SUNDAY TIMES OF LONDON

21-6-15

Sorry, Greece, you lose, and it isn’t a game. Best get sculpting

Dominic Lawson

When Christine Lagarde said last week that the Greek debt crisis could be resolved only “with adults in the room”, the French managing director of the International Monetary Fund (IMF) could not have made any clearer her exasperation with the Greek finance minister.

Yanis Varoufakis’s career before being catapulted into his present position was as an author of academic books on game theory. But this is not a game and it is not academic: thanks in part to the flippancy of Varoufakis — and his government’s childish bluff that it might borrow untold billions from Vladimir Putin’s Russia if its creditors didn’t reduce their demands for interest payments — Greece is now on the cusp of exit from the eurozone.

In fact, that allegedly apocalyptic prospect was meant to be the biggest card in Varoufakis’s poker hand. It was not so long ago that the ruling Syriza party claimed its country’s creditors would be “begging to lend us more money” as the only alternative to default. The point was meant to be that such a default would not only cost the lenders more than any other option: Greece crashing out of the euro would put the whole currency in danger of collapse.

Well, that was what Greek game theory said: you have too much to lose, so you will be the “chicken” who backs down. But in the meantime the commercial lenders (with the assistance of the European Central Bank) have restored their balance sheets sufficiently to absorb Greek default; and Wolfgang Schäuble, the tough-as-teak German finance minister, believes that the eurozone will actually be strengthened by Grexit. His point is that it will demonstrate that the currency has rules of economic probity within the member states that must be observed.

Schäuble has believed this for some time. What changed last week was that leading figures in the Social Democratic party, the left-of-centre minority partner in the German coalition — who had consistently argued that Greece deserved a little more understanding — finally recognised that the Greek government was not remotely interested in making the economic reforms on which its lenders (notably the IMF) had been insisting.

This should have surprised no one. Syriza is a rag-tag of assorted Trotskyites, Maoists and socialists: its leader, Alexis Tsipras, is a man who joined the Stalinist Greek Communist party in 1991 — just as the economic doctrine that had ruled the USSR for almost three quarters of a century was revealed to even the slowest learners as the most appalling misallocation of resources ever conceived (to say nothing of the cost in human liberty).

Little wonder such a government is not prepared to recognise the most basic laws of economic incentives: that it is necessary to slash early retirement rights to prevent more people from switching from employment to dependency; that doubling the minimum wage is madness in a country with 50% youth unemployment; that if you can’t collect income taxes, there is little choice but to put up indirect taxes such as VAT.

To be fair to Syriza, the Greek state has long had a completely corrupt tax system. It was not just its oligarchs who had evaded (and continue to evade) their obligations. It was the habit of all ruling parties shortly before general elections to tell the tax collectors to down tools. The whole system of the state’s accounts was customarily fabricated — which came in particularly useful when Greece wanted to enter the euro in 2001. Thanks to some amazingly creative accounting, the country fooled the EU’s dozy auditors into believing it had a budget deficit of 1.5% of GDP (well within the 3% limit set out in the Maastricht treaty). In fact its true deficit at the time was more than 8%.

“Greece cheated to get in and it’s difficult to know how we should deal with cheaters,” declared the former ECB chief economist Otmar Issing — but he said this in 2011, fully five years after he had stepped down from his post. This, though, underlies the political problem for the German chancellor, Angela Merkel, who during this interminable crisis has warned more than once that “if the euro fails, Europe fails”. She (like Mr Tsipras) is an elected politician, and her own people have come to believe that no financial deal with Greece’s signature on it can be trusted.

This is hardly a new phenomenon: Plutarch records how the teenaged Alcibiades had been told he couldn’t see his guardian Pericles, because the latter was busy working out his annual accounts. Apparently Pericles was wont to take certain liberties with them; Alcibiades observed that what the old boy should really have been doing was to find a way of not submitting any accounts at all.

Still, the ancient Greeks were the greatest traders and wealth generators of the age — the astonishing art and culture associated with Athens could hardly have happened otherwise. Which is where I struggle to see why many seem to imagine that Greek exit from the euro would be an unmitigated disaster for that troubled nation. Fundamentally — and beyond the immediate trauma of default and devaluation — what matters is a country’s actual human assets, social, educational and, yes, entrepreneurial. They are what they are, regardless of the currency in which they happen to be denominated at any one time.

Those human assets are more likely to be liberated than depleted by Greece returning to the drachma (on the admittedly heroic assumption that Syriza then avoided outright protectionism). Those with large savings have moved them offshore, so most of that is safe. And, as almost a fifth of Greece’s GDP consists of tourism revenues, devaluation might have a particularly strong immediate effect: holiday decisions come much more quickly than ones involving large corporate investment.

I understand that many Greeks — in fact a large majority — see membership of the euro as an immensely reassuring status symbol: it means they are part of the mainstream European elite, rather than just another Balkan country. It also differentiates them as much as possible from Turkey, an element of the national psyche that should never be overlooked. But the historic greatness of Greece would not the tiniest bit be dishonoured by its leaving the eurozone.

Greeks should consider the recent record of that other remnant of a once great empire, Hungary. In the wake of the global credit crunch, Hungary’s economic plight, in terms of its debts, was no less dire than that of Greece. Yet, by being outside the eurozone, Hungary (with the added advantage of an economically literate government) was able to operate an independent monetary policy suited to its own particular circumstances.

By contrast, consider the surreal situation in Greece. It is being asked to hand over its EU structural funds to the IMF and it is being told to repay money to the ECB. As an exercise in financial futility this takes some beating: imagine the Bank of England telling HM Treasury to pay up, and you understand what nonsense occurs when a country’s allegedly only available currency is one over which it has no influence whatsoever.

That, however, is at the heart of the whole euro project. Greece, largely through its own fault, is set to be the first casualty. The only question that really matters, though, is: will it be the last?