The sad and avoidable Greek economy debacle involves three sets of people all trying desperately to protect their own interests.
The first are the Greeks themselves. For years Greek voters allowed their politicians to provide public services without the need for proper taxes. Now they adopt a wide-eyed cynicism and a “nothing to do with me guv” approach to life. Their politicians let them down, they say, ignoring any responsibility for voting them in. They are in a fix, but they are not the only ones.
The second are the European banks and the national governments who will be left holding the can if the banks go down. The most pressing reason for the European bailouts of Greece was to save the banks, especially those in France, and Italy, who hold most of this debt. Greek government debt is, though, not large on a European scale, and playing for time has helped. Much of the now devalued Greek government debt is held by central banks and hence by governments rather than commercial banks.
The third group are the Euro-enthusiasts in the EU and among national governments including Germany. Although Greece should never have been admitted to the euro and was admitted for political reasons against all economic advice, the euro enthusiasts have decided that it would be a disaster for Greece to leave. The disaster would once again be political rather than economic.
The whole misguided project to build a European super-state with its own currency has always proceeded without public consent, never mind enthusiasm. A sensible step back by helping Greece to leave the euro is viewed by these people as a defeat that could begin the unravelling of their whole project.
This puts them in an impossible position. The current view of this German-led group is that Greek austerity must continue and the euro must be preserved in its current form. The Greek left-wing parties easily see through this bluff. If Germany and the others wish to keep Greece inside the euro, then the Greeks will test how much more they would be willing to pay to support Greek finances.
It is difficult to predict what will happen now. Irresistible forces are facing immovable objects. The best course would be for Greece to leave the euro and to reintroduce the drachma. This will require nationalisation of the Greek banks, just as the UK had to nationalise RBS, Lloyds TSB and Northern Rock.
The Greeks are in a better position than say Scotland would have been in 2008 having to rescue RBS and HBOS themselves if Scotland had been independent within the euro as the SNP had wanted. With their own currency restored, Greece could support its banks and pay its bills. The value of the drachma could fall to under half that of the euro and the price of imported oil and other essential imports would soar. Living standards will fall but in a way that is spread evenly across the economy.
As Keynes argued, devaluation is an easier, more effective and quicker way of restoring competitiveness than the German (and Irish) alternatives of using high unemployment to drive down wages.
What are the lessons for Northern Ireland? Greece is a poorly developed economy. Like Northern Ireland it depends heavily on low tech food production and tourism to pay its way. Like Northern Ireland it lived beyond its means for many years, but unlike Northern Ireland it has been called on to repay at least part of its its debts.
Northern Ireland’s subsidy from GB is much larger than any received by Greece. At present the subsidy looks secure but we would be sensible to do our best to rebuild our economy in case this changes.
n Dr Graham Gudgin is a former economic adviser to David Trimble