In David Mitchell’s novel “Number9Dream,” a patient who says he created the world proves his point to a psychiatrist by making Belgium disappear from maps (where it is suddenly called Walloon Lagoon) and from people’s memories. It’s worth considering what would happen if Greece suddenly disappeared from our radars.
One morning we’d wake up and find no Greek news on our website of choice, no links to Greek stories on Twitter, no mention of Greece in European Union documents or Eurostat reports. A look at the map would reveal a country called Hellas still jutting into the Mediterranean to the south of Bulgaria, Macedonia and Albania. It would be just another Balkan country.
Greek central bank governor Yannis Stournaras warned Thursday that no deal with creditors would probably mean default, then exit from the euro, and then, “most likely,” from the European Union. That, he said, would be painful. In fact, any pain would be of the phantom variety, coming in the form of regrets and dashed hopes. Economically, Stournaras’ nightmare scenario wouldn’t be terrible for anyone.
As Tim Edwards, senior director at S&P Dow Jones Indices, pointed out recently, “If Greek equities, Greek bonds and Greek GDP disappeared, it would certainly be a tragedy, but not of epic and globally destructive proportions.” That’s because the combined free-float capitalization of the Greek stock market — at about 19 billion euros ($21 billion) — is just 0.2 percent of the EU equity market, Greece’s GDP is 1.5 that of the EU’s and its exports and imports hover about 1 percent of the EU volume.
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There is, of course, the debt — 324 billion euros. But very little of that is liquid or market-based:
Most of the money is owed to European governments. If Greece defaults on those debts, there will, of course, be political repercussions — but no one will go broke. No European state will be unable to balance its budget because of missing Greek interest payments, which have already been deferred by 10 years and would in any case be linked to the European Financial Stability Facility’s minuscule funding costs. As for the principal of the loans, it could simply be treated as sunk cost: The EU has done its bit to keep Greece, but what to do if the attempt has failed? As for the remaining private lenders, they have known their risk for a long time and won’t go belly up, either.
If EU member Greece just disappeared and re-emerged as Hellas, a newly non-EU state, leaving its debt behind, it would be just like the countries that emerged from the Soviet Union’s breakup. They, too, had clean slates, because Russia assumed responsibility for their debts. There was a lot of purely psychological fallout, of course, including a fallen-empire complex for many Russians and a reallocation of trust in the markets. Yet the EU is probably better able to handle this than was Russia in the early 1990s: It is much stronger economically and more enlightened about how the world works. By getting rid of Greece, the EU would also send a message to current and aspiring members that it’s got some standards.
Greece, too, would be better equipped for continuing its journey alone. What Prime Minister Alexis Tsipras calls “catastrophic policies” imposed by his country’s creditors have helped build a good base for growth. Zsolt Darvas of Bruegel, the Brussels-based think tank, says that Greece’s labor market is now more flexible than the German one and that the adjustments in unit labor cost and ease of doing business have made the country potentially more competitive. Besides, the tradable sector (including agriculture, manufacturing, transport and tourism) now makes up a bigger share of the Greek economy than of the German one. It’s the non-tradable sectors, particularly construction and finance, that have been dragging Greece down.
A post-default Hellas could attempt to fix all of this with a currency devaluation and bank nationalization, the way Iceland did — to plaudits from everyone, including the International Monetary Fund.
Darvas writes that the growth implied by the structural changes in the Greek economy would be conditional on a comprehensive agreement with the creditors. I find it hard to see what the absence of such an agreement would change. Of course, Hellas would find it hard to finance itself by raising credit, but it could only benefit from more self-reliance: Governments would be forced to be more fiscally responsible, unless “friends” such as Russian President Vladimir Putin prove over-eager in providing financial assistance, which I doubt Russia can afford.
In any case, plenty of European countries survive outside the euro area and the EU. There is no reason why Greece shouldn’t do the same. Getting rid of its debt burden may well be worth it.
Leonid Bershidsky, a Bloomberg View contributor, is a Berlin-based writer.
© 2015, Bloomberg View