Part one, Greece’s future: eurozone exit ‘would be a disaster’

Transcript

On January 25, Greece will hold parliamentary elections: a move which has generated uncertainty in the eurozone, given the potential for the radical left party Syriza to emerge as the largest party. World Finance speaks to Steve Hanke, Professor of Applied Economics from Johns Hopkins University, to discuss what this means for the country’s debt-ridden economy.

World Finance: Steve, Greece’s debt crisis: what’s the current state of play?
Steve Hanke: They haven’t been as austere as they should have been. Government expenditures have gone up by about 11 percent since 2006; now that doesn’t sound very austere to most people that know the meaning of that word.

Also, we’ve had the economy decline by about 13 percent. If we look at the relative size of the government compared to what it was in 2006, it’s moved up from about 45 percent of GDP to about 60 percent. So government spending has continued to grow, the economy has shrunk, and as a result the government takes up more economic space than in 2006.

And there appear to be considerable structural problems in the Greek economy: they haven’t adjusted to the crisis.

World Finance: As you say, the Greek public debt has increased, and now exceeds 170 percent of GDP. The burden of this debt is so high that future Greek governments will not be able to continue to service it. Greece is in a no-win situation, surely?

Steve Hanke: One thing that they could do is make some attempt to: one, control the government; and two, do the kind of structural reforms that allow for the economy to adjust, and in fact deliver an internal devaluation that makes the economy more competitive.

I mean: look at Ireland; look at Spain; look at Portugal.

World Finance: So what do you think a euro exit would mean for Greece – and in fact the rest of Europe?
Steve Hanke: It would be a disaster for Greece, of course; because the first thing that would happen would be that their fiscal primary surplus would go into deficit, because financing costs would go up a lot. So the fiscal situation would get worse.

If they had their own currency and started to devalue it, they wouldn’t gain much by way of competitiveness, because you’d have a lot of inflation. And they’d be pretty much cut off from the international capital markets. I don’t think international capital markets would welcome a Greece with a Greek drachma currency.

World Finance: Well since German banks’ exposure to Greece is far from insignificant, do you think German politicians should reconsider their stance that Greece is not systematically important?
Steve Hanke: The German private banks are quietly unwinding their positions and exposure to Greece. And what you’re going to end up with I think, is much more European Central Bank exposure.

The real problem here is that you have an enormous moral hazard associated with having a country like Greece

World Finance: For the sake of argument, do you think what it all really boils down to is the concern of EU leaders not that Greece will leave the euro and fail, but that in fact Greece will leave the euro and prosper, leaving other countries to follow suit?
Steve Hanke: I think that’s a farcical thing; I don’t think that they would succeed if they left.

The real problem here is that you have an enormous moral hazard associated with having a country like Greece. And this comes down, by the way… if you look at the World Bank Doing Business report, in terms of protecting contracts and reliability of delivery and contracts, Greece ranks 155 out of 189 countries.

So you’re dealing with a country that, shall we say, has a reliability problem.

If you have a country with a reliability problem, and they’re part of the eurozone, there’s a huge moral hazard associated with this relationship between the EU and Greece.

Since they joined the euro, government expenditures have just exploded. They calculate in Greece that they will be bailed out.

World Finance: So come January 25th with these snap elections, you don’t think it’s likely that Greece will leave the eurozone?
Steve Hanke: This is a lot of talk and hot air, because they’re not exiting anything. And 74 percent of the public wants to stay in the eurozone. So if public opinion is behind something, no politician that’s rational takes that away from a public that wants it.