London economist warns greatest danger is Greece leaving eurozone, then thriving

The greatest challenge facing the eurozone is not to repair Greece’s broken finances and struggle on, financing it and fellow beleaguered nations such as Italy, Ireland, Spain and Portugal, says London economist Roger Bootle.

The managing director of Capital Economics, and author of The Trouble With Markets – Saving Capitalism From Itself, said: “The greatest danger in fact is if Greece leaves the union, and then does well, which I think is the more likely scenario.

“If you had default and depreciation [by Greece], what chances are there of the governments of Italy, Portugal and Ireland being able to force their people into depression? Zero.”

Bootle said years to come will bring “a series of departures from the eurozone”, as indebted countries see fellow strugglers prosper after leaving the currency and trading bloc, as their currencies fall sharply, boosting global competitiveness.

He said such a course “will be a good thing, and the best hope for Europe and for the world”.

The current malaise – necessitating a surprise 0.25% rate cut back to 1.25% by the European Central Bank today – by contrast, is “condemning us to low growth, and encumbering a leading source of the world’s economy – Germany and its neighbours – to not spending enough. If the deutschmark came back the German government would find all sorts of ways to stimulate German demand.”

German chancellor Angela Merkel and French president Nicolas Sarkozy rather lost whatever remained of their humour in Canne’s G20 meeting yesterday as their Greek counterpart George Papandreou announced a referendum on austerity measures – reported by SkyNews to have been scrapped today.

But Bootle said the best way for the euro to break up would not be just for Greece to leave, but for Germany to depart, with most of core Europe following. The Netherlands, Austria and Finland should follow Berlin to form a northern European bloc, and “split the eurozone in two”.

France should then play the role of economic leader of Europe’s southern countries

But Bootle doubts this will happen, “because the German political establishment is still behind the curve”.

He said Greece leaving is far more likely, followed by select others of the 16 members.

“There is a prevailing view among Europhiles that ‘there is a problem with Greece’, and if this could be solved the rest of the structure would be alright. I think that view is profoundly wrong.”

Speaking late last week, Bootle said the chances of “a severe banking crisis” in Europe were “pretty high”.

He said the “key undoing” of the eurozone was not Greece, but Italy with its very high debt to GDP ratio, low growth trends and political weakness.

He said Italy’s gross financing needs to the end of 2014 were about 11% of those of Germany’s and France’s, compared to between just 1% and 2% for Greece’s, Portugal’s and Ireland’s. Spain, the second-ranked beleaguered-eurozone member on this metric after Italy, has gross financing requirement of about 7% that of Germany and France.

Italy’s government receipts as a percentage of outlays, at over 90%, were higher than for Portugal, Spain, Greece, the UK, Japan, Ireland and the US, according to OECD statistics.

Italy’s gross government debt as a proportion of GDP is third highest among advanced economies, lower than only Japan’s and Greece’s.

Bootle noted a sovereign default, as many still predict for Greece at least, should not come as a surprise to market practitioners. Evidence from history showed it was not an “exotic occurrence”. Since 1800 Spain has been in default about 25% of the time, Russia for over 40% of the period and Greece over half the time.

“But people were falling over themselves to lend to Greece’s government at yields broadly similar to Germany’s.”


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