It might look as if the eurozone is on track for another crisis but it may be a shift that is good for us all, writes Peter Jones
TO ANYONE interested in where the eurozone is going, and let’s remember that a lot of Scottish export-orientated businesses and jobs depend on its economic health, the headlines after the Greek elections look pretty dire. Is it, as the headlines imply, heading for a crash, or will it, as I heard yesterday from a battle-hardened European economist, not just muddle through but prosper?
Prosperity? Surely that’s kidding – the case for looming disaster looks pretty solid. The new Greek government came to power on a promise of ending European-dictated austerity belt-tightening which makes British tax increases and public spending squeezes look like a mild post-Christmas no-chocolate diet.
After, in effect, seven years of recession, Greek unemployment is at 26 per cent and is more than 50 per cent for those under the age of 25. Public services and jobs have been slashed and provision of food banks is perhaps the country’s fastest growing business.
Small wonder then, that sufficient Greek voters rebelled to elect Alexis Tsipras and his radical left party on the promise that public service spending cuts (which the EU, the European Central Bank [ECB], and the International Monetary Fund [IMF] want more of) would be ended and to some extent reversed with the re-hiring of 12,000 sacked civil servants.
And then there is the big issue of Greece’s national debt. Despite all the austerity, it has now risen to 175 per cent of GDP, more than twice the level of Britain’s debt. If Greece had British debt levels, which Chancellor George Osborne likes to frighten British voters with, we wouldn’t be talking about this.
And halving the debt is precisely what Mr Tsipras wants the EU to agree with. Fat chance, Angela Merkel, Germany’s chancellor and the EU’s paymaster, has responded. And she is not alone, for other European governments, from Finland to Spain, know that any debt write-off would massively strengthen Syriza-type parties in their countries.
That doesn’t just threaten them with being turfed out of office, it also threatens economic chaos. Any cancellation of Greek debt would be demanded by other Syriza-type parties elsewhere, such as Podemos in Spain, and cause the interest rates on national debts to spiral upwards, as happened during the sovereign debt crisis of 2011-12, imposing a heavy cost on all citizens, not just taxpayers.
Greek 10-year bond rates have steadily risen to about 10 per cent, about a third of the levels reached in the debt crisis, whereas for the other weak economies of Spain, Portugal, Italy and Ireland, they are still about 3 per cent or less.
But if the EU doesn’t concede to Mr Tsipras, then he, although he says he doesn’t want to do it, will feel forced to take Greece out of the eurozone and replace the euro with the drachma, also resulting in a debt crisis and similar economic disaster.
Chaos to the left, disaster to the right – surely the only sensible course for any investor (which doesn’t just mean rich people trying to get even richer but, rather more importantly, companies looking to spend money and recruit people) is to back away, not just from Greece and other fragile eurozone economies, but from the entire eurozone.
“No,” Bill O’Neill, chief economist of Union Banque Suisse’s (UBS) wealth management arm, told me yesterday over breakfast in Edinburgh, “we like the eurozone.” Why?
Well, he explained, it is partly an old story of the darkest hour coming before the dawn and also a pragmatic assessment that if any economic system fulfils the basic requirements for recovery, the eurozone does.
“There has been a substantial decline in the [value of the] euro, a substantial easing of credit conditions, we now have a dollop of quantitative easing, and a massive shift – effectively a tax cut – through the decline in the oil price,” he says. All of this – exports becoming cheaper and therefore easier, personal and corporate loans becoming cheaper, and more money swilling around banks and private pockets – suggests to UBS, he says, that eurozone growth of 1.5 per cent is entirely credible and more likely to surprise on the upside than on the downside.
Really? No Greek-caused turmoil? While Mr O’Neill agrees with the consensus opinion that the chances of Mr Tsipras getting some Greek debt cancelled are nil, he thinks that he will succeed in getting a lot of it re-scheduled. That’s a euphemism for saying that the debt-holders will get lower interest payments per year and/or have to wait longer for their capital to be repaid.
The EU has the leverage to make that happen – much Greek debt is held by the ECB and commercial European banks. This is one reason why the EU is not at all insouciant about Greece leaving the euro – the debt would remain denominated in euros.
While any new drachma would collapse to perhaps half the euro’s value, boosting Greek competitiveness, such a collapse would also make the national debt unrepayable, threatening a new European financial crisis.
And, Mr O’Neill points out, the EU has a not-so-secret weapon – the €300 billion fund announced by EU president Jean-Claude Juncker to be spent on building energy, transport, broadband, and other industrial infrastructure. Even if only 5 per cent of that was to be directed to Greece, it would still dwarf Mr Tsipras’ pledge to inject the economy with €2bn in increased welfare payments.
Mr O’Neill acknowledges: “It is a dangerous game, and there will be a lot of brinkmanship.” But he thinks compromise will eventually emerge, though maybe not until the summer when big Greek debt repayments are due, because the costs to both sides of failure massively overshadow the price of a deal.
This doesn’t mean that the Greek election won’t change anything. It looks to have spelled an end, if not to austerity, then certainly to overly harsh austerity. While Greek public finances and, looked at through a telescope, the economy are trimmer, the political and social cost has been far too high.
Other European leaders, notably France’s Francois Hollande, Italy’s Matteo Renzi, and Spain’s Mariano Rajoy, are keen on easing the fiscal pain.
Achieving that on a European basis may turn out to be Mr Tsipras’ biggest victory.