With the smart money on an early Greek exit, the two main questions to arise are: what will happen to Greece, and what future then for the Eurozone? Ig Greece leaves, the exchange rate will drop sharply from 340 drachmae to €1 at entry to the euro to perhaps 1,000 drachmae, a loss of value to the national currency of around 75% as happened to Argentina in a similar situation in 2002. But though in the latter case savings were decimated and import prices trebled, Argentina, released from an untenable dollar-peso parity, recovered strongly. So probably will Greece, given the introduction of capital controls and administrative controls to ensure vital supplies reach key enterprises. Removing the pressure of unbearable debt, boosting competitiveness from the intial collapse of the currency, lifting austerity, and paving the way for a much needed industrial restructuring should, after a painful transition, see Greece through. But what of the other 26?
The pressure will quickly switch to Spain where already 10-year bond yields have risen above 6.3%. But a great deal will then depend on how significant, as opposed to the communique’ rhetoric, are the concessions on increased flexibility wrung out of the Germans at today’s Hollande-Merkel meeting. It seems that they will give a bit on inflation and bigger pay rises in order to boost domestic demand and help to inject some life into the ailing eurozone economy. They also seem willing to agree a bit more capital for the European Investment Bank to lend for some more infrastructure projects. The Balls-Mandelson package is very similar. But it’s all too little and too slow to materialise.
It also raises two big political questions. Why go on with austerity at all when there’s no evidence it’s working, and why should Greece, Spain and France stick to these policies when the voters in Merkel’s own heartland of North-Rhine Westphalia have thrown them out? Secondly, the real fundamental flaw of the Eurozone – that German industrial strength and competitiveness is incompatible with the relative economic weakness of the southern and eastern fringes of the EU – is still not being addressed at all. It is a steamroller flattening one country after another, with all the counter-measures written out of the script. The conclusion must be, if the Eurozone has a future at all, it is only one after substantial restructuring (far more than yet envisaged), not simply through dropping the weakest member.