foreigners.

By defaulting, it can reduce or even eliminate this outflow of money and so placate the Greek populace which is rioting in protest. It will, of course, upset Germany and France, its main creditors. But they cannot stop it.

The question then is, will Greece leave the euro? If one goes back to Argentina at the beginning of the 2000s, it defaulted and then abandoned its fixed exchange rate peg to the dollar, so reducing the value to foreigners of any debts they held in the peso.

After a short time, growth resumed and it is a robust economy again, with growth at 10 per cent. This shows there is definitely life after default and devaluation.

The reason Greece needs to do the same and leave the euro is that, without a massive devaluation, it will not resume growth for many years. It is in the interests not just of the Greeks but also of its creditors that Greek growth resumes, because then there will be more income to help the Greeks pay off more debt and restore their credit status.

In the Latin American debt problems of the early 1980s, many of the defaulting bonds were eventually honoured to a bigger extent than was feared at the start. So it could be with Greece, if it can only get back on its feet and grow.

If it does, it is likely to learn lessons about reforming its economy; reforms are unlikely in the present economic misery, but with some return of optimism, they could become politically popular.

After Greece's exit, other countries may well follow - Portugal, Ireland and Spain. Essentially, it will be their choice: whether to groan in misery inside the euro or rekindle their prospects outside. The politics of their public opinion will not permit the misery, so the markets will soon force them out knowing this.

As for Germany and France lending them sufficient money on concessionary terms, their own public opinion will not permit it. The euro will become a mainly "northern" affair.

Eventually these exiting countries might rejoin. But one thing is certain: the UK will never join, having now seen the mess that can result. It has reinforced the wisdom of the Treasury's Five Tests, which were, of course, not satisfied - now we have seen why.

• Patrick Minford is professor of applied economics at Cardiff University.