Guy Verhofstadt, the former Belgian prime minister and current leader of the liberal grouping in the European Parliament, has rejected talk of Greece leaving the Eurozone. Interviewed on the Today programme yesterday he said such speculation was aimed more at influencing public opinion in Greece than it was a prediction of the likely outcome of the current crisis.
Verhofstadt warned that the EU is unprepared for the contagion that would result from a Greek Euro exit, saying:
There is no real firewall around the other economies of Europe, we only have a few fire extinguishers.
You can hear the full interview – including Verhofstadt’s suggestions of how to fix the Eurozone’s problems – on the Today website here.
* Nick Thornsby is a day editor at Lib Dem Voice.
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20 Comments
This is frightening. At this juncture, a Greek exit from the Euro needs to be anticipated; there is no excuse for not having a contingency plan. However it’s precisely the lack of contingency that has been a fault in the Euro project: no one thought that circumstances might occur whereby a nation would have to drop out. It would have been useful had that planning taken place. But never mind, we need such planning now.
I’m certain there are detailed plans. However, any announcemen, to the effect that, “Plans are in place for Greece to leave the Eurozone”, would cause a major run, not just on Greek banks but those of Spain, Portugal and Italy.
“Less said; soonest mended”, as my mother used to tell me!
@Jason. Like many people, I am mystified by what is going on. If you are so certain, won’t the people with money deposited there also be certain, perhaps even more so, so why should should the announcement change anything? Would it not give depositors reassurance, and so calm things a bit?
These bailouts are paying off Greek interest, not Greek debt, aren’t they? So the payments must be smaller than the debt? If Greece defaults, presumably the debt itself gets lost, resulting in a problem that is several times larger. Is that a good reason to expect that the present impasse will be resolved without a default?
It’s important to make sure that you don’t accept the British establishment’s view of things about this (and anything else to do with Europe). Devaluation is not a get out of jail free card. If it worked, Britain, which keeps trying it, would have the biggest economy in the world. Devaluation is simply a way of trying to disguise a cut in the value of everything. The problem is, ever since Harold Wilson’s ‘pound in your pocket’ speech, that people are that daft. They notice.
The Greeks can’t devalue their way out of their problems and it would be utterly stupid to try it. There’s a sovereign debt problem and there’s a bank debt problem (which is much of the reason for the sovereign debt problem because of bailouts). There isn’t a euro problem.
Since 2000 the euro has gone from 57 pence to 80 pence against the pound. All that devaluation hasn’t done Britain a lot of good. The euro’s doing fine. It’s making trade in the eurozone that much easier, with massive advantages for the countries in it. We should join and give our business a chance to compete at European level without added costs that other countries have, sensibly, abolished.
Richard Dean17th May ’12 – 8:51pm…………@Jason. Like many people, I am mystified by what is going on. If you are so certain, won’t the people with money deposited there also be certain, perhaps even more so, so why should should the announcement change anything? Would it not give depositors…………
I’m, certainly, not certain. There have been so many ‘fudges’ since (and even before) the creation of the Euro that the final outcome (if there is one) will owe as much to ‘magic’ as financial prudence.
@Jason
I disagree. Saying you don’t have a plan in place creates a panic of its own. A choice needs to be made: what kind of panic do you want, the kind that comes from a potential Greek exit (which is ever more likely) or the kind of turmoil that arises from having no contingency? More uncertainty, in my opinion, trails the latter.
@Chris. I agreee. Joining the Euro looks good, for the reasons you mention, plus we get the benefit of being much better able to influence decisions that affect our destiny.
@ Chris – “There’s a sovereign debt problem and there’s a bank debt problem (which is much of the reason for the sovereign debt problem because of bailouts).”
No, europe has a collective Headless Sovereign problem, in that it cannot respond to catastrophic events with decisive policy for it has no legitimacy with which to claim a mandate for action that will prove contentious.
The fundamental problem is none of the nations of eurozone feel sufficient familial sentiment with [all] of the other nations of eurozone.
Thus common governance will not be considered legitimate for it cannot be [both] representative of [and] accountable too [all] the peoples of europe.
Want eurobonds? No
Want a looser monetary policy? No.
Surely exiting the Euro would be worse for Greece than current austerity? Alistair Darling (usually pretty sensible) said that the Greek state would run out of money in 6 weeks. So those people who have seen their public sector salaries and pensions cut wouldn’t receive them at all. And this would help Greek people? How? It would hit the most vulnerable the hardest because the wealthy who have avoided and evaded taxes for many years, are already moving their ill-gotten gains abroad, so they would be fine.
Devaluation is not a quick fix for decades of failing to collect sufficient taxes and government overspending. It would only help if Greece was a huge exporter (it isn’t) whose businesses were suffering primarily from an overvalued currency. The Greek problems are not directly related to the Euro; they started many years before the single currency existed. However, being a Euro zone country allowed various Greek governments to borrow more than they could have done otherwise and under more favourable conditions, which allowed them to continue to put off actually dealing with the country’s problems.
A Greek friend (working in London for some years out of choice although now unable to go home if he wanted) told me that most Greeks have known for years that the country had serious problems, but as long as those problems didn’t interrupt their lives, they ignored what was under their noses and no politician proposed any serious reform because it would have been unpopular.
“Devaluation is not a quick fix for decades of failing to collect sufficient taxes and government overspending.”
Devaluation isn’t a quick fix, the end goal of a happier more prosperous greece will only happen if allied to reform.
However, reform alone (inc austerity) will leave the country in grinding stagnation and unable to buck a primary deficit for many, many years to come.
Greece is a large exporter, of tourism, at least insomuch as it greatly improves the balance of trade. And for that a cheap drachma is a very handy thing.
