Euro-political Class is the problem – not Greece

In our post of August 2011 we gave the view that Germany’s leaving the euro was profoundly in Britain’s interest because the replacement Deutsche Mark would rise above its 1999 entry value[1] of 51.3 eurocents.  This would increase German export prices in its British and key non-EU markets: China, Japan, and the USA.  These are of critical importance to Britain’s attempts to export its way out of recession.  Shorn of Greece, the euro itself would rise against the pound (£) and the US Dollar, which would have a similar but lesser effect.

The rise of our principal competitor’s currency relative to ours and that of the US is hugely beneficial to the UK as opposed to a further devaluation of the pound, because commodity prices which are largely priced in dollars would not rise, but the prices of imported finished goods would rise, making UK goods more attractive in those key growth markets.

What should Greece do?

From a Greek point of view, ridding itself of the euro incubus is the first and most important step on the road to recovery.  Why, because it would allow it to devalue against the euro, making the two things which it has to offer to foreigners – tourism and property – that much cheaper.  Unless Greece can generate foreign income it will starve, being unable to pay for its imported necessities – principally food, pharmaceuticals, and fuel – however much “restructuring” is undertaken.  If they are not allowed to come out of the euro the true result will be to consign the Greek people to being permanent pensioners of the EU with all the detailed supervision of their national life which this would entail.

What is preventing Greece from leaving the Euro?

Fundamentally it is the pride of the Euro-political classes in Germany, Brussels, and Greece itself, in the United States of Europe project.

It’s important for the Anglo world to recognise that the determination of the Euro-political class to protect what it sees as its greatest achievement – the euro – is supported by large swathes of the general population in all Continental countries.  Recent polls in Italy, France and Germany showed popular support for the euro at 65%, 55% and 40% respectively, while support for the EU itself is virtually unanimous among the professional classes.  Even in Greece, a majority of the general population wants the euro as their currency, but at the same time does not want to pay down its accumulated debts[2], which at somewhere over 300 billion euros considerably exceeds its gross national income estimated in 2010 before this latest crisis at 240 billion euros[3].

Given the repeated German refusal to supply Greece with more funds directly or to underwrite a huge issue of Euro-bonds which would allow Greece to borrow more, the issue for Greek voters on June 17 is not austerity plus the euro, or the drachma plus growth, it is simple “starve or grow”.  The loss of national pride will be about the same in either case, but at least with its own currency Greece can eventually get back some semblance of independence and therefore pride.

However, reality will eventually overcome fantasy: sooner or later, in a few weeks at most – possibly a few days, Greece will leave the Euro zone.

What should Britain do?

Britain’s exposure to a Greek default, followed by the re-adoption of the drachma is two-fold:

(a)        On loans made by British banks to Greek banks directly or indirectly, the exposure to loss is around £7 billion.  With write-downs in taxpayer supported Lloyds and RBS banks of the order of £40-50 billion, this looks pretty small beer and well within the UK banking system to accommodate, even assuming the £7 billion is a total write-off – which it probably will not be.

b)        On unpaid invoices owed to British firms.

          Total UK exports to Greece in 2010 were around £1.5 billion on a rising trend.  Most of the 2011 invoices will have been paid and possibly half of the first quarter’s in 2012 – say £100-200 million outstanding, with much of it to SMEs (small and medium-sized enterprises).

The British government should announce that its Export Loan Guarantee Scheme will be extended to cover the unpaid invoices from SMEs where, after an interval of say 3 months, recovery is deemed impossible – without endless quibbling by the Industry Department.

[1] I.e. 1.95 DM is roughly equal to 1€.

[2] The bailout to date is 210 billion euros.

[3] In 2010 the World Bank estimated Greek GDP at $314 billion, converted at 1.30 $ per euro.  The GDP total will be smaller in 2012 by at least 10%.

Top| Home

6 Responses to “Euro-political Class is the problem – not Greece”

  1. Ron Holland says:

    Greece Must Leave the Euro To Survive & Prosper

    The press is warning of a Greek collapse and bank run and this is certainly possible in the near term but Greece and other EU nations can best recover economically from the sovereign debt crisis if they repudiate the debt, leave the EU and the Euro and return to their own national currencies. Even Germany will eventually leave the Euro and return to the D-Mark. The European Union experiment has failed.

    Please review the link at

    Top| Home

  2. Ageing Albion says:

    The problem for Greece if it leaves the euro is that its debt will still be in euros. This means its debt will proportionately be doubled (or more) because their currencies will halve (or be quartered, or whatever), and their debt is in Euros, so they will owe twice as much, hence even while their economy recovers without the drag of German exchange rates they will still go bust (ironically, this is the situation Germany was in, in the 1920s and we know What Happened Next in that case). They will have to default, which will cause worldwide economic collapse – and the collapse of Germany too, if Spain or Italy joins them, and at least one of those will.

    The only option instead is that Germany leaves the Euro. The Germans have not even considered this, and if they ever do, they won’t like it, because the debts are in Euros and the new Deutschmark will be worth much more. They won’t get all their money back. But that’s too bad, because the only other solution is that everyone, including the Germans, collapses.

    Top| Home

  3. Gillian Bush Gillian Bush says:

    Editor’s comment
    The German people, as opposed to their politicians, would love to have the Deutsche Mark back. Most of their external debt is held by German banks and any depreciation of this would trouble the German people not at all.

    Top| Home

  4. Ageing Albion says:

    It is a bit wishful thinking to assume that the German banks being hit by a massive drop in their assets (ie debts in Euros, which suddenly becomes a currency equivalent to the lira/pesata/drachma on a bad day) won’t affect the German people, but it would still be a preferable option than the other way around – Germany staying in the Euro and the other countries all going completely bust because they withdraw and their debts suddenly increase tenfold.

    Top| Home

  5. Frederick May says:

    Germany’s predicament is as old as the hills. A financially virtuous individual/company/country invests in a dubious project which attracts them for non-financial reasons. Almost inevitably the project gets into trouble. The question for the investor is how to get out with minimum loss.

    German industry has had a very good run from the European project – now it’s pay-back time. Germany should ask Greece to leave the Euro and in return pay off the loans which she incurred to build big infrastructure projects, including the Athens Metro and the Olympic sites from which German industry (Siemens) benefitted so much.

    Top| Home

  6. Ageing Albion says:

    The problem is the Eurocrats have been wanting and aiming for this sort of disaster all along. It is only a problem because the Germans don’t want to shovel money south indefinitely. But that’s because – and only because – they don’t regard the Greeks as part of the same country, whereas they did with the East Germans (who of course lumped them with a much bigger problem 22 years ago).

    On the other hand, rich northern American states have for most of the last 200 years been sending money to the poor southern states, much as London sends money to the North of England. Both are content to do so because (i) they regard the transferees as part of the same country, and (ii) because the transfers and the currency are controlled by the national government of that country. If the North of England behaved as badly with its funds as the Greeks do, the government in London would be in a position to discipline it. Or rather it wouldn’t happen because the North of England has the same accountancy rules and profession as the south.

    Therefore, although the obvious solution is for the Germans to leave the Euro and take a massive loss on the debt (their penance as Mr May says for lending them money to buy infrastructure back), the Eurocrats will instead propose fiscal union, so they can be in control of everyone’s budget just like a proper Federal Government.

    Top| Home

Leave a Reply

Top| Home