Five things the UK should do to prepare for a Grexit
By Matthew Lynn (The Telegraph)
As the Prime Minister meets Treasury and Bank of England officials on the possibility of a Greek exit from the euro, Matthew Lynn suggests five key ways the UK should prepare should the unthinkable happen
In game theory, it is known as “chicken”. Two cars drive towards each other across a narrow bridge. Both have an interest in swerving out of the way, since if they don’t then both drivers will get killed. So they both assume the other will get out of the way first, because they have such a strong interest in doing so. The result? According to the theory, quite often they both die as the cars crash into each other.
The stand-off between Athens and Berlin over whether Greece remains in the eurozone increasingly looks like that. Both sides might be better off reaching a compromise. In the real world, they might easily misjudge how the other side will behave. And in that case, Greece could quickly find itself out of the eurozone. Maybe there are firewalls in places, as officials in Berlin and Brussels keep assuring everyone. Perhaps the ECB has made sure that a Greek exit would be a relatively contained event. But that would still be a huge, and potentially catastrophic, event for the European continent; and while the turmoil would hit our neighbours in the eurozone much harder, the shockwaves would wash across this country as well.
The Prime Minister David Cameron and his Chancellor George Osborne have already asked staff at the Treasury to come up with some plans for how to cope with the fallout. “We’re stepping up the contingency plans here at home,” Osborne told the BBC at the weekend. And so it should. The Government prepares for all kinds of potential catastrophes: a terrorist strike on London; a closure of the ports because of an Ebola epidemic; a winter snowstorm, floods or a financial crash taking down the City. A Grexit is a lot more likely than any of those right now, and would have a huge impact on the UK economy.
But what kind of emergency plan should the UK put in place? Assume you wake up one morning to hear that Greece has exited the euro overnight, its banks have shut down, and once they re-open they will start issuing new drachma. Here are five measures the UK should have in place to deal with that.
Try and stop sterling from soaring. It doesn’t matter how much the market say they expected it. The euro will be in freefall on the news of a Grexit and the pound, along with the dollar and gold, will be the obvious safe haven for money getting out of the continent as fast as it can. The trouble is, while the US has only modest trade with Europe, about 18pc of our economy consists of selling stuff to the rest of Europe. We can’t afford to see all those exporters suddenly priced out of the market, anymore than the Swiss can. Short of capital controls, and no one is likely to be in favour of those, it is pretty hard to stop your currency going up in value, especially in a crisis. But a blast of quantitative easing, or else negative interest rates, which the Swiss and Danes have already been forced into, would help. Get the Bank of England to prepare do something to stop sterling climbing too high.
Line up emergency aid for the banks. According to the latest round of stress tests by the European Central Bank, the financial system can withstand just about any kind of shock. There’s just one snag. The tests didn’t include a Grexit. In fact, the financial system is so complex, no one knows how the impact of a Greek departure from the single currency might ripple out. Nor do they know on what terms Greece will leave – whether it defaults on day one, or promises to repay its debts in drachma some time in the future remains to be seen. So the British banks might well take a big hit. Or one of the German or French banks might go down, and that could easily lead to a collapse of financial institutions in London. If that happens, plans will need to be in place to recapitalise them, and to do so before confidence collapses. If it comes to that, let’s try and do a better job than we did in 2008 – it might be better to wind down some institutions in an orderly way rather than bail them out.
Offer emergency aid to Athens. No one has any interest in Greece turning into a failed state, or falling into an alliance with the Russians or the Chinese. The EU might well want to punish a Syriza government for damaging the single currency, as a way of discouraging the Portuguese, Spanish or Irish from doing the same thing. Normally you would expect the International Monetary Fund to step in, as it did when currency regimes collapsed in South America during the 1980s and 1990s. But its managing director Christine Lagarde seems more interested in propping up the euro than rescuing the global financial system. So it may well be up to the US and UK to step in with emergency financial and technical aid. At the very least, the Greeks will need hard currency to pay for oil and medicines – and the UK should be ready to offer it to them.
Get ready to trade the new currency. The City has a greater depth of financial know-how that any other centre in Europe. The new drachma won’t be worth a whole lot on the first few days after it is introduced – the Zimbabwean shilling will look solid by comparison. But the sooner it establishes itself, finds some kind of value, and becomes accepted on the global markets, the faster the Greek economy can start to stabilise. The UK, and the Bank of England in particular, should make sure that City firms start pricing and trading the new drachma as fast as possible – after all, if the City is willing to accept it, most other financial markets will follow that lead very quickly. The faster Greece gets back on its feet, the better for everyone – and the fact the City will have carved out a new market for itself won’t hurt either.
Wring some concessions from the EU. It is never polite to kick a man when he is down. No one wants to do it. But let’s be honest here. It can also be smart tactics. In the weeks immediately after a Grexit, the rest of the EU will be in crisis mode. Officials, commissioners, finance ministers and presidents will desperately be trying to contain the situation, and stop the rot from spreading. That will be a good moment to negotiate, in the Tony Soprano sense of the word, a few concessions. Such as? The taxes threatened on the financial sector could be the first to go. If it gets really bad, we might even be able to reform the Common Agricultural Policy.
True, no one has any idea whether Greece or Germany will back down in this stand-off. Even the Greek Prime Minister Alex Tsipras and the German Chancellor Angela Merkel don’t really know what will happen next. They would probably still rather avoid a Grexit. But if they don’t, it is best to have a plan in place for dealing with the fall-out for the UK – because once it starts, events will move very quickly and it will be too late to plan anything.
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