Greek euro exit would spark 'ghastly' new crisis
by Daniel Mason
The eurozone faces an "existential crisis" and a Greek exit would have "ghastly" consequences, Roger Bootle said yesterday. But Bootle, managing director of the think-tank Capital Economics, predicted that the eurozone could not return to sustainable growth in its current form.
"The crisis is in the eurozone is very far from being solved," Bootle said, in a speech to the Institute of Economic Affairs' annual State of the Economy conference in London. "I think Greece will exit and default within a few months and then there will be other exits from the eurozone." He added that the single currency was facing an "existential crisis" and its time was up.
Focusing on the impact on the United Kingdom, Bootle warned that British banks would likely be "heavily affected" by a eurozone break-up despite not being as exposed to the debts of periphery countries to the same extent as other European Union member states. But – noting UK banks' exposure to the French financial sector, which in turn has heavy exposure to southern European debts – he pointed out the difficulty of making predictions.
"I do believe there will be a ghastly financial crisis," he said. "Without the break-up of the eurozone I don't know how else the continent will recover. However, in the short term the implications for the UK will be nasty". Politicians and economists were in the "territory of the unknown", he said, making long-term forecasts difficult. "I was very amused that in this latest bail-out they say that Greece's debt will be 120.5 per cent of gross domestic product by 2020 – where they got that 0.5 per cent from I don't know."
That view was echoed by Steve Hanke, professor of applied economics at John Hopkins University, who said: "All these predictions about debt sustainability could have been thrown out of the window since day one because the economy is contracting, and because the money supply is contracting." However, Andrew Milligan, head of global strategy at Standard Life Investments emphasised a different problem. He said Europe was "doing quite well in controlling the financial crisis" but had "done nothing about creating economic growth."
Meanwhile, in a panel discussion on the future of the eurozone, Graeme Leach, director of policy at the Institute of Directors, said he believed there was "zero chance of the euro surviving in its current form" past the end of this year. He said that all the theoretical routes out of the crisis came up against "a brick wall", and inside the eurozone Greece faced a "decade of going absolutely nowhere" with society "on the edge of meltdown". With exit and devaluation, there would "suddenly be a light at the end of the tunnel", he said.
But economist Graham Bishop said the six-pack of economic governance measures agreed in December last year, giving the European Commission greater oversight over member states economies, would "drive this thing forward" and ensure that the eurozone would be intact in a year's time. France and Germany "drove a coach and horses" through the stability and growth pact earlier and were now paying "a very big price" of others following their lead. As a result, Bishop said, "politicians now know they've got to do the right thing". In Greece the "real shock", he said, was "the realisation that there is not a modern state called Greece that function – the government can pull the levers put nothing happens".
Figures published today showed that Germany's economy contracted 0.2 per cent in the last quarter of 2011, emphasising the impact of the crisis on the bloc's strongest countries. It follows the European Commission's prediction yesterday that Germany would grow just 0.6 per cent this year. Timo Klein, senior economist at IHS Global Insight, said: "The fourth-quarter retreat in economic activity owes to a moderate negative contribution from net exports and a likely only technical slight downward correction of private consumption after a very strong third quarter. Overall domestic demand growth was still slightly positive in Q4." It was also confirmed that the UK economy shrank by 0.2 per cent in the last three months of 2011.