I almost sympathize the Eurozone politicians right now. A question like “Are you planning for a Greek exit?” has shades of “When did you stop beating your wife?”. Say yes and you imply it’s inevitable, say no and you sound like you are incompetent.
Mario Draghi has said that the liquidity operations of the LTRO have “bought time” for Europe. But as Alistair Darling correctly noted yesterday, the Eurozone politicians have wasted the last two years in “running around like headless chickens”. Time was bought – at high cost – but the opportunity has been wasted. Yes, there are seriously problem with sovereign (and bank) solvency in the Eurozone, but much of the day-to-day crisis could have been eliminated if only the political will to resolve the fiscal problems was there.
As for joining the Euro, I think that is a complete non-starter and thank goodness for that. If the UK was in the Euro then (based on the change in values of the two currencies over the last ten years quoted above) it would be locked into a currency that we would need – but be unable – to devalue. In fact I suspect that we would be another “peripheral” Eurozone nation experiencing a vicious circle of austerity/deflation/depression.
“Alistair Darling (usually pretty sensible) said that the Greek state would run out of money in 6 weeks. ”
How can a sovereign nation that issues its own currency run out of money?
Risk is what stops speculators. Increase it faster than the returns and you reduce the speculation, One way to increase risk is to through civil disorder, as George Soros pointed out. But suppose we were able to join the Euro right now. We would be be playing chicken with the financial services industry, yes, but that’s what they’re already doing with us.
Can we buy Greece? There’s probably good profits to be made from tourism there. Holiday homes too. Does it have wind power potential? Minerals? Maybe agriculture – can greek cheese take off? Just like any business that fails, the present owners obviously don’t have a clue. A bit of takeover action could be all that is needed to turn it around.
Therre seem to be only two soutions for Greece, one bad and one worse – a euro exit and devaluation or potentialy decades of stagnation and grinding austeriry.
Devaluation is only useful if the financial discipline and structural reforms needed to regain competitiveness are put in place in the aftermath. Without this the benefits are soon lost, as has been the British experience.
Nonetheless, I think the Greeks should try to negotiate an orderly exit from the Euro. News reports indicate that there are 165 billion euros on deposit with Greek banks. The conversion of these funds at the prevailing exchange rate to the new drachma should be guaranteed by the ECB so as to prevent a run on the banks in the period prior to a switchover. International holders of Greek Euro bonds, primarily the ECB and European banks will take a serious haircut and credit default insurance will be called in. Forward planning will need to be undertaken by the remaining Eurozone members to prevent contagion and shore up the banking sysyems of the economically weaker eurozone members. This exercise is going to cost Germany a great deal of their accumulated reserves..
Following devaluation, the Greeks will have a much reduced capacity to purchase imports from Germany and elsewhere – but they will have control of their domestic economy back in their owm hands and a significant cost advantage over other eurozone countries in attracting tourists and investment to their country and in the export of agricultural produce.
@Joe. There my be other solutions. You are nice person, I am afraid I am a nasty one.
One nasty solution could be to crash the whole system, deliberately. Germany and France together might be able to stop all trade across Eurozone boundaries. They’d plan in advance and do it overnight, using military muscle from all Eurozone countries if needed. They might arrest financial servives people and control internal cash flows. Theyreplace the previous trade outside the Eurozone with trade between Eurozone countries.
A question then, is whether this would cost those countries more than the alternatives.
The UK has foolishly not joined either the Euro of the fiscal pact. The costs it would pay wouldnlt factor in to the decision of whether to do it. We would lose 40% of our export trade overnight. I imagine we would have 10 million unemployed a week later, and maybe a communist government.
Christian De Feo18th May ’12 – 10:20am……………………@Jason I disagree. Saying you don’t have a plan in place creates a panic of its own………………….
Double bluff! Saying you don’t have a plan ( when everyone expects the Germans at least to plan ahead) is sensible. Saying you have a plan invites the question, “What is it?” and intense speculation about all its details.
The doom and gloom merchants have been predicting a break-up of the Euro for three years now. I am no expert but I’ll wager that, unlike Osborne, there are plans ‘B’, ‘C’, ‘D’, etc.
@Jason. Actually I think you do both – you say you have a plan and you get one of your officials to say you haven’t, or the other way round, which seems to be what has happened, thereby allowing everyone to believe what they prefer to believe, plus allowing one of the statements to be denied later if necessary. Eurospeak!
Richard,
didn’t Hitler try this with disastrous results.
It is sometimes quite credibly put forward that Hitler managed to bring about a dramatic revival of the German economy. That after 1933 Hitler and his finance minister Hjalmar Schacht stabilized the economy and managed to solve the huge unemployment crisis that had destroyed the Weimar Republic’s legitimacy. This is said to be partly due to Schacht’s imaginative monetary policy and partly to massive public works programs, such as the autobahnen. There was a sharp move away from free markets to a much more interventionist economy that seemingly worked better than what had gone before. During World War II this economy was apparently able to achieve great success in terms of war production, notably under Hitler’s armaments minister, Albert Speer.
However, as Adam Tooze conclusively determined in ‘The Wages of Destruction: The Making and Breaking of the Nazi Economy.’ – The 1930s saw constant financial and foreign-exchange crises for the Reich and a resort to extensive barter agreements for international trade. By 1939 the condition of the German economy was desperate and this was in fact a major factor in Hitler’s increasingly aggressive policy. The supposed success of Speer simply did not happen and overall the regime was so crippled by its economic incompetence that it is nothing short of a miracle that it had as much military success as it did.
Sadly he’s in denial. There’s no question that, sooner or later, Greece will be leaving the Euro. Our MEPs need to start focusing on reality and the Party needs to develop a more credible European policy that reflects how things are, rather than how we might wish them to be.
@Joe. Yes. But people forget. And they re-interpret.