Why Greece won't leave the euro
By Daniel Knowles May 31st, 2012
"Βαζω στοιχημα οποια λιγη αξιοπιστια εχω: Δεν νομίζω ότι η Ελλάδα θα εγκαταλείψει το ευρώ. Όχι τώρα και πιθανόν ποτέ"
Regular readers (hi Mum!) must be wondering why I haven't decamped to a remote Scottish island yet. Greece, it seems, is on the verge of being unceremoniously pushed out of the euro.
Meanwhile, as the Economist's credit crunch index shows, across the euro area as a whole, credit is tighter than at any point since the global economic crisis began, back in 2007. Vast amounts of money are being pulled not just out of Greece, but also Spain, Portugal, Ireland and Italy as businesses and banks seek to avoid getting caught up in the conflagration. We're all doomed, right?
Leaving the euro is not at all like devaluing your currency, as Britain and Italy did at the end of DRM in 1992. It's not just about printing bank notes and telling people "huzzah, the drachma is back, be free!" To leave the euro, you have to create an entire new currency from scratch – by which I mean, you have to devise a store of value which the people who use it will trust.
Always remember: money is a confidence trick. That £10 note only has value because you, and several hundred million other people, choose to think it does. It's a collective delusion. As my favourite Onion article ever reported, "Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct." And trust me, if Greece sets up a new currency, no one will think it's a store of value. Rather, precisely because the only reason why Greece even would set up a new drachma is to print lots of it, no one will want to hold it at all.
What that means is that the Greek government will have to force people to take it. They will have to revalue everyone's bank accounts into drachma, probably overnight, and force every business to reset wages into drachma, which everyone will consider worthless. All the electronic euros in the country will be instantly cut in value by a dramatic amount – 20 to 30 per cent at least (the ones kept under mattresses and in shoe boxes they might just have to lose – I can't see the Greeks having the resources to start setting up border patrols to stop people carrying money overseas). And all contracts, debts and salaries within Greece will be revalued too.
So everyone in Greece with any savings, or with an income paid in euros, will be told that they are to take big cut in the euro value of their pay or savings. That's what "restoring competitiveness" means – cutting wages. The reason why the Germans are so competitive is because for a decade, real wages in Germany didn't rise. Except that in this case, it's not just cutting wages; it's also confiscating savings. Lots of Greece's creditors are Greek banks holding the deposits of Greek savers. So by defaulting on its debts and leaving the euro, Greece isn't just ruining Germany – it's ruining its own responsible citizens. It's not even hyperinflation (though that may follow) – it's just an instant loss in the value of everything.
And despite everything, the majority of Greeks are still in work. The Greek unemployment rate is 21.7 per cent, but the employment rate is about 53 per cent. According to research by the Pew Foundation, they seem to think that they work bloody hard too. How many of them are, when pushed, really going to vote for massive wage cuts?