On Greece

Jeremy Warner

In looking for areas of common ground between Germany and Greece - quite a search, I can tell you - I eventually stumbled across the following, shared experience; that of hyperinflation. Both of them have relatively recent experience of this economically and socially crippling phenomenon.

Indeed, according to a comprehensive league table of hyperinflation compiled by Steve Hanke, professor of applied economics at The John Hopkins University, Greece and Germany are among the worst such inflations of the modern age.

[.. T]he two episodes had the same underlying monetary and fiscal causes, common to virtually all hyperinflations; denied access to debt markets, and with the tax system in a state of collapse, governments tend to resort to the only available alternative to pay their bills – the central bank printing press. The government issues bonds, and the central bank buys them. It’s the modern day equivalent of the currency debasement that took place under Henry VIII, widely nicknamed in his time “Old Coppernose”, on account of how the increasingly thin layer of silver on the coinage would wear off on this particular part of the king’s image [..]

I don’t doubt the risks, but hyperinflation is ultimately always a matter of government choice. There is nothing fated or inevitable about it. By adopting a currency board arrangement with the euro, the dollar, or even sterling, Greece could quite easily avoid such an outcome.

The temptations to do otherwise are nevertheless high. and in the case of Greece’s hard left, Syriza-led government, with its commitment to end austerity, possibly irresistible. Remarkably [..] Greece is currently over-achieving on its budget numbers, with a primary balance so far this year of €1.5bn. On the face of it, Greece could, once freed of its debt overhang, leave the euro and on these numbers still be in a position to fund its expenditures internally from taxation.

Whether this can last is, however, open to question. The overall primary surplus so far this year appears largely to be down to simply not paying bills, and in any case, the country seems to have sunk back into deficit in May. Most likely - with the economy again contracting, capital fleeing the country as fast as the cheques can be cleared, and an ever rising backlog of unpaid taxes - there remains a sizeable and growing underlying shortfall.

As I say, the temptation to fund this deficit via the central bank printing press would be close to overwhelming once out of the euro, nevermind the new money the central bank would be forced to provide to the banking system to keep it afloat. High levels of inflation become almost inevitable in the event of unrestrained debt monetisation. Greece would rapidly become Venezuela, only without the oil.

On Greece leaving the euro, the shock of devaluation alone would cause inflation to spike. But it needn’t become permanent.

The way to avoid such an outcome would be to set up a currency board, of the type that Prof Hanke helped engineer in a number of the former communist states of eastern Europe, including Estonia and Greece’s neighbour, Bulgaria.

The detail of how these monetary arrangements work need not concern us unduly here, suffice to say that the central bank is required to maintain a fixed exchange rate with a major reserve currency. All other purposes become subservient. This might sound like another version of euro membership, only without the supposed benefits of full participation. In fact it is quite different, for the problem of the euro is that it has always been an implicit “transfer union”, even though it denies this reality. The reason Greece is in such an unholy mess is that the euro conspired to make it so.

The single currency’s founding fathers obviously didn’t intend it this way, but the whole endeavour is chock full of moral hazard. Eurozone periphery nations were allowed to spend with such abandon during the boom because markets knew that when push comes to shove, they would be bailed out.

So far, this assumption has been proved absolutely correct. Many Greeks complain of being robbed, but the fact is that they have already twice been bailed out and after another interminable period of crisis talks will no doubt be bailed out a third time, once the final tranche of money from the last rescue has been delivered and fully exhausted.

A currency board has no such default mechanism; it is a harsh and often cruel taskmaster that requires rigid and inescapable fiscal and monetary discipline. Ironically, it would provide the very disciplines that the hated Troika has so far struggled to impose by diktat [..].

Almost exclusively focused on tax rises, targeted largely at business and the better off, it will only further undermine the Greek economy and its ever more remote prospects, while part of monetary union, of standing on its own two feet. Anglo-Saxon commentators often wonder why Greeks are so attached to the euro, given the neverending penury it seems to condemn them to [..].

For everyone’s sake, this needs to end.