Greece’s economic misery is far from over

21/8/2018

By Matthew Lynn

A couple of years ago, I was driving from Athens airport to the Peloponnese along the sparkling new highway that connects the two. I had never driven in Greece before, and was slightly nervous of how the Greeks might be on the road. As it turned out, there was nothing to worry about. Not only are they courteous behind the wheel, and far more so than most of their Mediterranean neighbours, but more importantly the road was completely empty. The reason? There is a toll. It is only about six euros to drive the length of the country, but hardly anyone, even the truckers, can afford that. They take the old roads instead. There are lots of different ways of illustrating the scale of the economic catastrophe that has unfolded in Greece over the last decade. But it is the small details that are most telling.

After eight years, today Greece finally exited the bail-out program imposed by the IMF and its partners in the euro zone. It can finally stop relying on reluctant hand-outs from Germany and the others and stand on its own two feet again. The trouble is, it is not the emergency rescue scheme it needs to leave. It is, as it was almost a decade ago, the euro itself.

The IMF recently admitted that Greece had suffered the greatest economic calamity of all time. From its peak, the Greek economy has shrunk by more than 25 per cent, which is worse than the United States in the Great Depression of the 1930s. Not only that, but it has gone on for far longer – after eight years the US had bounced back. Over a century or more, no economy has managed to suffer more than this one. Even worse, the policy-makers of the 1930s didn’t really know what they were doing. Before Keynes, central bankers and finance ministers hadn’t worked out they could mitigate a downturn with cheaper money and more spending. In Greece, the EU and the IMF knew exactly what was going to happen – and they went ahead and did it anyway.

Leaving the bail-out program is not going to fix that. Sure, the Greek government can borrow money again on its own. But it is not as if people are going to be queuing up to lend to it (bankers have short memories, but not that short). In fact, borrowing too much was part of what got it into this mess in the first place. Greece is now left with a hollowed out industrial base, a de-skilled workforce, a devastated small business sector and some of the most punishing taxes in the EU: at 24 per cent it has one of the highest VAT rates in Europe, corporation tax is 29 per cent, and personal taxes of 45 per cent kick in at a mere 40,000 euros, with social charges on top. Economies don’t recover when they are crashed by all that.

In fact, what Greece requires is fairly simple. It needs a devalued currency to massively inflate demand, increase tourism and boost exports, while at the same time using its own currency to slash taxes and increase spending. It is the same kind of program Italy’s ‘populist’ government is hoping to introduce. But it can’t do whilst it is stuck with the euro. A few bureaucrats in Brussels might celebrate Greece ending the bail-out. In truth, they should keep the ouzo on hold. It is only when the country at least suspends its membership of the single currency, and takes back control of its own economy, that there will be anything worth cheering.

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