My subject today is Greece, and the possible effects of the Greek election on Ireland.
But first let's imagine Cork decides to leave the Republic of Ireland. They all think they're better than us anyway, and in fairness to the Corkonians, they do have a vibrant city, a series of picturesque towns, a large pharmaceutical and light manufacturing industrial base, a growing services industry, sports, ports, tourism resources, and more. According to the census there are 519,032 Corkonians, putting them on a par with other small countries like Iceland.
The People's Republic of Cork is born when the people of Cork decide to leave (or secede) from the Republic of Ireland. They will no longer abide by our laws, allow free movement across their borders, recognize judgements from either the Irish Supreme Court or the European Union, and most importantly for the story I'm going to tell, use our currency.
Let's say under its new President, Jimmy Barry Murphy, the People's Republic of Cork decides to introduce a new currency, the Keano. This currency, when introduced, immediately replaces the Euros in Cork bank ATMs, and begins trading on international money markets at a 1 to 1 value with the Euro.
What will happen? First, anyone with Euro deposits will be desperate to get them out of Cork and across the border to the Republic of Ireland. This drainage of currency will hammer the banks' balance sheets and capital controls may need to be put in place to stop people doing this.
Second, no one will want to hold the Keano, and its value will depreciate against the Euro. This means one Keano might buy you, say, only 50 cents worth of stuff denominated in Euros. This would have positive and negative effects. Cork's exporters would be delighted, as the depreciation of the Keano represents a huge boon to them, their costs of doing business have halved.
Cork's importers--basically anybody who eats, drinks, or wears clothes--would be devastated, as their price of living has just doubled. Those with mortgages and other debts will be very unhappy, because their debts are denominated in Euros, meaning it will cost those in debt double to repay their debts. There will be many mortgage defaults as a result, which will hammer the balance sheets of the local banks, and some banks may go under, taking depositor's money with them.
The People's Republic of Cork will also have to borrow on the international money markets to fund State services like hospitals, schools, road maintenance, UCC, and more. There is no doubt the taxation revenue of the half a million Corkonians will be insufficient to cover the cost of State services. If the new State can't borrow on the international markets, it will have to go to the International Monetary Fund, the IMF. Having shown two fingers to the EU, there won't be any Troika loan package for them.
The IMF will insist on slashing public sector pay and pensions, as well as rolling back services and increasing taxes in order to put the new State's finances on a solid footing. Remember these households are already in deep trouble with their debts, and so they may refuse to pay higher taxes, or they may default on more of their debts as a result. This will hugely increase the pressure on the elected local officials and of course the President of Cork. There will no doubt be social unrest in the capital as people march to demand their services and pay be restored.
In short: it won't be pleasant. But the making of States never is. In fact, the Anti-Treaty Munster Republic of 1922 was a failed experiment in this vein.
What has any of this got to do with Greece? This weekend the Greek people go to the ballot boxes in a re-run of a previously inconclusive election. In this election the center-right New Democracy party won, but with just 19% of the vote. The left-wing Syriza party won a surprise second place, while the extreme right Golden Dawn party came into parliament for the first time. No party could form a viable coalition.
The re-run of this election is being seen as a referendum on Greece's membership of the Euro everywhere except Greece. Opinion polls there suggest the average person wants to stay in the Eurozone, but doesn't want any more austerity.
Nevertheless, the Greek people have a choice: to vote in parties that will accept further increases in taxes and decreases in social expenditure as mandated by the EU, which will decrease their standards of living, or to vote in parties that will essentially try to reverse the austerity policies, and perhaps secede from the Eurozone.
Greece's economy has contracted sharply in recent years, with unemployment at record highs at 22.6%. In the last quarter alone Greek national output fell 6.5% compared with this time last year. Despite a series of defaults on outstanding debt Greece still owes more than any respectable analyst thinks they can pay at over 160% of the value of their output (by comparison, Ireland’s debt to output ratio is 108%). Something has to give.
And like Cork in our little thought experiment, the Greeks may vote in parties, like Syriza, who would, eventually, choose to leave the Eurozone, with all the consequences I've listed above. Polls indicate that New Democracy seems the most likely party to win, but not outright.This result would bring some relief to the markets. But an New Democracy-led coalition would be very fragile might collapse early on while trying to implement the conditions of a bailout programme, like the ones Ireland has to comply with.
If the anti-bailout Syriza party win, then markets will be turbulent for quite some time. Even with a large win, Syriza would find it difficult to form a government and, should that government fall apart, Greece would enter a third election and pre-election period, during which it would likely run out of money.
Remember though that the Greek people have repeatedly said they would not like to leave the Euro. They’d just like their debts forgiven to a manageable level of repayment.
If Greece left the Eurozone, it would damage the European currency for decades. Every time a crisis happened, the markets would run to the possibility of a country leaving the Eurozone. Confidence in the coherence of the European project would falter, and inward investment levels would be lower than otherwise for years to come as a result.
The short-term impact would be a collapse of trading on Euro-area bonds, which would no doubt harm Ireland's ability to enter the bond markets in 2013. There might also be a worry that Ireland would be the next to go, as it is the next weakest Eurozone State after Greece. The logic would be inescapable, and eventually the Irish people would tire of austerity. Then Ireland would be Cork, in the example above. Just like the Cork people think it is anyway.
In a nutshell, the Greeks need to cop on to themselves. Do they realise the consequences of leaving the Euro?
Perhaps, they're better aware of the consequences of remaining in the Euro. It isn't pretty.
Choosing to remain in or leave the Euro (assuming nations aren't simply forced out) isn't simply a case of making a right and wrong choice, but choosing the lesser of two evils.
Last December, Boston Consultancy Group published a paper on the likely consequences for nations leaving the Euro vs remaining in. In brief, for nations like Greece & Ireland exiting would mean a painful short term adjustment before returning to growth (Icelandic-like scenario). Remaining in- austerity and stagnation in the medium to longer term (Japanese-like scenario).
Some economist express a view that the source of this crisis is monetary dysfunction and that economic misgovernance is a symptom rather than the source of the crisis. Hans Werner Sinn, for one, has suggested the need for a Bretton Woods like solution for this crisis. If this is the case, no fiscal consolidation, irrespective of it's duration or severity will resolve this crisis.