Greece best left to its own devices

A demonstrator waves a European Union flag in front of the Greek Parliament during a rally in Athens on Thursday. Photo / Emilio Morenatti

From this distance, the strenuous work in progress called the European Union looks reasonably secure, which is probably why I find its fear of losing Greece so hard to understand.

The solution to the crisis has always seemed perfectly obvious. Greece can never repay its debt in a currency its economy cannot support. It would be better for all concerned if the European Central Bank cut its losses, stopped the supply of credit to Greece and left the country to its own devices.

Greece would quickly run out of euros and would need to issue its own banknotes, which would do Greece a lot of good. Wages and savings would drop in value and its credit rating would be rock bottom, forcing its government to find revenue by cracking down on tax evasion at last.

Its living standards would fall but that sort of "austerity" might be no worse than Greeks are suffering under the terms of their credit extension. At least with their own currency they would have a future. The low exchange rate would boost its tourism and exports and wages and living standards would slowly pick up.

None of that looks likely while they remain in the euro but they have elected a government that believes when it comes to the crunch, Europe will not cut off their credit. Last Sunday's referendum said most Greeks also believe it, and they are probably right.

The country defaulted on its debt to the International Monetary Fund at the beginning of the month and its credit from the ECB loan expires a week from Monday. The crunch is here. European leaders are reported to be preparing for the "Grexit". I'll believe it when I see it.

Reading the commentaries, it's noticeable that the stakes for Europe seem to have risen since the first Greek crisis five years ago, when only the euro was thought to be at stake. At that time Portugal, Ireland, Spain and even France were also struggling in the wake of the global financial crisis.

Not that there is less risk of currency "contagion", there is said to be a fear that Greece's exit would be ominous for the survival of the EU itself. If that is hard to believe at this distance, the reason may be that the European entity has loomed so large in New Zealand's economic life. It deprived us of a secure British market, ending our days as a colonial farm and making us an independent global trader.

EU farm subsidies have distorted world markets for our strongest export product and, most recently, the EU's removal of a cap on its subsidised dairy production started the collapse of prices that is entering a second season and slowing our economy now. Fortunately our dollar has fallen to help farmers and reduce our consumption a little. Greece should be so lucky.

The lesson of this latest euro crisis is that the European ideal, as adherents call it, is still a very shaky project, as they also call it. It was foisted on national populations by their political and business leaders more than 50 years ago and clearly it has not taken root in their allegiance.

I don't suppose I should be surprised. The mind goes back to times that constitutional propositions were put to popular votes, rejected and resubmitted as many times as it took until a reluctant electorate gave European idealists the answer they wanted.

The adoption of a common currency was the last and most drastic step the idealists have taken, a step too far for Britain and several other EU members. A currency needs to be backed by a government with monetary, fiscal and regulatory authority in the economy it represents. Ideally a common currency would follow the formation of such a government of Europe, not precede it.

But with most people in the EU still regarding themselves as French, German, Dutch, Danish ... the idealists decided to put the cart before the horse, and go for broke. A common currency would create tensions that would be impossible to resolve unless Europe was given many more powers. It would make Europe or break it.

The tension between stronger and weaker euro economies came to breaking point in the wake of the global financial crisis. So far it has brought Europe closer to common government. Ireland, Portugal and even Greece have accepted onerous economic reforms demanded by European institutions. But now Greece is breaking ranks and Europeans fear for the momentum of their project.

Without momentum it withers. They know better than me whether the idea of European unity has taken root in popular allegiance after half a century of assiduous watering. If next week's meetings prove Europe dare not expel a defiant, defaulting member, it must be weak indeed.