Papademos, Grexit, and catastrophe blackmail

ΠΗΓΗ: The Telegraph

by Ambrose Evans-Pritchard 

Greece's ex-premier Lucas Papademos has put a figure on the post-drachma fallout.

"Some calculations I have seen suggest that inflation could accelerate to 30pc or even to 50pc, depending on the impact of such developments on inflation expectations and on the strength of the second-round effects of price increases on wages," he told the Wall Street Journal.

It certainly could, but there is no reason why it should. That would be a policy error.

Iceland saw a 50pc crash in the exchange rate after the Viking bust in late 2008. Its inflation was 12pc in 2009, 5.4pc in 2010, and 4pc in 2011. (OECD data). It is ticking up now to 6pc as the economy recovers briskly but that is a different story.

Technically, Greece could match this – or could come close to doing so. It has first-rate economists. The EU Task Force has done wonders for structural reform. In some respects, Greece is (very belatedly) pulling ahead of Germany in supply-side labour rules.

Mr Papademos – who was an excellent MIT professor and was one of just two ECB governors of Nobel Prize calibre over recent years (Orphanides is the other, both Greek-speakers) – said the global costs would be €500bn to €1 trillion, depending on cross-border contagion, etc, etc.

Well, yes, perhaps. But one presumes that global central banks and the world authorities would/will step in with massive liquidity on Drachma Day to prevent such contagion. That is why the smart money crowd is preparing for a brisk – if brief – market rally when the moment comes.

In my view the risks are different. The danger for Euroland is slow contagion later once the sanctity of monetary union is violated, compounding the underlying crisis as Portugal, Spain, and Italy sink deeper into (policy-driven) debt-deflation.

Fitch boss David Riley told a banking form in the City that the Greek saga is "knocking down the central pillars underpinning monetary union".

EU leaders said successively:

1) There would be no bail-outs.

2) Sovereign defaults inside EMU were inconceivable.

3) EMU exit was out of the question, lunatic, and so forth.

Every one of these claims has been shown to be untrue.

"The question of whether EMU becomes a fixed exchange rate regime rather than a monetary union matters a lot," he said.

Indeed it does. Charisma would drain away. How fast it drained would depend on the body language of EU leaders in subsequent months. But who really believes Wolfgang Schauble's assertions that Europe will pull out the stops to uphold Portugal?

Fitch said it would downgrade every EMU sovereign the moment Greece leaves on the grounds that nothing is clear any more, and contingent liabilities might become real.

Mr Riley said EU policy-makers couldn't "simply shrug" and move on with the status quo ante, minus Greece.

There would have to be an entirely new regime for Euroland, and a quantum leap to fiscal union to restore credibility. It is far from clear whether this would materialise.

Be that as it may, Mr Papademos said withdrawal from the euro would be "catastrophic" for Greece. This is a religious incantation, or possibly just a threat. It would be catastrophic if EU leaders and the IMF chose to make it catastrophic. That is a political decision. Such shroud-waving borders on political blackmail.

We hear this sort of language before every devaluation crisis. Argentina in 2001-2002, Mexico's Tequila crisis in 1994-1995, the East Asian crisis in 1997-1998, not to mention countless others through history, including the UK's two liberations from dysfunctional fixed-exchange systems in 1931 and 1992.

"No one ever told us we could do that," said Labour's Fabian luminary Sidney Webb, after the Tories took Britain off Gold in 1931. Indeed, not. The mantra had been that exit would be, yes, "catastrophic".

The catastrophe – quite literally for Weimar Democracy, and the French 3rd Republic – was for those who clung ideologically, blindly, with no political imagination, to the destructive machinery of interwar Gold.

Mr Papademos was governor of the Greek central bank when the fateful decisions were first made, and then vice-president of the ECB as Frankfurt presided over the unfolding disaster.

He was at or near the helm when the ECB's uber-loose monetary policy pushed the Greek economy into its disastrous bubble. He was ECB vice-president when Greece's current account deficit reached 16pc of GDP.

As a top-notch MIT man he must have known what going to happen. What did he do about it, may we ask? Did he meekly toe the Bundesbank line when this disaster was incubated, and then when the ECB raised rates twice at key moments of the crisis, and when it withdrew banking support from Greece in early 2010?

He is a fine and honourable man. He is also a Project man, totally compromised by his own leading role in the debacle. Of course he wishes to vindicate his legacy. That is human nature.

But the awful truth is that Mr Papademos is more responsible for the desperate crisis facing the Greek nation than any other Greek public figure, and certainly more responsible than the hapless George Papandreou who merely inherited the consequences of a massive monetary and strategic blunder.

Papandreou was clueless. Papademos was complicit. Where does blame really lie?

Greek exit may perhaps be catastrophic. Remaining in the euro is demonstrably catastrophic already.

There is poison, and poison.