John Roughan: A big fat Greek disaster

The Parthenon atop the Acropolis is a dead remnant of a civilisation that looks lost and forgotten in the daily life of Athens. Photo / AP

It is easy to dislike Greece. All that history, that ancient wisdom, a warm scenic location in the eastern Mediterranean, yet it struck me as a scrabbling, help-yourself sort of place, not poor but not as rich as it should be.

Athens is not Rome or Istanbul. The Acropolis on the hill is a dead remnant of a civilisation that looks lost and forgotten in the daily life of an otherwise unremarkable city. But maybe it is that heritage that gives Greeks an exaggerated sense of entitlement, and maybe it explains Europe's indulgence of them.

It is two years since their insolvent state was first bailed out for the sake of the euro. In February it needed to be rescued again so that it could continue paying their salaries and pensions.

Their creditors took a heavy loss, exchanging bonds for new ones worth a fraction of the old. In return Greeks were asked to make the economy a bit more competitive.

At an election this month they gave their answer, awarding the balance of power to a party led by a larrikin who rejects the deal, promises free meals for students and pensions at the rate of a retiree's final salary, and thinks they can stay in the euro.

No responsible party could work with him and no government could be formed this week so the voters have been given another election next month. Suddenly it looks too late. Sensible Greeks have been taking euros out of their banks.

Deposits had dropped 30 per cent before this week. Now it is turning into a run.

External lending to Greek banks, companies and institutions has largely ceased. The crunch will come if the European Central Bank, guardian of the euro, stops supplying cash to Greece and the country has to resurrect its own currency. It could happen quickly, it could have happened overnight.

Stockmarkets around the world and currencies such as our own fell this week with the sense that the moment of truth has arrived. Markets are ready, they've already coined a name for it.

The sooner the "Grexit" happens the better. Much of Europe is back in recession and the rest of us - as we will hear in the Budget on Thursday - are feeling the chill.

Europe's currency crisis may not be the only lingering illness in the world economy but it is the most visible and scary, because nobody quite knows quite how a country quits a common currency. Nobody has seen a currency like the euro before.

I was taught that money is issued by the sovereign power in the economy the currency represents, and that if the sovereign's laws, debts, tariffs, taxation or spending raise producers' costs too much the exchange value of its currency is likely to drop.

When it drops, my teacher said, it causes prices of imports to rise, curbing excessive spending, lowering living standards for a while and forcing a democratic sovereign to correct its economic behaviour before the currency falls further.

If its value cannot drop - because the government wants to maintain a certain exchange rate or in this case, because it shares the currency with other states - the strain on the economy will cause inflation, unemployment and increasing social dissension.

That teacher at Canterbury University in 1971 was not taken very seriously at the time. We'd never heard of floating exchange rates, every country fixed them, and devalued them to a lower fixed rate when the strain got too much. The first oil crisis was still two years away and inflation and unemployment in New Zealand would not hit double digits until later in the decade.

Internationally, floating exchange rates became orthodox policy.

The creators of the euro didn't think the orthodoxy mattered, or if it did, it was much less important than their European dream.

Since voters in Europe's various nations persistently decline to sink their differences in a united Europe, the dreamers put up a symbol easier to sell.

A common coin, they said, would be wonderful for cross border trade and travel, and it is. But they ignored warnings that a currency not backed by a sovereign power was a recipe for disaster.

It is difficult to suppress the suspicion that the euro's designers knew it would be unable to reconcile the differences between the various electorates and the calibre of governments in its member nations.

They must have known it was an unstable step, half-way to European unity, and hoped it might give Europe no option but to take the next step.

If they did, they have miscalculated. Europe is not about to take the next step, it looks more likely to let Greece go. It could be the catharsis we need.