Greece and the euro

Brexit is a burning issue but the term “Grexit” is still around, referring to the possibility of Greece leaving the eurozone, n spite of recent progress in the economy, The Economist Intelligence Unit in its current economic forecasts for Greece says that “We assume that Greece will leave the euro zone by 2022.” In its long-term perspective on Greece, it said that “An exit from the euro area would boost medium- to long-term competitiveness.” (This assertion is dated 22 May 2017.)
But opinion polls show that the majority of Greek citizens do not wish their country to leave the Eurozone. Nor does the governing party. And they are right: exit from the euro would have very negative consequences for the Greek economy.
There are many reasons for Greek attachment to the European project as a whole. Most basically, there is a sense in Greece that it is their history and their concepts of freedom and democracy that have informed the European project, and that Greece’s natural place is in Europe and at its heart. But like all other European citizens, Greek citizens are also attracted to the practicalities of the euro, the fact that they don’t need to change money when travelling to another Eurozone country, and visitors to Greece don’t usually need to do either. Business has found the euro also useful not only for removal of uncertainty in business transactions due to the single currency but also because of price transparency across Europe which has allowed both businesses and consumers to source more easily. And crucially, Independent governance of the currency has led to two key advantages for business across Europe: low interest rates and low inflation.
However the most fundamental reason for Greece not to leave the euro is that it would lead to economic catastrophe for Greece, making its present difficulties seem very benign. It may be that, as has been reported, that the European financial system in general is prepared for a departure. It might even welcome a Greek exit from the euro. But, on balance, no advantage would derive to Greece from such a departure. And devaluation without changes in policies and institutions does not work as an economic strategy: costs are only one factor in competitiveness.
A new drachma would immediately devalue, with severe implications. Greece has few distinctive exports to reap advantage from the devaluation. Its main strengths are in the services industries, in particular shipping and tourism. But the shipping industry is internationalised and devaluation would have limited effects on its competiveness.
The tourist industry is sometimes pointed to as a potential beneficiary of a Greek exit. But Greece is already cheap for tourists. Nor is the infrastructure in place for any major expansion. Certainly, tourists used to using the euro could adapt to having to change currency on arrival and during the course of their stay although they would hardly be very pleased about it. Credit cards are not always accepted in Greece. However the wider impact of devaluation on the Greek economy would be a huge deterrent to any expansion of tourism. Rampant inflation as a result of Greece’s import dependency, not only on energy but on a huge range of other products would certainly lead to significant unrest, and foreign tourist numbers have already been shown to be sensitive to such unrest. If exchange control were introduced, the bureaucratic nightmare this would evoke and the rich possibilities for corruption would be a further hindrance to any expansion of tourism. Shortages of foreign exchange could then affect supplies of many products including those that tourists might well want such as pharmaceuticals cosmetics and other products. The health system, already under pressure, would be further weakened. Again, oil plays a huge role in Greece’s energy consumption, and further inflationary effects would result from this.

The present crisis is part of a longer-term structural weakening of the Greek economy. Of the five euro crisis countries, Greece saw the largest deterioration in inter-sectoral linkages, while some others, such as Italy and Portugal improved their position. Thus Greece’s resilience to shocks, and its ability to take advantage of any other growth impulses, have been further impaired. The share of manufactures in its non-fuel merchandise exports, which had been showing an upward trend for many years, is now below the level it was in 1995.
A final thought: a devaluation of 50 per cent would double the national debt of Greece, and, with an almost certain immediate contraction of the national economy, it would mean that the size of the debt relative to GDP would more than double.
The simplistic call for a euro exit should be replaced by a more sophisticated approach to economic policy, one that takes advantage of some encouraging geopolitical trends and is also based on some idea of technical progress. Firstly, even though they have been going sharply down, Greece’s military expenditures amounted to 2.4 per cent of GDP for 2013, which is the second highest percentage among NATO members, after the United States. Although this is a decline from the late 1980s, when the percentage was over 5 per cent, the improvement of relations with Turkey needs to be a key priority to relieve pressures on government spending. The recent increases in trade with Turkey point to the possibilities for the future and both countries are pledged to a target of further increases. Secondly, energy development, whether in terms of pipelines from Asia, exploitation of Mediterranean resources, or renewable energy sources offers a growth path that would be based on regional cooperation, better utilisation of Greece’s construction and engineering skill base, and an opportunity to begin upgrading the manufacturing base. Thirdly, the EU as a whole needs to develop a longer-term Mediterranean cooperation strategy that offers an alternative to the present migration turmoil and displacement, and recognises the further pressures that climate change will bring. In the implementation of this strategy, Greece, like other Mediterranean EU members, will have an important role for the EU as a whole, and it should be resourced accordingly.